Online Book Retail

• The Online Environment
• History of Online Book Retail
• Online Book Retail Today
• Key Players in Online Retail
• Buying Practices and Title Availability
• Issues and Emerging Trends
• A Concluding Note on the Online Sales Channel

The Online Environment

The Internet is now a significant presence in many spheres of Canadian life. We have gone beyond relying on it mostly for communications (email) and research (search and browse) to participate in a host of other activities, including social networking (e.g., Facebook and MySpace), banking, sharing photos, and shopping. Social and consumer behaviour is increasingly shifting online.

Canadians are among the most sophisticated Internet populations on the planet. Statistics Canada reports that two-thirds of adult Canadians surfed the Internet in 2005. In 2006, the United Nations' International Telecommunication Union counted more than 22,000,000 Canadians (68% of the population) as Internet users. With a population this tapped in to the Internet, it is understandable that companies' interest in the Internet as a marketing channel to Canadians is acute.

Even so, Canadian companies have been relatively cautious in their embrace of the Internet for sales and marketing. Online sales recorded a fifth consecutive year of double-digit growth in 2006, but only 15% of Canadian retail firms sold online in 2006 (up from 10% in 2005)¹.

Meanwhile, Canadians have been inundated online by major American and global brands, such as Google, Yahoo, and MSN, all of which draw a large volume of Canadian traffic. Traffic volume, however, does not necessarily indicate online sales volume, an area where Canadian online firms seem to hold the majority share. According to Statistics Canada, about 57% of the 49.4 million electronic orders for goods and services in 2005 were placed with a Canadian vendor. These orders represented 63% of the dollar value of online orders that year, or just under $5 billion. In other words, for every $100 spent by Canadians online during 2005, $63 was spent with Canadian vendors. (It should be noted that these numbers include business-to-business as well as consumer sales².)

The emerging online marketplace has had an effect at both the consumer and supplier levels in Canada. For Canadian suppliers, it has meant investing in the technology to meet retailers' standards for order procurement, fulfillment and distribution. For Canadian consumers, it has meant access to seemingly infinite shopping and purchase choices, which has turned us into value shoppers. We are more exacting in our research, price comparisons, and spending. The Internet offers a quick and easy way to research products, availability, and price in advance of purchase.

According to a recent report by J.C. Williams Group, Multi-Channel Shopping—Canadian Style, Canadian online shoppers spent an average of $447 online in a six-month period in 2006, with 80% making two or more online purchases. The Internet is also making an important contribution to traditional (i.e., offline) sales: the J.C. Williams Group report found that more than 8 in 10 Canadian online shoppers researched online prior to buying in-store.

Of the report, one of its sponsors, Pat Bartlett, vice president of Canada Post's direct marketing division, said, “U.S. retailers who are considering expanding into Canada have an extraordinary opportunity to grab hold of a rapidly expanding market. The study clearly shows that Canadians are savvy consumers whose lifestyle behaviour demands multiple channels to shop and a breadth of brands to choose from.”

Statistics Canada reports similar interest in online window shopping:

• An estimated 9.2 million adult Canadians used the Internet to do some window shopping for goods and services in 2005. They accounted for over one half (55%) of all Internet users.
• More than 6 out of every 10 of those online window shoppers actually wound up making a purchase not online but directly from a retailer.

Canadian publishers and booksellers have long been experimenting in the online channel, with varying degrees of success. This chapter will explore the online channel as it relates to the Canadian book industry, outline what factors have influenced Canadian book businesses' initiatives and outcomes in this area, and explore current threats and opportunities.

History of Online Book Retail

In 1994, Jeff Bezos introduced Amazon, Inc. to the online retail trade in North America, effectively inventing a technology framework and process for consumer engagement that pioneered online bookselling. Amazon grew rapidly in the late-1990s, as did the online retail sector in general. In North America, several bookstores launched e-commerce sites:

• 1996: Libraire Renaud-Bray
• 1997: Barnes and Noble
• 1998: Chapters Online and later efollett.com, a partnership between Follett Higher Education Group and 450 campus bookstores
• 1999: Archambault

From 1998 to 2002, Chapters Online was the only major English-language retailer from which Canadians could buy Canadian editions of books in Canadian currency. However, in 2002, Amazon created Amazon.ca, thereby providing direct competition to Chapters Online (now merged with Indigo) because it offered Canadian-source titles in Canadian currency. Amazon.ca also offered discounts, and shipped faster than Amazon.com within Canada. For publishers, this meant another sales channel and an opportunity to repatriate some of the sales that would otherwise go to the US publishers supplying Amazon.com. For Canadian consumers, it meant increased access to Canadian-source titles and a greater choice of online retailers.

