It was approximately one year ago that Barnes & Noble stunned the publishing world with its announcement that it was buying Sterling Publishing. The purchase is a key part of B&N's vertical integration strategy, one in which B&N sells other publishers' books through its 877 stores, but publishes and sells its own books as well. Both publishers and booksellers have watched warily as the company has steadily increased its publishing programs' title output. Publishers worry that as B&N gives more exposure to its own titles, it gives less to their books. And other booksellers are concerned that they may be forced to stock a book purchased from a competitor.
But while B&N is the most prominent company involved in more than one aspect of book publishing, it is far from the only one. A growing number of companies are branching into areas outside of their core businesses—mostly into book publishing. The move into publishing is driven by the greatest force in capitalism—higher profits. Despite trade publishing's reputation as an industry with low margins, within the publishing industry, trade publishers actually perform well. HarperCollins, Penguin and Harlequin all had operating margins of better than 10% in 2002, while Barnes & Noble and Borders Group dealt with margins of 4.5% (for just the bookstores) and 5.6%, respectively. Margins for wholesalers and distributors are razor thin. It's no wonder, then, that companies are looking at vertical integration as one strategy to improve earnings.
By now it is obvious that, despite concerns from other industry players, B&N is committed to publishing. Last month, B&N CEO Steve Riggio told analysts that B&N's future is in the businesses of bookselling, publishing and direct marketing. With its purchase of Sterling, B&N's goal of having publishing generate 10% of its total sales is "easily achievable," Riggio told analysts. The company's in-house publishing efforts have been expanding in a number of different directions. Its major initiative was the launch of a new classics line last spring which now has 63 titles in print. B&N has also revamped and rebranded a how-to series as Barnes & Noble Basics (21 titles in print) and increased its promotional activities for individual titles such as Law & Order and The Stones of Summer.
In addition to boosting margins, B&N sees its publishing program as a way to differentiate itself from its bookselling competitors.
B&N's publishing program certainly makes it different from its top rival, Borders. "We have no intention of making publishing a major initiative," says Jenie Dahlmann, manager of public relations. Ironically, Waldenbooks, before it merged with Borders, had a very aggressive publishing program through its Longmeadow Press unit. The imprint, however, was dissolved in 1995.
Borders's publishing operation now consists primarily of two different classics lines. The larger of the two is Borders Classics, which made its debut in September with 25 titles. The company had been publishing classics under the State Street Classics name, but in mid-2003 Borders gave the line a fresh look and changed the name as part of an overall Borders branding campaign. This year, Borders will publish approximately 10 titles in February, 15 in May and 15 in August; after that it will re-evaluate the program to determine the demand for further editions, says Dahlmann. All classics are published in hardcover and prices range from $7.95 to $9.95. Dahlmann says that the classics "are a nice complement to our Borders Recommends program."
The second line offers leatherbound editions of classics. There are about 20 titles in this program, and Borders recently added Ulysses and the two-volume Oz Chronicles. The leatherbound editions sell for $19.99.
In addition to the trade classics, Borders Press publishes some blank books and an occasional general nonfiction title, such as the recent Gray's Anatomy. According to Dahlmann, Borders Press has no publishing director, and each project is managed by a buyer or manager in that specific category.
Publishing and Distributing
Perhaps the most vertically integrated company in the industry is Advanced Marketing Services. For the year ended March 31, 2003, AMS's wholesaling operation generated sales of $629 million, or 69% of total revenue. Another 14%—$127 million—came from its distribution subsidiary, Publishers Group West, while $73 million came from its publishing program. Operating under the Advantage Publishers Group umbrella, AMS publishes about 400 titles annually through its Thunder Bay, Laurel Glen, Silver Dolphin and Portable Press imprints. AMS has steadily built up its publishing operation as one way to lessen its dependence on its wholesaling business. Book publishing also generates higher margins than the company's core wholesaling operation.
