This year Canadian publishers face a triple challenge—tough economic conditions, the first big surge of e-book sales, and a dramatic shift in strategy at Indigo Books & Music, Canada’s largest book retailer. But, as is often said, no one goes into publishing unless he or she is an optimist, so PW is devoting these pages to looking at these challenges for publishers north of the border, and the innovations and strategies they are employing to turn that optimism into results.

So far in 2011, the sales numbers tracked by BookNet Canada have been pretty bleak. In the first quarter of 2011, the number of print books sold in Canada dropped by 10.9%, and by 10.8% in the dollar value of the sales. BookNet CEO Noah Genner attributes the drop to a combination of factors, including the jump in the sale of digital books, difficult economic conditions, and the lack of blockbuster hits that have buoyed sales in recent years. Sales picked up a bit over the summer, with George R.R. Martin’s fantasy series and Kathryn Stockett’s The Help both doing very well and boosting sales figures somewhat. But Genner says, “We’re still seeing the year trending down a little bit over the year before. And 2010 was down from 2009.” As for e-book sales offsetting the decline in print, Genner says he cannot say for sure what the proportions are, as BookNet is still developing a panel to measure digital sales, and he doesn’t expect that to be in place for a year or so.

Economic Elements

Still, the big fall season is just beginning, and Canada has a few things going for it. Amid the global economic turbulence, the Canadian economy, relatively speaking, has been an island of stability. In an August article, the Economist concluded that most of the strengths that helped Canada through the recession that hit the U.S. and Europe hard in 2008—tightly regulated banks, a stable housing market, sound public finances, and a strong Asian demand for Canadian commodity exports—would help it through a double-dip recession that some analysts fear is looming. However, there is a downside to that success: the Canadian dollar has soared, to as high as $1.06 U.S. this summer, its highest level since 2007. Although it has come down since, close to par, those heights put pressure on publishers who received a lot of bad press in 2007 when the media and even the federal finance minister used books printed with both U.S. and Canadian prices as an easy target for stories about prices not keeping up with the dollar’s climbing value.

“Pricing is a big issue for us,” says Alison Morgan, managing director of Tundra Books. Because of economies of scale in the much larger U.S. market, prices there are expected to be lower, but since 2007, publishers have been trying to keep Canadian prices close to the U.S. price. “So where we used to have an $8 spread, we’re now trying to do it with one or two dollars and even that meets with some resistance,” says Morgan. “We’re losing margin on both sides of the border.”

Jack David, copublisher of ECW Press, says, “It’s a killer. I wake up in the middle of the night [after dreaming that] the dollar is at 72 cents again.” But he says ECW has found ways to soften the blow, making the new exchange reality work by printing more in the U.S. And because ECW’s books are shipped out of Chicago, the company pays its distributor IPG in American dollars. “So, between printing and sales and distribution, we’re spending a lot of money in U.S. dollars with our Canadian dollars.”

The Economist article also warned that one weakness in the Canadian economy is “its intrinsic vulnerability to the outside world, in particular its American neighbor and biggest trading partner,” and trouble for the U.S. is trouble in Canada.

Some Canadian publishers, such as Firefly Books, sell more books in the U.S. than they do in Canada, and thus feel the impact of events in the U.S. most directly. “There are loads of challenges for us because we have to replace our sales that we used to make to Borders,” says Firefly publisher and owner Lionel Koffler. “And we have both adult illustrated books and children’s titles that sell to school and high school libraries that are missing a lot of their historic funding in the U.S. and Canada. So we have to be very clever and diligent to make more sales out of fewer customers or fewer dollars around.”

Several publishers observed that the market is tougher in Canada than abroad. Rick Wilks, director of Annick Press, says it is “daunting.” The U.S. market is “really tough and getting tougher,” but he says sales in the U.S. “make all the difference” for Annick, along with important international sales, rights, and film sales.

The view from HarperCollins Canada is different. President and CEO David Kent says that the Canadian publishing program remains the most profitable part of HarperCollins Canada’s business. The company just closed a fiscal year with a happy ending that included such highlights as Emma Donoghue’s Room selling more than 100,000 copies and Sara Gruen’s Water for Elephants selling more than 405,000 copies. Perhaps inspired by a series of good years, Kent takes a philosophical approach to the challenges of publishing. He says years ago he told people in the finance department, “ ‘You want predictable. Don’t be in books…. Be in aspirin, be in Band-Aids. You want to be consistent, open funeral homes. Don’t go into books.’ ”

The E-book Has Arrived

For a few years, publishers in Canada have been busily digitizing their lists and backlists preparing for the digital revolution to cross the border. There was a time lag, partially because many of the e-reading devices like the Kindle launched first in the U.S. while Canadian consumers waited impatiently. But now, all the e-readers are here. Many Canadians got them for Christmas and they have been enthusiastically buying and reading on them since. E-book sales in Canada still have a way to go to catch up with sales levels in the U.S., but publishers are watching the e-book portion of their sales rise. “As we pass into 2012, we anticipate more e-book devices being sold,” says Kevin Hanson, president of Simon & Schuster Canada. “We think 2012 will be the year that e-books really have a full impact on the business broadly speaking.”

