In the competitive world of bargain books, where you are only as good as what you have to sell, exclusive agreements are changing the nature of the business, especially the hurt book market. Whereas once publishers put books out for bid whenever they wanted and to whomever they wanted, now they call up their contractual wholesaler to say there's a truckload of pallets ready to be picked up. The wholesaler sends a truck, the publisher offloads his unwanted wares and that's that. No fuss, no muss, no individual titles to worry over. There may be a few rotten apples in the bunch, but that's a small price to pay for the advantages built in to the system. This, at least, is the view of some of those people most intimately involved.
"Without question it's the most significant change in the bargain book business in the past 10 years, with the obvious exception of the Internet," says CIROBE cofounder Marshall Smith. "This way of doing business has completely changed the landscape."
Exclusives lock up a publishers' entire stock—usually of hurts, sometimes of remainders and occasionally of the whole kit and caboodle. Exclusive deals were first hammered out in the mid '90s, often as a natural progression from solid working relationships that led to repeat business between the same parties season after season. The contract was but the next step, an agreement that formalized what was being transacted on a day-to-day basis. In the past couple of years, the number of such agreements have increased substantially. "Six years ago, exclusives represented 0% of my business. Now it's 30%," says Dean Winegardner, president and CEO of American Book Company in Knoxville, Tenn., one of the biggest wholesalers in the country.
"We still bid on books occasionally, but that is not the main thrust of our operation," says Steven Lam, president of Book Club of America, a giant wholesaler in Hauppauge, N.Y. The company has many exclusive contracts, including one with Simon & Schuster, and is always pursuing others. "We're looking," Lam explains, "for strategic partners and scenarios that allow us to provide long-term value-added service." This includes freight, collection and warehousing, he says.
Richard Roberts, president and CEO of Book Country Clearing House in McKeesport, Pa., worked out five exclusive contracts while in negotiations to buy the company last year. "We went after the contracts in order to shore up books so we'd know we'd be the exclusive handler and wouldn't be in competition with others," he says. He'd go to a publisher and explain what made Book Country unique. That strategy evidently worked: "We got everyone we approached."
If one publisher's experience is any indication, exclusives, once tasted, are hard to pass up. Indeed, according to sales rep Bill Haydis at Oxford University Press, what used to take hours of his time each month now takes only minutes, and he can't imagine going back to the old system. "We had just laid off a bunch of people, and Book Country came to us and made a proposal," he says. "We thought about it and about the reorganization of the sales department. To put hurts out to bid is very time consuming, and we did it at least 10 to 12 times a year. So we went for an exclusive contract. Now, our systems are basically almost automated. We get a list once a month from our warehouse and fax it to Roberts at Book Country. He faxes back a purchase order. I submit it to the warehouse. When an invoice is generated, they call Roberts and he sends a truck to the warehouse in Cary, North Carolina, and takes the books back to Pennsylvania. And then we start building hurts for the next load. It takes 20 minutes of my time each month, compared to 30 to 40 hours." When the one-year contract is up, Haydis is strongly inclined to renew, he says.
"We don't have the manpower to hold a bidding sale each month," he says. "We come out better financially now. We don't get stuck with pallets. You know they're going out every month."
The drawback, Haydis says, it that you eliminate the competition and irritate some of the dealers. "There were a few angry customers," he admits. "They asked why we hadn't signed with them. But they never asked us. The early bird gets the worm."
Hopping on the Bandwagon
So why haven't all publishers made the switch to exclusives?
"Some publishers aren't interested in contracts," says Marty Cutler, president of Fairmount Books in Buffalo, N.Y. "They have a tough time with the idea. Mentally, it's easier to have a bid list. They think they'll do better dealing with a number of companies but in terms of practical details, there's a lot to be said for dealing with one wholesaler."
Other publishers simply haven't been approached on the subject, several wholesalers say, while others may be a bit scared of the concept. "They don't want to put all their eggs in one basket," says Winegardner. "But it's a smart thing to do. We pay perfectly. We don't nickel and dime publishers on credit. And we realize there's going to be some garbage in there. Some skids you open and you ooh and aah. You have to take the good with the bad. We sell publishers on the ease of doing business with us." More and more, Winegardner says, "publishers are realizing that exclusives are a good way of dealing with their hurts. Exclusives allow them to concentrate on their frontline business, where they make their money. "
Unless, of course, the wholesaler goes under or doesn't pay. "If you're a publisher with an exclusive, you haven't leveraged your risk," says Robin Moody, founder and president of the 24-year-old Daedalus Books in Columbia, Md. A good fit between publisher and vendor can eliminate the problems, he says, but for the most part he's in favor of letting the market forces play themselves out. "The best thing a publisher can do is put his books out there and take bids. Whatever isn't bought can be pulped."
According to Fairmount's Cutler, the best thing about exclusives is that they give him access to titles that no one else has. In an inventory-driven business, he says, "it's good to have that edge. We have an improved bottom line because of exclusive titles. It's good for business. Everyone except my competition should do it," he quips. Nonetheless, he says, the vast majority of his business—he didn't specify a percentage—is handled through bids, not exclusives. Fairmount is unusual in that the exclusive contracts it has are all for remainders. "We don't have any contracts for hurts. We get them through bidding or negotiating," Cutler tells PW.
Though exclusives are "the least profitable aspect of our business," says Winegardner, "they are good for us. We know we will have consistent supply of product. It's a good foundation. If I was a publisher," he says, "I'd try to have a relationship with a remainder company so I could concentrate on my core business."