As of 2007, the online retail space has seen the rise and fall of several dot-com sites. Canadian retailers³, large and small, have entered the online market to varying degrees of success. Independent book retailers have opted for their own e-commerce sites, such as McNally Robinson Booksellers. They have joined networked communities of like-minded retailers, such as Abebooks. Or they have signed on to services offered by data aggregators such as BookManager's WebStore, which allows booksellers to showcase their inventory and stock status on public-facing websites. Despite these advancements, Amazon remains the dominant player in online book retail in many world markets.

Online Book Retail Today

In 2005, Canadians ordered close to $8 billion worth of goods and services over the Internet for personal or household consumption, according to data from the Statistics Canada's Canadian Internet Use Survey. Of the nearly 50 million orders Canadians placed online during that year, the second highest product category in terms of volume of purchases was books, magazines, and online newspapers. Second only to travel (36%), online purchases of books, magazines and online newspapers represented 35% of all online orders (17.5 million orders).

Indigo's online sales alone indicate growth in the online channel. In May 2006, Indigo Books & Music stated that its online channel, Chapters.indigo.ca, recorded revenues of $79.5 million, an increase of 23% over the year prior. However, its strongest year to date was recorded in the following 2006–2007 fiscal year. In May 2007, the company reported a 9% increase in online sales, from $79.5 million to $86.7 million. This represents an increase from 5% of total revenue in 2002 to nearly 15% in 2007. Amazon does not report its Canadian sales publicly, but has recently stated that sales through Amazon.ca have doubled since 2002.

Indigo, Amazon, and AbeBooks—the Victoria, BC-based firm described in the Key Findings section of this study—have established themselves as the leading competitors in online book retail in Canada. AbeBooks reported worldwide sales of $181 million for 2006, most of which would have consisted of used books sold outside of Canada.

Between Indigo and Amazon, there is some suggestion that Indigo now has the edge in terms of Canadian market share. The National Post recently reported that:

“Amazon's web sites have always generated more traffic than Indigo's, averaging about 25% higher in recent months. But much more crucial is a metric known as the ‘conversion rate', which refers to how many browsers convert to buyers, resulting in a concrete sale. In online retailing, the average conversion rate is a paltry 3% and several sources said that Indigo's conversion rate is significantly above that of Amazon.

‘It is my sense that [Indigo's web sales] are higher than [Canadian sales for Amazon.ca and Amazon.com],' said retailing analyst Brian Pow of Acumen Partners, who covers Indigo. ‘It would be fair to make that conclusion. I think one of the big reasons relates to the fact that their presence is endorsed by traditional storefronts. Amazon is dependent on their brand awareness in general [to generate sales].⁴'”

On balance, however, the online sales channel for books in Canada was arguably invigorated by the entry of Amazon. The visibility of Canadian titles—and Canadians' access to them—in online book retail rose significantly with the launch of Amazon.ca and its considerable selection of Canadian-sourced inventory. Faced with increased competition from Amazon.ca, Indigo increased the quality and marketing for its online program, Chapters.indigo.ca, to strengthen the profile and appeal of the site with Canadian consumers.

The online competition for book buyers quickly became about what each site could offer. Key considerations for consumers include:

• Price discounts
• Availability of goods
• Personalization of shopping experience
• Limited risk: physical locations for pick-up and returns offered by Indigo and length in business and customer service offered by Amazon

While Amazon and Indigo control a large percentage of the Canadian online book marketplace, opportunities remain open for smaller players and niche offerings. Most prominent of all is the opportunity for publishers, already engaged and invested in business-to-business transactions, to sell directly to consumers.

Publishers who want to take advantage of this opportunity face the challenge that most of their competitors will have longer histories and greater brand recognition (at least in the online channel). To succeed in selling direct-to-consumers online, publishers will need to develop distinct competitive advantages. These might include a strong editorial niche position, price discounting, convenience, depth of information, discovery aids (search tools and filters), personalization and quality of service, speed of fulfillment and/or fulfillment options (e.g., in-store pickup, exchange, or return), ease of use, and trust.

