After mutilating the music industry’s profits, the internet has turned its sights onto booksellers with devastating effect. First Borders fell in the UK, then the US business started to struggle and last week announced it would file for bankruptcy. Then, last week, private equity firm Pacific Equity Partners appointed administrators to its 26 Borders and 164 Angus & Robertson shops in Australia (and New Zealand’s Whitcoulls). Angus & Robertson is one of Australia’s oldest booksellers, having started operations in 1886.

The move was no shock to industry insiders, as Glenn Dyer explained in Crikey last week, in October 2010, the PEP subsidiary, which owns Borders and A&R, REDGroup, announced a $43 million loss for the 2010 financial year, noting that the loss would have caused it to breach several covenants attached to its considerable debt.

While the demise of “bricks and mortar” bookselling is no doubt a sad event, this writer has little or no sympathy for Pacific Equity Partners, who over-burdened an already struggling business model with far too much debt than it could ever handle, in the meantime (along with the big department stores, who would often use latest release books as “loss leaders”) to mortally wound many local and independent booksellers.

Borders, however, seemed to take the opposite approach to the big department stores, especially in recent years. Instead of selling a book for far less than its recommended retail price, Borders and A&R would actually add a premium to the RRP. This may work if you’ve got a powerful brand selling a product such as Tiffany’s or BMW, but not if you’re selling the exact same thing as the vendor a couple of doors down. This was a business model that was doomed for failure. To give an example of just how inept Borders’ business model was, take the example of my book, Pigs at the Trough. With a wholesale price of about $15, the recommended retail price of the book was $32. Despite the fact that most booksellers tend to sell books for slightly less than the RRP, Borders and A&R, have the book on sale for $37.95 — a gross margin of more than 100%.

By contrast, Dymocks (the last remaining solvent bookseller in Australia of any considerable size), sold the book for about $28 while Australian-based an online retailer Booktopia offers the book for $29. But it gets worse — UK-based Book Depository (which doesn’t charge postage anywhere) has the book on sale for only $26.96 while Amazon (which charges postage) has it for $US22.76, despite having to ship the book the US and back again. The real killers are Amazon’s Kindle and iTunes, which have a digital version for less than $20.

What that means is Borders and A&R were trying to collect a gross margin of $23 per book, compared with overseas-based retailers, who would deliver the book to your door for a margin of only $12 or digital sellers whose margin is less than $5. This is, of course, for a virtually identical product. (The move was terrible for publishers and authors, who are paid on volume — which meant that less books were sold and publishers and authors received less money, even if Borders and A&R were making a much bigger profit on each unit).

It is hard to tell whether Borders and A&R sold books for so much more than their RRP because they felt that their market power was such that they could afford to charge a premium for a homogenous product, or whether they were simply doing everything possible to boost short-term profits, hoping consumers wouldn’t catch on.

However, it appears that consumers aren’t as stupid as REDGroup’s executives thought (or hoped).

Then there is the argument that REDGroup’s incompetence merely sped up the group’s inevitable demise.

There is probably some truth in that.

Most large booksellers worldwide are facing similar problems. As explained, only days before administrators were appointed to the local Borders and A&R, Borders’ massive US business filed for bankruptcy last week (this affected Borders across the world). HMV, the owner of the last remaining UK mega-store, Waterfords, is facing serious problems of its own (even after the UK Borders shut its doors a few years ago). Barnes & Noble, the original US mega book retailer has been the subject of a corporate battle between chairman Leonard Riggio and frustrated shareholder Ron Burkle.

Should the demise of the mega bookseller come as a surprise? Probably not. While more romantic than say, manufacturing, bookselling is subject to economic forces and the notion of “creative destruction” that is faced by every other industry. As technologies develop, old ways of doing things become obsolete, replaced by newer, more efficient models. When books can be sent from overseas warehouses for less than the price of displaying them in Chapel Street or Pitt Street shop-fronts, or digitally with a few key strokes to a hand-held device then the old way of doing things will no longer be practicable.

So while video may not have actually killed the radio star, it seems like the internet has very much destroyed the retail bookseller.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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