AMS chairman Charles Tillinghast told analysts last summer that two of AMS's priorities were to expand its distribution operations and to make niche publishing purchases. AMS met its first objective last fall, when it took PGW's domestic operation and combined it with its international distribution companies to form Publishers Group Worldwide. The new entity, which comprises AMS's seven distribution companies, is aimed at offering clients distribution in a wide number of foreign markets. Perhaps sidetracked by federal and SEC investigations into its advertising practices, the company has made no further moves into the publishing arena.
Where Others Have Tread
In cobbling together a company that combines distribution with publishing, AMS is following the path taken by several other companies, including the original PGW, which also matched publishing (the Avalon Publishing Group) with distribution. Charlie Winton, a cofounder of PGW, remembers that the company was able to move into publishing by capitalizing on an opportunity. Winton's interest in publishing was piqued in 1987 when PGW provided financial assistance for the self-published 50 Simple Things You Can Do to Save the Earth. After providing financial aid to some other publishers it distributed, AMS bought its first stake in a company, Moon Travel Handbooks, in 1992, and when, two years later, PGW bought a controlling interest in Moon, Winton felt it was time to establish a publishing entity.
Winton says that he realized that if PGW was to grow, it needed to control a certain amount of publishing, and he set a goal of 20% of sales coming from PGW's own publishing efforts. "Owning publishing supplies some security and gives you an editorial device to help grow the business," he explains. Avalon and PGW were structured as two separate companies, controlled by a holding company called PGI. Winton says that while the two operations helped each other grow, "synergy only takes you so far. Eventually the businesses need to prosper by themselves."
While PGW began as a distributor that entered publishing, National Book Network is an offshoot of the publishing company Rowman & Littlefield. R&L began publishing academic titles in 1975 and added a small trade component, Madison Books, in 1985. To get Madison's titles into general bookstores and to avoid the necessity of giving a short discount, R&L's executives went in search of a trade distributor and settled on Scribner, says R&L/NBN president Jed Lyons. When Macmillan bought Scribner a year later and stopped the distribution of Scribner's smaller distribution clients, R&L decided to form National Book Network.
Because most of R&L's publishing program is directed to the academic market while NBN serves the trade market, there is little cross-fertilization between the two, Lyons says, although there is some defraying of operating expenses. The profits from R&L, however, helped give NBN the time to start making money. "It took nine years before NBN had the economies of scale to become profitable," Lyons notes. And even though NBN is now profitable, the margins are small, especially compared to the margins of R&L's academic publishing program. NBN has added some trade publishing companies over the years, but they account for only about 5% of sales, and Lyons is not interested in increasing that percentage. What Lyons is interested in is buying more academic publishers. So why does Lyons stay in distribution? "They're both good businesses now, even if publishing is more profitable," he says.
In 1987, when Chicago Review Press bought distributor Independent Publishers Group, the main impetus for the move, according to president Mark Suchomel, was to be able to continue to sell Chicago Review's and IPG publishers' titles to large accounts, which consistently have not wanted to deal with small publishers individually. Since the deal, IPG has gone from 12 to 14 publisher clients to about 400 publishers and grows 25%—40% annually.
The company has maintained its representation in national accounts, but it has grown, too, because it has diversified—as much for self-protection as to expand business. "We want to give our publishers a distribution system so that if a big account decides not to sell them or if a big wholesaler goes out of business," the effect will not be disastrous, Suchomel says.
IPG has diversified by expanding into new markets on its own as well as through acquisitions. While traditional bookstores remain a significant part of its business, IPG has a strong presence in museum stores, computer stores and teacher supply stores, and sells to other markets via its many specialty catalogues, which include children's titles and Spanish-language books.
Acquisitions have added to diversification. In 2001, IPG acquired Paul & Co., the university and scholarly press title distributor. The purchase "has allowed us to sell more trade books into the academic market and to sell more academic titles from Paul into the trade," Suchomel notes. The company also now puts out an academic catalogue to sell to universities, academic libraries and related outlets. In 2003, IPG bought Zephyr Press, a publishing company with a mail-order catalogue that sells directly to teachers, focusing on teacher resources for the gift market. The purchase "has taught us much more about mail order," Suchomel says.
