The REDGroup Collapse: a Post-Mortem and Musings on the Future …

I mentioned a couple of days ago that two of Australia’s major book chains – Angus & Robertson and Borders (both run by REDGroup Retail) – collapsed. Chuck McKenzie, Australia’s most astute bookstore manager (and author, editor, reviewer, and Keeper of the Dead at NecroScope), was kind enough to write this detailed post-mortem of REDGroup’s demise as a loose part of the Grand Conversation about ebooks (be sure to click the ‘Read More’ button – Chuck has a lot to say!):


The REDGroup Collapse: a Post-Mortem and Musings on the Future …

So. Big week in the book industry, huh?

For those who have been living under a rock, this Thursday just past, REDGroup – the company that owns both the Borders and Angus & Robertson chains in Australia, and Whitcoulls in New Zealand – went bust, with the company placed in the hands of administrators. You can read some of the initial reports on this Event (yep, I’m using the big ‘E’ here) on the following sites:

Sydney Morning Herald

Smart Company

For those of us working in the Australian bookselling industry (I currently manage a Dymocks franchise, having previously managed an A&R company-owned store) this announcement hasn’t perhaps been as big of a shock as it seems to have been to the general public. Regardless of the financial woes and alleged mismanagement issues plaguing REDGroup for quite some time (the details of which are only now fully beginning to emerge), for those ‘in the know’ it’s long been a question of ‘when’, not ‘if’.

Why did it happen?

On the surface, the more obvious difficulties seemed to begin in 2009 when – right in what turned out to the middle of the Global Financial Crisis – REDGroup purchased the Australian Borders chain, thus claiming ownership of around two-thirds of all Australian booksellers*. While one assumes that a step of this magnitude would be carefully calculated – the acquisition undertaken specifically to gain the majority market share of the industry, thereby offsetting losses due to dwindling book sales – even at the time, industry opinion was that this was a reckless move. The chain-wide practice, implemented shortly thereafter, of both Borders and A&R marking their stock above the publishers’ recommended retail price (often significantly so), certainly seemed to confirm this suspicion.

(* When I refer to ‘booksellers’ in this article, I’m speaking solely of bookselling specialists – actual bookshops – rather than retailers who sell books along with other items, such as big-box stores: K-Mart, Big W, Target, and so on).

Then there were whispers, and finally confirmations, that failure to pay their accounts had resulted in the two chains being consistently put on stop-credit with various publishers and distributors, including United Book Distributors (who represent both Penguin and Allen & Unwin, among others) and Random House Australia. With limited access to ‘big’ new-release titles, often for weeks or even months at a time, the chains began to lose even more business. Various means appear to have been employed to minimise the problem, including the transfer of stock between individual stores, and the cosmetic restructure of many shops, so that the ‘New Releases’ display – once the biggest display in many stores – now occupied little more than a single bench space, with the majority of ‘new releases’ there in reality being anything up to eight months old. From perhaps July 2010, the prevalent opinion throughout the remainder of the local bookselling industry – booksellers, publishers and distributors alike – was that it could only be a downward spiral from here for the REDGroup bookselling chains.

That the chains held out as long as they did – presumably bolstered somewhat by Christmas trade – is astounding, given the massive level of debt they ended up incurring, not to mention various financial contracts breached . Nonetheless, in the end this counted for little.

This is not to suggest that the acquisition of Borders alone was responsible for the collapse of REDGroup. There’s been much discussion recently – both well prior to and following the collapse – over the various pressures currently facing all Australian booksellers; so, rather than go into it all again here, some further links.

Things We Keep Repeating, on pressures within the industry, and matters specifically pertaining to the collapse of Borders and A&R

An insightful blog post from author Kirstyn McDermott, on an issue that – frankly – has been consistently and (in my opinion also) erroneously cited as damaging to the Australian bookselling industry.

An alternate view on the same issue, from Leo Shanahan.

