Over the past few years, publishers have successfully reduced expenses by improving the efficiency of the supply chain. But now soaring costs of paper and energy are forcing publishers to reexamine ways to keep costs from spiraling out of control. Simon & Schuster CEO Carolyn Reidy said the escalating prices have made S&S “take a fresh look at the way we do business. Our basic costs are up dramatically.” One publisher estimated that costs have risen 10% to 40% so far this year, “depending on how much paper you had in inventory” before those costs started rising. Paper costs are now at record highs. Paper companies, faced with their own increased energy costs, implemented a third price hike May 1. Unlike some other periods, when prices were rolled back, the new increases have stuck—at least for now—as the consolidation of Canadian paper mills and increased demand abroad have stressed capacity.

While publishers have faced paper price increases in the past, the skyrocketing cost of fuel is adding new concerns. “If the cost of freight wasn't an issue before, it is now,” said Dominique Raccah, president of Sourcebooks. One large publisher that had a $2-million increase in freight surcharges last year said costs are already running 10% over 2008. “There is no doubt that the cost of putting books on shelves is going up,” said Al Greco, a principal at the Institute for Publishing Research. “It's just a question of who will bear the brunt of the increase.”

Reidy noted that with the economy softening, retailers are looking for lower prices, but that can't happen with the cost of goods rising. “We're stuck,” Reidy said about pricing. Publishers are looking to cope with higher prices by consolidating more shipping, improving returns management, revising trim sizes and using cheaper grades of paper where possible. Some are even changing formats. Raccah said last month Sourcebooks moved four books it was planning to release as hardcovers into trade paperback, including one title it had been working on for three years, In the Land of Invisible Women, to keep the books at a reasonable price. Even Dover Press, renowned for selling books as low as $1.50, is considering raising prices. “We have some wiggle room,” said Eric Zimmerman, v-p of publishing for Courier Corp., parent company of Dover. In other Courier units, such as Creative Homeowner, the company is removing extra features that don't add any real value, such as jacket flaps, to keep prices the same.

Penguin Book Group USA CEO David Shanks said his company has also looked at improving efficiencies in different ways, but he believes that the different cost pressures eventually will lead to higher prices. “No publisher has margins that can eat these kinds of increases,” Shanks said. “When all these things [cost-cutting steps] are exhausted, the increase in cover prices is inevitable.” An executive at another major house agreed, predicting that list price increases are likely within eight to 12 months. HarperCollins president Jane Friedman said she is not looking at any “up pricing” for HC's general titles, but said books have been underpriced in the religion market for a while.

Getting retailers to accept higher prices, however, could prove difficult. Late last month Wal-Mart issued a notice to its magazine suppliers, explaining the steps they must take to justify any price hikes. While the memo was directed at magazine publishers, book publishers expect the giant chain to implement the same process with them. According to the memo, any price increase must include a detailed breakdown of the costs behind the increase—e.g., fuel costs have risen X%, paper is up Y% and so on.

With consumer confidence plunging, disposable income shrinking and costs soaring, few publishers will disagree with Greco's assessment that 2008 “is going to be a messy year.”