Diversify or Die
For Sandy Jaffe, head of Booksource, St. Louis, Mo., the virtue of diversification is simple and powerful. "If we had stayed just in retail wholesaling," he says. "We wouldn't be around today."
While once the company relied entirely on wholesaling to book retailers, it now has four divisions: retail sales, educational sales, the San Val bindery subsidiary and Peaceable Kingdom Press, which sells cards, posters, calendars and other products based on the works of many children's book illustrators. The company is now integrated as a manufacturer, publisher and wholesaler—and it also sells to more markets than it did before its diversification. While the retailing side of the business is erratic, Jaffe says, the other divisions, particularly educational sales and the bindery, tend to grow steadily at about 10%—20% a year and provide much more attractive results than wholesaling's traditional slim margins.
The effort to diversify at Booksource began 25 years ago in challenging times that are reminiscent of today's general retail situation. As Jaffe puts it, "We recognized the dominance of Dalton and Walden in the retail market and began looking for other opportunities." Booksource began selling to schools, at first just in the St. Louis area. The company learned more about the market as it went along, and in 1984 bought San Val, which at the time had just one bindery, 20 employees and sales of about $750,000. (San Val converts paperback books into hardcovers for schools and libraries.) Now the division has two binderies, about 150 employees and sales of well over $6 million. "Unlike books, it is a very, very profitable business," Jaffe says.
Likewise, the educational sales division is more profitable and steadier than retail, despite requiring a larger investment in people, systems, backorders, special ordering and library processing. Customers, mainly schools and libraries, may be slow in paying, "but they always pay," Jaffe says. And once they become customers, they are usually loyal. Altogether, Booksource's educational operations now account for some 40% of total sales, approximately the same amount as the company's retail business.
In the late 1990s, the company wanted to diversify further. "Five or six years ago, we started looking for an acquisition that had two elements: a much higher growth profit margin than wholesaling and some control over pricing and manufacturing," Jaffe explains. The search led Booksource to Peaceable Kingdom Press, which Jaffe bought in 2000. The first several years were "a real struggle," Jaffe says. But after the hiring of a new sales manager and a new creative director to whom "we gave lots of leeway," Peaceable Kingdom's business has turned around. "In 2003, we've had 45% growth," Jaffe says.
With all the growth and acquisitions, Jaffe has aimed to make each part of the company as autonomous as possible. At most, they share accounting and warehousing functions; editorial, creative, sales and marketing efforts stay separate.
Booksource is not abandoning its roots, however. Despite the erratic nature of retailing and the soft retail climate, Booksource is opening a second warehouse this month, in Fresno, Calif. The 22,000-sq.-ft. facility will stock some 7,500 fast-moving titles, including bestsellers, new releases and basic backlist. The impetus comes from Hudson News, which, as the new owner of WHSmith airport stores, wants next-day and two-day delivery for West Coast stores. Booksource will also be selling to other accounts from the Fresno warehouse. "It's all new business. We've never done anything on the West Coast," Jaffe says. Without the cushion of the non-retail businesses Booksource owns, the company might not have made such a move. "In wholesaling, the margins are so narrow that if we make a mistake, we get killed," Jaffe notes. Diversification changes that equation.
Printer Becomes Publisher
Another company from a different part of the industry that has benefited from vertical integration is Courier Corp. The printer acquired Dover Publications in August 2000 with an eye toward combining Dover's publishing and distribution skills with its own book manufacturing expertise. The result has been an unequivocal success. Helped by Dover's higher margins (pretax margins of 15.9% in fiscal 2003, compared to manufacturing's 14.1% margin), the company posted a 9.5% operating margin from continuing operations in fiscal 2003, compared to margins of less than 6% in the two years prior to the Dover acquisition.