A Dymocks franchisee’s view of the threat (or lack thereof) posed by online sales.

A guest blog-post I wrote for Shane Jiraiya Cummings a few weeks back, on the impact of e-readers.

Plus various other posts I’ve made on my own blog, as I’ve followed the increasing plight of the industry over the past couple of years:

On online book sales: http://chuckmck1.livejournal.com/35005.html

On REDGroup’s woes, pre-collapse: http://chuckmck1.livejournal.com/29505.html

On Parallel Importation: http://chuckmck1.livejournal.com/15495.html

In a nutshell, though, the cited reasons for the collapse of REDGroup – and the continuing woes of the remaining industry – appear to vary depending upon who is volunteering the information, and it’s fair to say that not all of the issues cited are credible, or even relevant. Certainly issues such as the rise in popularity of e-commerce and e-readers have played their part, as has the rise in bricks-and-mortar rents, and the GFC overall. Over the past few days, accusations of catastrophic mismanagement have also arisen, even from within REDGroup itself; many corporate booksellers (Dymocks included) have blamed ‘unfair competition’ in general, and the ban on parallel importation specifically. I’ve also heard numerous suggestions that both chains brought the collapse upon themselves through a combination of various public relations issues (such as the 2007 proposed move to have ‘unprofitable’ publishers pay for shelf space in A&R stores), and a gradual move away from ‘genuine’ bookselling in favour of catering to ‘browsers’, as opposed to genuine book-buyers (in the case of Borders) and increasingly substituting stock of ‘real’ books in favour of  cheap remaindered titles, to cash in on the ‘bargain hunter’ set (in the case of A&R).

While some – though again, not all – of these observations are not without merit, it seems unlikely that any one issue would sufficiently eliminate sufficient custom to drive the REDGroup chains to the wall. In all likelihood, the major forces at work here were (and, for the remaining bookselling industry, continue to be) the ongoing effects of the Global Financial Crisis, the increasing popularity of online purchasing, and the recent ‘serious’ investment by manufacturers and readers alike in e-reader technology, as well as – specifically in REDGroup’s case – a yet-to-be fully detailed level of corporate mismanagement. Factor in lower – though still contributory – levels of pressure due to PR mismanagement and a perceived failure to perform as a ‘reputable’ bookseller, and the proverbial final straw becomes somewhat difficult to pinpoint. No doubt further contributory factors will be cited in the days, weeks and months to come; what does seem clear, however, is that the REDGroup bookselling chains were ultimately undermined by a fairly wide variety of problems that, unfortunately, came to a head at almost precisely the same time, and in a combination which they simply couldn’t survive.

What Now?

This is largely where matters fall into the realm of speculation, because it simply isn’t clear yet where the REDGroup chains – or, indeed, the Australian bookselling industry as a whole – is headed. We can certainly make some educated guesses though.

What is known, at this stage, is that REDGroup is currently in the hands of administrators Ferrier Hodgson, who will act to assess REDGroup’s financial situation. The various memos sent to REDGroup creditors and staff over the past few days (which you can read here) explain in broad terms the various processes undertaken, and expectations of REDGroup employees.

In a nutshell, though, A&R and Borders stores are expected to remain trading, and it seems as though FH are confident that monies and entitlements owed to staff (at least) will be made available.  If this is in fact the case (no actual guarantees have been given), then this certainly leaves local employees far better off than their US counterparts; the US Borders chain went bust a mere two days prior to the Australian collapse, although the two Events are totally unrelated on a corporate level, and it is now emerging that many US employees may walk away from their jobs with nothing.

