The last year has brought good news and bad news for children's book publishers targeting the value end of the business. On the one hand, sales in the value channel—composed of dollar stores, regional discounters, and other off-price chains—are growing as price-conscious consumers look for bargains. "It's been the engine of growth for us for the last four years," said Rich Hilicki, president of Dalmatian Press, one of a handful of houses targeting this channel. "It's amazing, the demand for this product," added Randy McDonald, senior v-p sales at Vision Street Publishing. "The numbers are just staggering."

On the other hand, selling to the value retailers is a tough business, with tight margins, as retailers demand both high quality and very low prices. In fact, two of the leading players in the market disappeared in the past year. Playmore Publishers' intellectual property was purchased by puzzle and activity publisher Kappa Books, whose parent company also owns a minority share in Bendon Publishing. Through a spokesperson, Kappa, which is in the process of relaunching some of Playmore's formats, declined to be interviewed. In addition, Paradise Press ceased operations and sold its intellectual property to the Clever Factory in Nashville. A group of Paradise Press's former employees and a private investor formed Vision Street, which launched its first line in fall 2009 and specializes in low-priced licensed and generic coloring and activity formats similar to Paradise's. About 85%–90% of its offerings retail for around a dollar.

"It's a tough business, and if you don't maintain a lean overhead you're not long in the business," said Ben Ferguson, Bendon's president. "You need cutting-edge licenses, great artwork and innovative products, and this costs more. You really have to manage the budget." McDonald explained, "It used to be stack-'em-high, sell-'em-cheap product, where the quality wasn't as important as the price. But that's not the case any more."

Costs have been rising over the past few years—domestic printing has become more expensive, and increased wages, inflation, and exchange rates raising offshore costs. In addition, testing requirements in the U.S. and around the world add to production costs. Retail prices, on the other hand, are not rising. "Dollar Tree isn't going to change its name to Dollar Forty-Nine Tree," Ferguson said.

The temporary influx of closeout merchandise due to Playmore and Paradise's inventory sell-offs contributed to the downward price pressure already being felt from value retailers wanting to offer their customers a bargain. As a result, publishers sometimes believe they must lower their wholesale prices, but that leads to an unsustainable margin. "We try to give them what we can, within the pricing parameters we have," Hilicki said. "You can't give the books away," agreed Andrew Steinberg, president and CEO of Modern Publishing. "What works is a balance of A+ licenses, value-priced generics, and some novelty items where you can make some margins."

Despite the challenges, the value channel is attractive, largely due to its sheer size and fast pace of growth; sales, store counts, and traffic are all on the rise. Dollar General has 8,800 stores—the most of any U.S. retailer—and saw sales jump 12.8%, to $11.8 billion, in 2009; Family Dollar, which has 6,600 stores, saw sales rise 6%, to $7.4 billion, last year; and Dollar Tree, with more than 3,800 outlets, posted sales of $5.23 billion in 2009, up 12.6%. All three opened a significant number of new stores in 2009 and expect to do the same in 2010. They also reported increased numbers of customers and higher average transactions.

Some of the value stores devote significant real estate to children's books, and some have even increased the space dedicated to this category. Publishers estimate that Dollar General has more than doubled its square footage for children's books over the past 18 months, for example.

All of these positives are noteworthy given that mass retailers such as Wal-Mart have been relatively soft for children's books lately, as have drug stores and other channels where low-priced formats such as coloring and activity books are sold. Wal-Mart plans to reduce the shelf space dedicated to children's books this year, introducing new fixtures and moving the department, publishers said, while Walgreens revamped its children's book section last year, decreasing the number of books and space devoted to them by over 75%.

Mass market chains also are pricing books more in line with the value chains' prices, but Steinberg notes that mass retailers are evaluating inventory turnover per square foot carefully, looking for the most quick-moving and profitable product, making for a challenging atmosphere for value publishers. "A coloring book is no different from a fishing pole" in the eyes of a retailer, Steinberg said. Each type of retailer selling value books has its own margin and price point, and publishers must carry a mix of products in order to thrive. Publishers "can't live on the value channel alone."