"We didn't have a plan to become a publisher," says vice-president Peter Tobin. Much like PGW's move into publishing, Courier entered the business by acting on an opportunity. Courier had long been Dover's principal manufacturer and when the Cirker family was looking to sell Dover, they approached Courier. "They had the content, we had the infrastructure, so we did the deal," Tobin says.
By owning Dover, Courier has a little more flexibility about printing times; the company can print books when space is available, and can do similar-sized titles together and shorter runs, all of which saves a little money. But equally important to the successful partnership is the promotional capabilities, particularly on the electronic side, that Courier has brought to the table. Dover now does a significant amount of promotion via e-mail, has developed a number of Internet partnerships and has a community of users "that gives us great feedback," says Tobin. E-commerce is one reason why Dover's direct-to-consumer sales rose 13% in fiscal 2003, Tobin says (Dover also still sends out "lots of catalogues," Tobin notes).
The success Dover has had as part of Courier was not lost on Max Fogiel, the founder of test preparation and study guide publisher Research & Education Association. A long-time customer of Courier, Fogiel turned to Courier when he was looking to sell the company he founded in 1959. With lots of proprietary content and in a niche area, REA is the type of publisher that Courier believes will fit well with Dover, Tobin says.
The acquisition of Dover has also helped make Courier a better printer. "It's taught us about the challenges of trade publishing," Tobin says. "Now we really know the value of turning jobs around as fast as possible."
While Courier is a printer that entered the book publishing business, Health Communications Inc. is a publisher that is also a printer. The company has manufactured the books in its wildly successful Chicken Soup franchise, along with other titles, at its production facility in Deerfield Beach, Fla. where the company is headquartered. HCI's manufacturing capability predates its entry into book publishing, says Terry Burke, v-p, sales and marketing.
HCI began its corporate life as a magazine and journal publisher and, in keeping with the philosophy of cofounder Peter Vegso, looked to keep as much work in-house as possible. As the company grew larger, it added more production equipment, and to accommodate the large volume of Chicken Soup business in the late 1990s, it had a custom-made press built, upping its capacity by about 65%, Burke says. The new press allows HCI to do relatively short runs—5,000 copies—to as many as 300,000 copies. With the industry moving toward shorter runs, HCI is using the flexibility its production system provides to do work for third parties. Burke says he expects HCI to generate about $1.8 million in sales from outside companies this year.
Publisher as Distributor
Although Scholastic's publishing profile has risen in recent years with such successes as Harry Potter and Captain Underpants, the company is a major distributor of children's books, having distributed more than 320 million books in its last fiscal year ended May 31. Distribution generated the largest part of the $1.19 billion in sales in Scholastic's children's book publishing and distribution segment in the last fiscal year. The combination of its school book fairs and school book clubs had sales of $678 million in fiscal 2003, making Scholastic by far the largest player in those businesses. Since Scholastic's sales through trade channels is still relatively small (17% in fiscal 2003), the ability to sell its titles through its own direct-marketing efforts helps boost margins for its publishing operations.
In Scholastic's December conference call with analysts, children's publishing and distribution group president Barbara Marcus said the company is putting "a renewed focus on developing properties that work across our trade, club and fair channels." This approach, Marcus says, "creates more outlets for our titles and allows us to drive demand in the trade channel through our proprietary clubs and fairs."
Independent Tradition
Barnes & Noble may provide the first real test of what can happen when a huge company puts its muscle into combining bookselling and book publishing—but some independent booksellers, following in the tradition of Frank Nelson Doubleday and Charles Scribner, have been doing so successfully on a smaller scale for years. They say marrying the two makes both sides of their business stronger, as retail provides an eye-level look at readers' tastes and publishing raises awareness of the bookstore and builds customer loyalty.
