Last week's announcement that the owners of the aptly re-branded REDgroup Retail -- the bookselling chains of Borders/Angus & Roberston/Whitcoulls -- had placed the group in administration provoked a flurry of bullshit, special pleading, and knee-jerk nonsense.
Bob Carr, a board member of Dymocks, jumped onto his failed hobby-horse called Parallel Importation, and whipped it into a lather. He claimed that the chain was a victim of the Labor government's wrong-headed refusal to heed the wise advice of the Productivity Commission to allow the importation of cheap foreign books. The Australian dutifully reprinted his inane blog on this subject, and echoed his argument editorially.
Carr was wrong during the debate about territorial copyright, and he's wrong now. If he'd ever stepped inside a Borders or A&R store, he might have noticed that they regularly added 10 per cent to the publisher's recommended retail prices for frontlist titles. At the very least, this doesn't sound like a retailer trying to compete with cheap foreign imports. He might also have noticed poor customer service, a lot of out-of-date stock, odd or poor selections of new titles, and a lot of non-book items where customers used to expect to find books. Why you'd go into Borders to buy barbecues I don't know, but that was apparently part of their business model.
If Mr Carr had kept his eyes open when he visited any stores belonging to the chain whose board he sits on, he might have noticed the opposite of what I've just described. And he would have noticed that, while they were struggling during 2010 -- along with many of their bookselling peers and many retailers -- the business was doing much better than Borders or Angus & Robertson. I'll return to this point later.
At the same time, the chairman of the failed group wrote to the federal government, claiming that their plunge into administration was due to their lack of access to parallel imports, and competition from offshore online retailers who didn't have to pay GST or duties. The PI argument is not worth thinking about, and not just for the reasons I've listed above. First, there's hypocrisy: REDgroup’s submission to the Productivity Commission on this subject supported the continued exclusion of parallel imports when the debate was on in 2009. Second, if there were any point to it, there'd need to be some evidence, the least of which would be signs that all booksellers have been suffering more or less equally from the problem. As the Dymocks example above indicates, and as I'll explain below, that was certainly not the case.
Readers of this blog will know that I started complaining and campaigning about the GST tax break last year, but no one should accept the absence of offshore GST as a reason or excuse for REDgroup's failure. As I've argued before, the Australian dollar is so high that most customers would keep buying from offshore sites even if GST and duty added 20 per cent to the costs they had to pay. Ironically, this isn't an argument against dismantling the tax break, but it is an argument against thinking that, at current exchange rates, it would make much difference to domestic retailers.
The initial reaction of the media was to parrot the claims of Carr and REDgroup, and to argue that the problems they'd cited foreshadowed the end for bricks-and-mortar bookshops. There is no doubt that bookselling and book publishing are under tremendous pressure at the moment, but this interpretation was way off the mark. The REDgroup story is indeed a cautionary tale, but not of the type that Carr and some others think.
Whenever a business goes broke, the first questions to be asked should be of the management and the owners, not of the government. So let me spell this out. Borders/A&R in its REDgroup incarnation was a very badly run business, for which the owners, Pacific Equity Partners, a private-equity group, are responsible. PEP deliberately created a brutalist regime: they installed bovver-boy managers who alienated all their inherited knowledgeable staff (who left), made appalling decisions about stock selection and presentation, and tried to treat books like potatoes. They were focused on fluffing up the business so it could be floated, so all they seemed to care about was inventory control and their cash position. As they tormented their suppliers -- who understood their business better than they did -- things started to go badly wrong.
The group kept refusing to listen to well-informed and well-intentioned advice, so their business declined drastically. Eventually, several times last year, the group was 'on stop' with major publishers -- that is, the publishers refused to supply books to them because the group was in breach of its credit limits and trading terms. At other times, the group simply stopped re-ordering titles that were selling or ordering new-release titles that might have sold.
The supermarket model that REDgroup had adopted was a grotesque failure. In the end, the group became a very good example of why bookselling is not a corporate business – it's a hands-on, detail-intensive business, with low profit-margins. Only people who love it and know what they're doing can make a success of it – Internet or no Internet.
As partial evidence for these assertions, let me proffer some internal financial information. In the 2010 calendar year, compared with the year before, Scribe's turnover with Angus & Robertson company stores fell by 51 per cent. By comparison, our turnover with A & R franchise stores (which are effectively independents) fell by only 10 per cent. Our turnover with Borders stores within Australia (which were all company owned and run) fell by 40 per cent. For REDgroup as a whole, our turnover was down by 44 per cent. These are staggering figures, and I would be very surprised if they weren't at least typical of other publishers' experiences. I suspect that REDgroup's market share fell by around half during 2010.
As to other bookselling buying groups, our turnover moved in a range from -6 per cent to + 48 per cent. In other words, REDgroup's business performance was by far the worst of any of its peers that we traded with. And we had a relatively good year: in the critical July–December period, the sales of our titles by the book trade, as measured by Bookscan, rose by 7 per cent by value and by volume, while the invoice value of our 'sales' to the trade fell by 7.5 per cent. (For an explanation of the difference between the two, see an earlier post on this blog, headed 'Sales, Returns, Reprints, and Bookscan'.)
For the whole of 2009, it was obvious that REDgroup's woes were causing serious damage to all publishers. Publishing being international, its troubles were known abroad, and were the subject of great consternation. Within our own company, if I was asked for my opinion on the subject, I would say that everyone except REDgroup itself would be better if they just went broke. I've since heard that other publishers had come to the same conclusion.
And yet, despite all this, PEP kept trying to exit their investment in the REDgroup by preparing it for a public flotation on the Australian Stock Exchange. If they'd succeeded, it would have made the notorious 2009 Myer float by a fellow private-equity buccaneer, TPG, look like a responsible and well-priced endeavour.
And hereby lies the final cautionary tale, which the media doesn't want to know about: the demise of the REDgroup is a good example of how hopeless our business journalism is. As I've indicated, everybody and his dog in the industry knew that Borders/A&R were in trouble. Yet no print journalist had the contacts or the wit to chase the story. They've all become too used to regurgitating press releases and reporting media conferences, and even limiting that to stock-exchange-listed companies. Yet the REDgroup employed thousands of people, and their fate affects many other companies and individuals. If business journalists had been on the case, last week's announcement wouldn't have been such a shock -- and people with vested interests wouldn't have got away with making wrong pronouncements about what it means.
Henry Rosenbloom