This is not to suggest that it’s a case of ‘business as usual’ at the affected stores. For a start, staff are (understandably) under orders to minimise controllable revenue loss; this includes at present a ‘no refunds’ policy, as well as a policy introduced immediately after the collapse, that Borders and A&R gift vouchers would not be redeemable unless voucher holders agreed to match the value of their voucher when making a purchase. In other words, to redeem a $20 voucher, one must make a $40 purchase. The relevant public notification from FH may be viewed here. Understandably, this announcement was poorly received by consumers, to the extent that many A&R stores (including my local competitor) took it upon themselves to hire security staff during business hours. Also, fairly obviously, none of the affected stores are receiving stock from suppliers, which has resulted, over the course of just a few days, in some stores sporting near-empty shelves and poorly-stocked displays.

Consumer reaction to the collapse has been interesting: aside from the knee-jerk reaction by a vocal minority to the voucher fiasco – which actually saw at least one store receive threats of arson if vouchers weren’t honoured – the day following the announcement of the collapse saw many affected stores inundated with customers, some desperate to redeem vouchers, others simply expecting a massive ‘closing-down’ sale. This certainly had a flow-on effect to other booksellers (including myself); almost every other customer I encountered on Friday 18th either thought that Dymocks was also closing down, or expressed concerns over whether we were going the same way as the REDGroup stores. In both cases, of course, customers were reassured that we were still trading strongly; in fact, in the days since the REDGroup collapse, we’ve experienced our busiest trading period since Christmas, perhaps suggesting that customers were actively choosing to purchase from us rather than A&R (although this could also be coincidental).

Where to from here?

While the future of the REDGroup chains is far from certain, what I personally suspect will happen is this: FH will attempt to find a buyer for the chains, and will almost certainly fail, as nobody is likely to want to buy into a bricks-and-mortar bookselling business at the present time. Instead, I’d imagine that certain key stores – those with the highest costs and lowest turnover – will be closed, and their stock transferred to other stores for disposal. It’s also likely that the remaining stock – everything that the chains are unable to return to their distributors in return for credit – will need to be increasingly discounted in order to sell it, as there’s currently very little in the way of ‘fresh’ or new release stock in any of the stores I’ve been into recently, and thus comparatively little that customers might purchase at full price. This is a process that may well continue until all company (as opposed to franchised) stores are closed.

While all of the 26 Borders stores in Australia are company owned (and therefore likely doomed to closure), of the 180 A&R stores, 60 are franchised; thus, assuming that all franchisees are left standing after the final company store closes, that’s still a reasonable presence for A&R across the country. But will visibility alone be sufficient to keep A&R – as a company, collective, chain, or whatever – afloat? Collins Booksellers went down this road around a decade back, with company stores liquidated and a handful retained by franchisees, who then restructured as a smaller company. This hasn’t necessarily worked for (or against, for that matter) Collins; some stores trade strongly, others not, with current information being that several are due to close shortly. Certainly the reduced visibility of Collins seems to have put them Out of Mind as a viable retailer, at least with most of the customers I speak to. In all likelihood, however, A&R will survive in some small way – assuming that traditional booksellers in general survive into the future, about which more later – even if only as a series of largely disconnected, individually-owned stores with only their branding in common.

As far as the wider bookselling industry goes: there have been various articles doing the rounds since the collapse of REDGroup that cite A&R and Borders as representing 20% of the Australian bookselling market – which is a pretty big damn slice of market to lose, in any industry (and I’ll come to the repercussions of that in a moment). However, as I’ve previous stated, in terms of dedicated bookselling retailers – actual booksellers, who will ideally offer extensive, browsable range and service, and not solely the cheaper prices offered by big-box and online retailers – A&R and Borders actually represent closer to 60% of the bookselling industry. That’s a huge slice of industry to vanish overnight, and you bet there’s going to be major repercussions.