BookNet Canada is in the process of assembling a panel to track digital sales, so hard statistics are not available yet, but anecdotally publishers surveyed generally believe that e-book sales are about 5%–7% of sales, with higher figures of 10%–12% on some titles. A few houses, such as House of Anansi Press and ECW, report e-book sales are already between 10% and12%. “On certain bestsellers [e-book sales] can be anywhere,” says Leo MacDonald, v-p of sales and marketing at HarperCollins Canada. “It depends on who takes it. If Costco doesn’t take it, it can be a higher percentage. If Costco takes it, it drops. I’ve seen some books up to 50%.” He notes, however, that e-books have a very short shelf-life. “We find that e-books sell like crazy when they are on [an e-retailer’s] home page; once they are off the home page they drop dramatically.”

“E-books are mass market books,” says Kent. “If you look at the categories that do well in e-books they are the categories that do well in mass market—romance, mystery, thrillers. Mass market existed because it was inexpensive and disposable.”

Other publishers make similar observations. Kevin Hanson notes that e-book purchasing is especially high for commercial authors. ”I think in that context we’re actually finding new readers in e-book formats,” he says, noting that the cheaper price encourages people to sample work from authors they haven’t read.

So far, most Canadian publishers tell PW that e-book sales do not seem to be noticeably cannibalizing their print sales, but they acknowledge that it’s nearly impossible to know whether the e-book readers are additions to the market or if they previously would have bought a print copy. Sarah MacLachlan, president of House of Anansi Press, says that there was a huge spike in e-book sales for three of Anansi’s books—Alison Pick’s Far to Go, Patrick deWitt’s The Sisters Brothers, and Stephen Kelman’s Pigeon English—when they made the Man Booker Prize’s longlist. (DeWitt’s and Kelman’s books also made it to the shortlist, announced Sept. 6.) MacLachlan says she doesn’t know if the e-book spike was bigger because consumers couldn’t find print copies, but “they could certainly find them easily as e-books.”

Annick’s Wilks says “the economic model associated with e-books is not hugely encouraging,” observing that so far the sales aren’t sufficient, and even when you do have sales the margins are even worse than print. “A huge misconception the public has is that e-books will work well for us because we don’t have printing costs and paper costs and all the rest. For us, when it takes us a year and a half to develop a book, the printing and paper is a really small piece of that. Yes, there is some saving, but on the other hand, it’s not all that substantial, and the thing about e-books is that they are going to take colossal marketing efforts.”

At Orca Books in Victoria, B.C., publisher Andrew Wooldridge says, “People still need physical books, so I’m not concerned yet that it is going to be cannibalizing print sales. People are buying them more in conjunction with print sales.” Orca sells extensively in the library and school market and is experimenting with a digital subscription model. “Teachers and librarians don’t like buying one e-book for one student. They want to buy multiple-user, buildingwide access to books,” says Wooldridge. “It’s slow to start but we’re seeing good interest from both the individual schools looking at a single series to an entire library system taking every book that we have.” Subscriptions are a way for publishers and creators to be compensated and a way to protect copyright. Says Wooldridge: “As far as digital content goes, we see a lot of opportunity—ways of using our content in different ways and having access to a much wider market than we were able to before.”

Many children’s publishers are still holding back production of e-books, waiting for the technology to be better able to handle heavily illustrated books, but Kids Can Press is experimenting and testing the market. As part of the celebration of the 25th anniversary of the Franklin the Turtle books, Kids Can partnered with Open Road Integrated Media in New York to publish and distribute Franklin e-books, sold as single titles or in bundles of three. Some of the titles are also audio enhanced. It’s still too early to measure the response, but Kids Can president Lisa Lyons says the launch of the read-and-listen version of Franklin and the Thunderstorm “was well beyond our expectations for sales in both Canada and the U.S., so based on that, we’re going to be adding more audio-enabled titles. This is very much what digital is about right now—it’s experimenting and getting that marketplace feedback to know what consumers respond to,” she says. “As there are more capabilities and more tablets, there’s no question. They are going to flood the market. It will be a significant area of growth down the road.”

Watching Indigo

“We’re seeing retailers brace themselves for what they see as an e-book tsunami, so retailers are contracting their inventories,” says Hanson. “So that’s affecting us in terms of the number of books, particularly backlist, that we can carry in the marketplace. And then we’re not there yet specifically with the usage and sales of online [e-books], so there’s a bit of a transition we’re experiencing.”

Some might call that an understatement. “The whole industry is in a big transitional moment and how you come through the transition is the ticket, and I don’t think we’re through it yet,” says Anansi’s MacLachlan.

