The bookshop

Did you ever hear about the cinema? Television was going to kill it. For a long while it looked like it was going to, as suburban cinemas and drive-ins disappeared everywhere. Then the megaplex emerged and movie studios got the hang of marketing films through multiple windows - cinema, rental, pay tv, purchase, free tv. They even have reduced some of the gaps between windows to maximise the carry over effects of the advertising spend on earlier windows. Of course sequels are even better when you can time the free tv release with the cinema release of the sequel.

The news that the group that owns Angus & Robertson, Borders in Australia and Whitcoulls in New Zealand has gone into administration has fed a flurry of opinion pieces about the future of bookstores. It has been under-reported in Australia that Borders in the US has also entered into Chapter 11 bankruptcy.

Let's first unpick the story a bit. Borders Australia was sold to A&R Whitcoulls Holdings which in turn was owned by Pacific Equity Partners in 2008. They then formed RedGroup Retail to house both businesses and pay off debt.

The acquisition was not opposed by the ACCC. The ACCC's assessment was dominated by discussion of whether A&R would reverse Borders discounting policy.

This itself was a nonsense. The Borders asset was for sale because its parent was in financial trouble. A "with or without" test on the merger wasn't about the future with a vibrant Borders.

The ACCC satisfied itself on the dynamics of the Australian book market alone. In particular it noted;

The ACCC considers that, although the internet may be an increasing channel for
book purchases in Australia, it is not a close substitute for the merger parties and
is not comparable to the bricks and mortar retailers in terms of the competitive
constraint it would provide to the merged entity.
Specifically, the ACCC considers that the internet is unlikely to provide a strong
competitive constraint on bricks and mortar book retailers, at least in the short to
medium term, and the ACCC did not rely on the internet as a constraint in
reaching its decision.

I have not troubled myself with the detail of the ACCC report. Suffice to say that it is also a nonsense in the way it analyses competition, in particular referring approvingly of "discounting". The theory of competition on which the trade practices law is based doesn't allow for discounting because there is one market price determined by the effects of competition.

To the extent discounting has had a deleterious effect on bookshops it has been the discounting by non-specialist booksellers like Myer and Big W of new release books. This has taken a large cash flow away from the bookshops that needed that cash flow to contribute to the overheads of a big store with a large stock.

The ACCC report only very briefly touched on the issue of the parallel import restriction. This restriction has been retained by the Government despite a contrary recommendation by the Productivity Commission because the Government is more concerned by the luvvies in the content creation business than by the book purchasing public.

My version of this horrid tale is that the Borders business model was always a "crush the competitors" strategy. That strategy looks good early, especially as all you take out is the very bottom end of the market. When the strategy is only confronted by the other big guys life is a lot harder.

The costs in crush the competitors are all big upfront costs in store fit-out and acquisition. You have a higher fixed cost than everyone else and can't be as nimble in competition.

So then you die. Borders group should have died in 2008. The Us was saved by the cash from the sale of Australia. Australia was saved by having new owners.

The new owners thought it clever to buy out the cheap competitor, but could never sustain the sales - especially once they junked the CD sales. So Borders brought down A&R. Everyone should just have let Borders die in 2008. Or even stopped Borders from opening originally under FIRB rules - as the end game was always obvious.

There were only two possible end-points. Borders won and crushed all competitors, hence creating a monopoly. Or Borders failed but caused the closure of a lot of Australian retailers on the way through. Set up like this the FIRB would have had no competition or trade concerns.

Similarly it could be argued the ACCC should have opposed the Whitcoulls acquisition on the same basis. The acquisition was only viable if the merged entity could crush all competition. If the merger was not viable it would damage the book retailing market by taking out A&R on the way.

Ultimately the solution to this is in the wholesale not the retail market. We need to facilitate entry and exit in retail by creating a better more vibrant wholesale market. That means an end to the prohibition on parallel importation.

Just imagine your local friendly bookstore, with books on the shelf you do want to buy. But he also has an online ordering system to a global wholesale equivalent of Amazon, but he gets his books at a bulk shipment rate. Indeed the wholesaler would have a strategy of deploying some books further down the distribution chain. So for Asia Pacific there might be the equivalent of an Amazon distribution post in Singapore.

Finally, e-books are wonderful. But I'll stick with my kindle so I don't need to worry about the Kobo Borders tie in.




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