For a start, the 2500-odd folk employed by the REDGroup chains are likely to find themselves unemployed. That may not sound like many in the scheme of things, but 2500 people is a big number of people to dump into what is currently a pretty damn slim job market. It’s not just a question of these people finding new jobs within the bookselling industry (and almost none of them will, for fairly obvious reasons); while the current rate of unemployment in Australia is reckoned at 5% (which is extremely low), that doesn’t necessarily indicate that there are plenty of unfilled jobs on offer. To whit, when my own employment with A&R ended somewhat acrimoniously back in 2007, it took me a full three months to secure another position – and I certainly wasn’t being fussy about the jobs I interviewed for. The potential lack of employment prospects for former REDGroup employees is unlikely to cause major economic waves, but I personally feel it’s important to remember that – as with any industrial event of this nature – there will be a fairly major cost to a large number of people whose only connection to the collapse now directly affecting them was to work for the company involved.

The next question is: what happens to the publishers and distributors to whom REDGroup currently owes millions? Even assuming they can survive the potential loss of monies owing, the closure of REDGroup effectively represents a loss of perhaps half of their current market. How many businesses can survive a 50% loss of annual revenue? Many smaller publishers and suppliers are almost certain to close as a direct result of the REDGroup collapse. Those that survive may have to resort to extreme measure to get by, possibly including (though not restricted to):

  • Further increasing the rrp on books, which – while perhaps providing revenue in the short term – would undoubtedly drive yet more Australian customers to embrace online sales and e-readers;
  • Investing far more heavily in e-reader technology and product;
  • Massive staffing cutbacks, with various departments (or even entire companies) moved offshore (which has already begun to occur in the case of at least one major Australian publisher/distributor);
  • A massive cutback on the acquisition of new publications and authors, with all but the latest ‘sure-fire’ bestsellers (already having proven themselves in overseas markets) frozen out.

To jump on a well-ridden, tangential hobby-horse of mine for a moment (with apologies to those I’ve bored with this before): I believe that the only truly long-term solution to maintaining the Australian bookselling industry in anything like its present form is to overhaul the entire pricing system. In a nutshell (and this is a generalisation, granted, as various factors come into play along the line) books are expensive in this country largely because – for such a big country – we have a comparatively small population. Approximately 21 million people, compared with, say, a population of 61 million in the UK, and 307 million in the US. Because the markets in the UK and US are both so huge, books are cheaper, as everyone along the publishing line – from authors to editors to printers, publishers, distributors and booksellers – can each take a far smaller cut of the profits, yet still make a reasonable return on their services. This isn’t necessarily the case in Australia – or at least, not as far as those in the local bookselling industry are concerned – and thus the prices are higher.

In the face of growing consumer dissatisfaction, however, an overhaul of pricing seems to me to be not just practical, but essential. It’s no magic bullet, to be sure, but if every contributor along the bookselling chain took a smaller cut – say, even 20% less – then the resulting lower rrp on books might drop to a level that was at least a little more competitive with online sales. It’s even possible (though not guaranteed) that consumers would then buy more books than they currently do, perceiving better value for money, and thus offsetting the loss of profit overall to the industry with a rise in overall sales.

It’ll never happen, though. I just can’t see an entire industry sitting down to discuss the idea of everybody making less money per item, even as part of a long term strategy to save that industry; certainly not when that industry is already in financial straits, with everyone’s sight set squarely upon short-term profits. Then again, I’d be overjoyed to be proven erroneously cynical.

The future

We can theorise and extrapolate all we like, but – as science-fiction authors and readers have been aware for a very long time – the future is never what you imagine. Inevitably, various emerging and unforseen trends, opinions and technologies will continue to affect the Australian bookselling industry for as long as there is an Australian bookselling industry. Based purely on the current lay of the land, however, I feel I can make some fairly valid predictions as to where the industry is headed:

  • E-reader technology will continue to grow in popularity, especially over the next few years. Currently, there are a handful of genuinely ‘good’ e-readers on the market, by which I mean e-readers that balance functionality, cost, and product availability to a reasonable extent. This balance will certainly continue to improve, with upgrades to existing models, and the emergence of new products. More new and backlist publications will be made readily available for download, and prices on e-books will be standardised.
  • Cheap online book purchases will likewise continue to grow in popularity. However, the bubble will, if not burst, at least deflate somewhat when online prices begin to rise. Many online businesses are deliberately geared to lose money in their first few years of operation, with a view to securing a massive and loyal customer base. The relative lack of overheads allows such companies to offer major discounts on books, as does their ability to sell in bulk (ie – if they can guarantee sales of, say, a million copies of the latest big release,  they can negotiate a fairly major discount on those books from the supplier). Once you factor in free postage, which most of the current e-retailers do, you end up with an extremely inexpensive and attractive package for consumers. However, three years down the track, with a customer base numbering in the millions, the company begins inching prices up, usually beginning with the introduction of paid postage – and remember, when you charge for ‘postage and handling’, you can charge pretty-much anything you like, and make a tidy profit on the side…
  • Many publishers (particularly emerging and small press publishers) will become solely concerned with e-publishing, thus eliminating many overheads. Furthermore, many tech-savvy authors will bypass the traditional publishers altogether, offering their own e-publications directly to consumers. As a result, traditional Australian publishers may well be caught up in the next ‘extinction level event’ of the bookselling industry.
  • Traditional booksellers will not disappear altogether: just as there are those consumers who still prefer to own ‘hard copy’ CDs of particular albums, there will always be those who prefer to not only own a physical printed book over a downloaded copy, but to whom the process of entering a bookshop, browsing the shelves, maybe picking up a publication they’d not previously been aware of, and soliciting expert advice from an actual bookseller, is an integral part of the book-buying experience. Having said that, it’s almost certain that the number of physical bookstores in Australia will halve over the next decade or so – and that’s half of all booksellers remaining after the collapse of REDGroup. The surviving booksellers, who should do quite well from a customer base now willing to travel greater distances to visit a genuine bookshop, will include franchises, independents, and smaller company chains, but the things they will have in common will be a) a greater level of customer service than is currently evident from Australian retailers (booksellers or otherwise), and b) an increasing move away from mass-market publications (which will continue to be stocked by the big-box stores) and towards servicing niche markets; either specialising in certain types of book, or catering heavily to their immediate community, or both.

Whether any of these suppositions actually come to pass is obviously unknown. What does seem certain is that things are unlikely to improve for the Australian bookselling industry in the near future, and will probably in fact get far worse, in the short term at least. Remember: bookshops other than Borders and A&R are even now closing regularly as a result of at least some of the factors that have forced REDGroup into bankruptcy.

Hard times ahead, and all we in the industry can do is plan as best we can for the future, and keep our fingers crossed; hopefully it’ll be enough.

Note: The opinions expressed here are those held by Chuck as an individual and do not necessarily reflect those of Chuck’s employer, Dymocks.

4 Comments

  1. Patty Jansen says:

    this is interesting stuff, Chuck, and pretty much mirrors my own thoughts about the matter.
    As internet bookseller myself (non-fiction) I am wondering what is going to happen once Book Depository starts charging postage.
    One thing I also thing adds a lot of cost to the print market as a whole is the sale-or-return policy. It’s awkward, wasteful and dare I say stupid. I’d say that the entire bookselling model worldwide needs an overhaul and needs to be brought up-to-date with technology.
    I’m curious to see as to what will happen.

    • chuck mckenzie says:

      It certainly is a pretty archaic system, Patty – although, having said that, it’s often the only thing that keeps us afloat; imagine a bookstore purchasing 50 copies of the latest hardcover bestseller, only to find it doesn’t sell. That’s potentially a catastrophic loss the the store if we couldn’t send it baxk. Conversely, if one under-orders, and the title runs out, you lose sales. Print-on-demand in-store might alleviate both probs – but very little has been done to develop this technology/system to any useful level.

  2. Alan Baxter says:

    Great post, Chuck. I blogged about this today too and I’m pleased to see your far more informed opinion largely mirror my less informed one!

  3. Vicki says:

    Terrific post, Chuck. Thought-provoking and insightful.

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