There's also an advantage in breaking down skids for resale, says Roberts at Book Country. "We are able to maintain a higher resale value on books and better control where they are sold so they don't end up in the same distribution channel," he explains. "We never compete with publishers. We've developed secondary and tertiary markets. Basically, when we get them, the books disappear." Roberts's company does 90% of its business in hurts, and all but 10% of the hurt business is done through exclusive contracts.
"Exclusives provide order and structure in a business that doesn't have a lot of order and structure," says Lam at Book Club of America. "We do a lot of sorting and remarketing. We take titles and market them to a variety of channels. We do freight, collection and warehousing. We benefit the entire industry."
And what about the eager-for-product retailer, who used to be able to buy books directly from the publisher? "Now they have to look elsewhere," says CIROBE's Smith.
Even the most enthusiastic wholesaler is willing to admit to the headaches that the special deals create. "True exclusive agreement means you take everything, " says Cutler. "The downside is you might have dated or unsalable material. There is the cost to receive it and the cost to keep it warm in winter. These can outweigh the benefits. It's good it if works and if you're thoughtful, if you choose a publisher carefully. But it's not a panacea; it's not gold every time."
For the deal to work, the "fit" has to be right, Cutler adds. "There has to be trust, the assumption that the publisher has some good titles and the wholesaler will do a really good job selling those books. If while under contract the publisher changes the nature of what he publishes, well, you live through it, like a marriage." Forging the contract itself is easy, he says. The tough part is the relationship—living with it day to day."
"At times we choke," Winegardner admits. "But that's the down side of having a supply of product you can count on." American Book Company has tripled its warehouse space and added staff, he adds: "It's not as convenient for us as many people may think it is."
"We know when the books are coming," says Roberts at Book Country. "We're ready for them. We have a 200,000-square-foot warehouse and 30 employees."
The matter of timing is a more complicated and sensitive issue. "To say that there's never been an issue would not be true," says Winegardner. "We have to be careful that selling hurts doesn't come back and bite the publisher. If you're trying to build a relationship with a publisher, you're careful."
"The fact that some publishers seem to be putting all bookstore returns into hurts and selling to one vendor means that those books end up in the bargain market earlier than in the past," says Moody of Daedalus Books. "More titles are available, and they're more recent titles. It may dampen sales of books when they are actually remaindered."
Daedalus operates without exclusive contracts and, says Moody, he doubts that situation will change anytime soon. "We have a healthy, growing business simply buying remainders." He is skeptical as well for others. "A few years ago, one publisher sold its whole list to a remainder company that went out of business. There's a risk even in a company encountering cash flow problems, and getting paid late."
Roberts at Book Country laments that, because of his company's promise never to compete with the publisher, he ends up sitting on books for longer than he would like. "We don't sell back into bricks-and-mortar stores," he says. "When you have an exclusive, you get the good, the bad and the ugly, and there certainly are some ugly ones in there. We sell or donate those we can. We are formalizing a program to donate books to schools in underprivileged markets. We've dabbed in online sales, but the jury is still out on that. The volume makes it impractical."
What he offers publishers, he says, is a chance to cut some of their losses. "Basically we find it's publishers that are considering or are shredding their books who sign on. We offer them a way to recoup a portion, if not all, of their cost in a way that doesn't compete with their frontlist books. That's very compelling."
Have wholesalers who haven't signed on with a publisher been hurt by the new arrangements? Not a lot, says Moody. "We were afraid they would hurt us but we find we can get as many books as we need. It would hurt me more if more publishers were to do this. Obviously we have to have supply. But I don't think that many publishers will go for the deal. It's not appropriate for most of them. When it's a good fit, and when the contract that governs their relationship is formulated in such a way that each side takes some of the risks and benefits, then it can work. But the bidding process is a healthy thing. You're less likely to get overloaded with books. You will moderate your bidding if you're getting too much. It's a self-adjusting system. It's where competition works."
Less sanguine is Ed Grossman, president of the New York City—based Marketing Resource, which wholesales remainders but not hurts, often into the Christian market, as well as sidelines. "We're not terribly pleased about the fad," Grossman says. "We can't try to buy books people have exclusives on. It eliminates some sources we had previously." Though there's no shortage of available inventory, he says, he is not happy that his access to certain publishers has been cut off. "Penguin Putnam kids, S&S for all their lines—they both often have product in which we would be interested." So, he says, the company is always seeking new sources for inventory. Nevertheless, he doubts he will pursue a publisher into signing an exclusive anytime soon. "With contracts we would get inventory we wouldn't hold in great esteem. You can't be as selective as you'd like, and I don't agree with that."
Also, Grossman says, he believes he can buy books more reasonably and pass along lower prices to the consumer. "Those with contracts can either ask for a price that seems appropriate to what they're paying, which may be too high, or shrink their margins." Both of these are deterrents to pursuing exclusive contracts, he says.
Exclusives may be the biggest thing in the industry right now but it's not such a big deal, says Haydis at Oxford. Comparing it to Amazon.com or the superstores ruining the independent bookstore market, as some people have done, is a comparison he doesn't abide by. "It's a definite big change," he says, "but it's not the death knell of the bargain book industry. It's just in flux. People do get shaken out. But business is business."
Another view of the bargain book landscape comes from Winegardner, who, like others, cites the spectacular growth of the bargain book industry in recent years. "The biggest factor is not that there are exclusives but that there are more and more bargain book companies than ever," he says. "CIROBE continually grows. There are more and more remainder dealers every year. Exclusives are a small part of the business. A part, but a small part still. I don't think they're a deterrent. If I were going to start over today, I'd still get in the business. It wouldn't scare me. For every publisher that has an exclusive, there are 50 that don't."