All retailers may be bracing themselves for that tsunami, but when one retailer represents about 50% of business for many publishers and that retailer shifts its product mix dramatically and reduces the space for books and the time they will have on the shelves, it makes a big wave of its own. Indigo Books and Music has been Canada’s dominant book retail chain since it merged with Chapters in 2001. Its size and dominance has sometimes been its own challenge in publishers’ dealings with it (and is one of the reasons why they generally avoid criticizing the chain publicly), but CEO Heather Reisman and the company have also been recognized for their promotion and support of Canadian literature and publishing over the years.

Part of Indigo’s bracing for the e-book tsunami was to dive into the water with the creation of Shortcovers, which grew and was spun off into a separate company, Kobo, in late 2009. Indigo maintains a controlling interest in Kobo and continues to invest heavily in it. The new Kobo eReader Touch was launched this summer at BookExpo America. Kobo is Indigo’s reach into the digital market, but the second prong of Indigo’s strategy is the diversification of products in its bricks and mortar stores, which is what worries publishers most. This fall it launches its own line of home decor and lifestyle products—desk lamps, book ends, candles and candle snuffers, throws, cushions, scarves. But that means there is less room for books. Reisman has insisted that books remain “the heart and soul” of Indigo. She was not available to comment for this article, but she answered questions from PW about the new product line at the launch of Indigo’s new Plum rewards loyalty program in the spring and spoke about it as a survival strategy. “In order to continue to be in the physical book business, we must add other product which feels like it fits with our journey because if you don’t and you lose 20%, 30% of your business to digital, you can’t stay in business.” Indigo has invested heavily in this strategy. When its first-quarter figures were released the net loss attributable to shareholders was C$18 million compared to C$5 million last year. But, Reisman says, “The results were expected as we invest both in the growth of our digital business and in preparing to launch our proprietary gift and lifestyle business in the fall.”

A new line of products is understandable, but publishers were already disturbed by some of the changes Indigo imposed on its dealings with them this year. One irritant has been that Indigo changed a co-op program, in which publishers paid to have particular titles prominently displayed, to a 4% discount Indigo charges publishers on all books sold. “They call that a co-op? We have no control over where our books are placed at all,” says one frustrated publisher.

Another change in policy that publishers are very concerned about is a shortening of the amount of time books are allowed on the shelves before they are returned to the publisher from a typical 90 days to 45 days. In that time frame, a book intended for the Christmas holiday season could be returned before Christmas. The Association of Canadian Publishers took up the issue with Indigo and managed to win a temporary reprieve. “They are suspending the short turnaround time for the fall and holiday season,” says ACP president Margie Wolfe. “However, we are very concerned that as of January 2012, books will only have 45 days on Indigo/Chapter shelves.”

Janet Eger, Indigo’s v-p, public relations, tells PW, “changes to our process do not have any effect on assortment. What our team has communicated to our vendor partners is that after 45 days we will look at product performance and make decisions about the level of inventory to carry at each store. If one store is selling a book fantastically and another is not, we will first look to determine whether there is something we should be doing to better merchandise or promote the title to bring performance up. But if after 45 days we see that a title is truly underperforming, we may choose to thin down our stock appropriately on a store-by-store basis.”

Eger also emphasizes that books remain a strong presence in Indigo stores. “Our new exclusive products for the home often allow us to integrate and amplify the presentation of books in our stores—for example, cookbooks alongside entertaining essentials or great new fiction between bookends.”

Publishers also express support for Indigo’s need to adapt to survive. “We don’t want to see them go the way of Borders. We want them to be successful and a healthy retailer,” says Hanson. “[Their health] for the last number of years has been good for all publishers.”

“If you try to stay still and hope that things are going to return to what they were, you are almost doomed to failure,” says Bob Dees, president of culinary publisher Robert Rose. “Although I as a publisher might look at the changes going on with some retail partners and wish they were doing something else, I am supportive of people trying to do new things to bring customers in.”

Other publishers expressed confidence that Indigo will maintain its commitment to books and to working closely with them. Kristin Cochrane, publisher of the Doubleday Canada Publishing Group within Random House of Canada, says Indigo’s support for its fall list is “strong and thoughtful.” For example, she says, Heather Reisman recently chose Roberta Rich’s The Midwife of Venice as a Heather’s Pick. It’s a first novel, trade paperback original. Indigo is also supporting a book called The Grandest Challenge by Dr. Abdallah Daar and Dr. Peter Singer, which focuses on ways to bring new health research and treatments to the developing world. “It’s important for us as publishers, but it isn’t the most obvious book” for Indigo to get behind, says Cochrane. “It’s not cautious.”

But if Indigo has less space for books and less time on the shelves to sell them, one other possible silver lining is that it might present opportunities for independent booksellers. Mark LeFebvre, president of the Canadian Booksellers Association, says there are incredible opportunities for independent booksellers. But referring to entrepreneur and author Seth Godin’s ideas, LeFebvre says bookstores can’t make the mistake of trying to carry everything. It’s impossible and too costly. LeFebvre likes Godin’s idea that the bookstore of the future is likely to be a bookstore that carries 1,000 titles that the staff are all absolutely passionate about and that has the ability to access everything else.