Book Returns Rise, Signaling a Downturn in the Market

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Amazon is already teetering despite there world renown spin department. This is one more coffin nail for Amazon.

Book Returns Rise, Signaling a Downturn in the Market

By DAVID D. KIRKPATRICK

Book publishers are once again facing a rising tide of unsold books returning from bookstores, a painful phenomenon that just a few years ago became severe enough to cause a crisis in the industry and widespread cutbacks in the publication of new books.

The number of adult hardcover consumer books returned from bookstores in the first four months of this year rose 11 percent from last year, according to the Association of American Publishers. The number of adult trade paperbacks rose 13 percent. Because books shipped to stores last year were still being returned this year and bookstores are also scaling back their new orders, publishers reported receiving roughly one returned book for every two new books shipped out during the same period, the association said.

The unusually high level of returns indicates a pronounced downturn in the book market after several years of robust growth, fueled in part by booming sales at online bookstores (and a little help from Harry Potter). Surprised by a falloff in book sales that began during the important holiday season, publishers now face sales disappointments worsened by the wasted expense of printing, shipping and, eventually, pulping unsold books. Printers are already suffering as well, because publishers are cutting back on new orders. Authors and agents may feel the effects, too, as book publishers watch their purses more closely.

Returns are a perennial risk in the book industry because publishers' sales agreements with stores typically allow the return of unsold inventory for a complete refund, a practice similar to arrangements in other industries where retailers take a chance on untested new products. Publishers normally expect about 25 percent of their new books to return.

Returns of unsold books last made headlines in 1996. The rapidly expanding superstore chains like Barnes & Noble, the Borders Group and Books-A-Million were racing to stock their vast new stores at the same time that general merchandisers like Wal-Mart Stores were moving aggressively into the book business. Neither the stores nor publishers were experienced in projecting sales in such new contexts. When publishers realized that the vastly expanded shelf space did not mean more consumers were buying books, return rates soared to 35 percent for hardcover books and 25 percent for trade paperbacks, according to the publishers association.

Publishers began talking of a "returns crisis." Stung by poor results, several large houses began cutting back on the number of new books they published. The News Corporation's HarperCollins Publishers, which took a $270 million charge for unsold inventory and unearned advances, took the extraordinary step of canceling some authors' contracts for unfinished books.

Since then, distributors and bookstore chains say, HarperCollins has led other publishers in improving systems to track book sales and avoid the unfortunate surprise of heavy returns. But book sales have risen steadily since 1997, and the publishers' new systems have not yet been tested in a downturn.

Jane Friedman, who became chief executive of HarperCollins in 1997, said she was confident about the company's improved techniques. "We are not entirely happy with the returns of the last six months," she said, "but it certainly is not desperate."

But other publishers said a problem might be looming, and distributors are more blunt. "The returns this year are exactly like what happened in 1997 — it is déjà vu," said Jean M. Srnecz, vice president for merchandising at the distributor Baker & Taylor Books. She who wrote a report on the returns problem in 1997.

In the last few years, she said, soaring sales at online bookstores led publishers to optimistic expectations of the market, just as the expanding superstores and mass-merchandisers did in 1996. In addition, retailers and distributors greatly expanded their own warehouse capacity to feed that demand, creating a surge in orders to fill their shelves. Amazon.com, in particular, built four new warehouses in 1999 and added another last year. The Ingram Book Company, the other major distributor, also added new warehouse space and so did BarnesandNoble.com.

This year, however, the growth in on-line book sales has flattened. Ingram closed two facilities, in Chino, Calif., and Denver. A spokesman for Ingram confirmed that its returns were up.

Jim Miller, vice president for supply chain management for Amazon, said the company temporarily increased the rate that it returned books to publishers over the last few months as it tried to rid itself of slow- moving inventory. But he said Amazon's return rate remained well below the industry average of 20 percent to 25 percent.

Ms. Srnecz of Baker & Taylor said the company began returning excess books to publishers before the end of last year as the lackluster sales trend became clear.

Some of the increase in the rate of returns came from the superstore chains. Phil Ollila, vice president for merchandising at Borders, estimated that the chain's return rate was about 10 percent higher than last year. At the same time, the company had reduced the volume of new books it was buying, to adjust for the sluggish market. In addition to the soft holiday season, he said, superstore chains are expanding into markets where sales volume is lower and sales patterns are harder to predict.

Terrance G. Finley, a Books-A- Million spokesman, said his chain saw similar patterns of higher returns, adding, "it is not an alarming number within the general ebb and flow from year to year." Early in the year, returns were up about 10 percent at general retailers as well.

But Alan Kahn, chief operating officer of Barnes & Noble, said that the chain expected to do better and keep its return rate for the year to around 20 percent of its orders.

Many other bookstores failed to survive the poor holiday season, resulting in the return of much of their inventory. The discount chain Crown Books filed for bankruptcy protection early this year and the Canadian chain Chapters is closing many of its stores. Two smaller chains, Wallace's and Bibelot, also closed their doors along with other independents.

As publishers have cut back on reprints, printers who faced a shortage of capacity last year are now reporting an unexpected lull. In April, the printing giant R. R. Donnelley & Sons told analysts that a sharp decline in its consumer book printing business was contributing to poor results.

Some publishers, meanwhile, are bracing for rough sailing. "In a book marketplace facing flat or negative sales growth," Peter Olson, chief executive of Bertelsmann's Random House division, wrote last week in a letter commending employees for strong results last year, "the only way we can hope to achieve our goals is also to focus relentlessly on containing our operating expenses."

-- Guy Daley (guydaley1@netzero.net), July 03, 2001


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