"I've never understood why more bookstores don't do this," says Lawrence Ferlinghetti, founder of City Lights Bookstore and City Lights Publishers in San Francisco. Ferlinghetti, who established the store in 1953 and the publishing company two years later, became an international celebrity when he was tried on obscenity charges for publishing Allen Ginsberg's Howl. In the nearly half century since he was acquitted, his company has been able to ride financial ups and downs by drawing on the strength of whichever side of the business was stronger at the time.
"Some years we would have had to cease publishing if it weren't for the bookstore," Ferlinghetti says. "And then, as we got more established as a publisher, we lent money to the bookstore."
City Lights publishes 10 to 15 titles a year, including memoirs, literary fiction, translations, nonfiction dealing with political and social issues, and poetry. It has an active backlist of 250 titles, including Howl, which sells about 20,000 copies a year. The bookstore and publishing company have a total staff of 18 people, some of whom split their time between the two sides. Everyone on the publishing side has put in time at the store, Ferlinghetti says, getting a retail reality check that makes them better editors. "It keeps an editor from going off in Never Never Land and publishing a book that there's no audience for," says Ferlinghetti.
The store also provides a showcase for City Lights authors, many of them unknowns, in a venue where receptive readers can easily find them. About 75% of the publishing company's authors do readings at the store, said Nancy Peters, who co-owns the business and is the press's executive director. While the books have modest print runs—2,000—3,000 for fiction, translations and poetry; 5,000—10,000 for nonfiction—they make up about 10% of the store's sales, she says.
A more recent entry into publishing, Poisoned Pen Press, grew out of the owners' bookselling experience. The husband-and-wife team of Barbara Peters and Robert Rosenwald opened the Poisoned Pen Bookstore in Scottsdale, Ariz., in 1989, specializing in mysteries. By 1997, they'd become frustrated because more and more of the books they wanted to sell were unavailable, so they established the press to do reprints. They quickly got into publishing original titles and now do about 40 new hardcover mysteries a year, often selling the paperback rights to major publishers.
They set up the press and bookstore as separate businesses, but what they learned from the retail side strongly influences their publishing strategy. "I have listened for years to authors talk about their craft and what they feel, so I'm in a constant seminar," says Peters, who is senior editor of the press and CEO of the bookstore.
Hosting about 240 author events a year at the store, Peters has heard many writers gripe about their publishers giving bigger advances to other authors. So Poisoned Pen Press sticks to a strict policy: a flat $1,000 advance for every book, but making up for it with "better than average royalties," Peters said.
"So far, I have to tell you, it's been an ace negotiating tactic, because we haven't lost a book we wanted," she says. They often do lose authors to larger houses after the writers have successfully published a book or two with Poisoned Press, but Peters insisted that doesn't trouble her. "We're getting 100 submissions a month," she says. "If we can do a couple of good books with someone and open up a spot for someone else, I'm thrilled."
But combining the two sides of the business can have at least one big drawback—the sheer amount of work involved in running both. A few years ago, exhausted from working 80 to 90 hours a week, Tom and Enid Schantz decided they had to choose between the store they'd run for 30 years and their publishing company. In 2000, they sold the Rue Morgue bookstore in Boulder, Colo. They now concentrate on Rue Morgue Press, which publishes trade paperbacks of formerly out-of-print mysteries, one a month. Giving the books an average print run of 2,500 copies, they cater to an admittedly small but devoted audience. The bookstore has since been renamed the High Crimes Mystery Bookshop, but Tom Schantz still delights in bringing long-buried works to avid mystery readers and says his experience as a bookstore owner has shaped his approach to publishing.
"I think it's a good mix because you have a more intimate idea of what a person walking into a bookstore wants," says Schantz. "What I want is to hand someone a book they've been looking for all their life, but didn't know it."
Whether it's booksellers moving into publishing or publishers moving into printing, the trend toward vertical integration is likely to continue and even accelerate in the future. Companies have recognized that operating in different business segments is a way to increase profits, and in an industry with limited overall growth, any move that can boost margins can't be overlooked.