Key Players in Online Retail

Online bookselling in Canada is as varied as the bricks-and-mortar retail sector:

• There are online retailers, without physical retail locations, operating proprietary e-commerce sites, such as Amazon.ca.
• There are bricks-and-mortar booksellers who operate e-commerce sites using off-the-shelf or custom-built e-commerce engines, for example, Indigo Books & Music.
• There are networked communities of bricks-and-mortar booksellers using platforms such as Amazon's Web Services and BookManager's WebStore, to name two.
• And there are publishers—from small independents to large multinationals—who are operating e-commerce sites to sell their books directly to consumers.

Online Retailers: e-Commerce Only

Amazon.com, as the pioneer of online retail, remains a popular shopping destination for Canadians. According to the Alexa Traffic Rankings, a tool developed by Amazon.com, Amazon.com is ranked #20 in top destinations for Canadians versus Amazon.ca's #74. Amazon does not disclose Amazon.ca's online sales or the percentage of sales through Amazon.com that are shipped to Canadian addresses, so it is currently impossible to offer a solid estimate of Amazon.com and Amazon.ca's relative market share. Some industry analysts believe, however, that Amazon.com commands greater market share than Amazon.ca, and speculate that this is part of the reason Amazon does not report separate Canadian sales figures. According to its 2006 annual report, however, Amazon's North American net sales (year ending December 31) were $5.8 billion, a year-over-year percentage growth of 25%.

In addition to Amazon.com and Amazon.ca, Amazon offers online retailers access to the Amazon database via Amazon Web Services, which allow third parties to create independent websites that access the Amazon platform and product database. For Amazon, the result is mini-Amazons operating at very little cost to the company, which capture online sales that might have gone elsewhere. For programmers, the Amazon product database can be harvested and represented on third-party websites in a customized way.

Hampstead House Books is an example of a Canadian-owned, family business using the Amazon platform to operate an e-commerce site. Hampstead House sells books by mail order catalogue across the country and specializes in publishers' remainders.

Amazon is not the only online retailer to create a proprietary system. However, it is the largest of the online-only retailers operating in Canada. Smaller players include online retailers such as Northwest Passages, which offers Canadian literature and title and author information on a custom, e-commerce platform, and Aaronbooks.com, self-labelled "Canada's Online Bookstore," representing over 50,000 books online.

Bricks-and-mortar + e-Commerce (Custom-built or Installed)

The largest and most dominant player in this category is Indigo Books & Music. In addition to its retail outlets, Indigo continues to operate an online store, Chapters.indigo.ca, and e-commerce kiosks in its retail outlets.

Chapters.indigo.ca, which first launched as Chapters Online in 1998, was one of Canada's biggest online success stories. Prior to its launch in 1998, English Canadians did not have a Canadian-based, major online bookstore from which to buy. In Quebec, Librarie Renaud-Bray (1996) and Archambault (1999) were providing e-commerce to francophones and francophiles around the world. But in English-speaking Canada, the only major retailer was Amazon.com. As a US operation, Amazon.com shipped to Canadians but the pricing was in American dollars, the books were sourced from American distributors and wholesalers, and the delivery times were estimations that did not include border delays. In contrast, Chapters Online originally offered over 2 million Canadian-sourced titles.

Independent booksellers, including McNally Robinson and Munro's Books, are also competing for online sales via custom-built e-commerce systems. McNally Robinson Booksellers is an independent and family-owned chain of bookstores based in Winnipeg. The company's online site features Canadian—in particular, Prairie—writers and bestsellers lists, a searchable database, and a store locations list. Munro's Books of Victoria, BC, is an independent store stocking Canadian, American, and British books-in-print. The company's online site features award-winning titles, bestsellers, bargain books, events and reviews, as well as a searchable database. As noted previously, the two regional chains in Quebec, Renaud-Bray and Archambault, have been operating e-commerce sites since 1996 and 1999, respectively.

The development and maintenance of a custom-built e-commerce system presents a number of challenges for the retailer including:

• The continual update of existing product information and the addition of new product information can be time-consuming unless automated.
• Public-facing inventory and order placement needs to feed into a back-end system that handles fulfillment.
• Expansive product offerings require search and browse functionality for users.
• Any large e-commerce business benefits from an understanding of all aspects of search marketing so that product pages are well placed in search results.
• Custom e-commerce solutions can be expensive to build and require continual technology development.

Bricks-and-mortar + e-Commerce (Networked Platform)

As an alternative to building their own e-commerce platforms, some independent retailers have joined online marketplaces, such as eBay, or collaborative networks such as AbeBooks and BookManager.

Although eBay and AbeBooks offer interesting opportunities for individuals and small retailers to build e-commerce sites on existing platforms, BookManager appears to be the platform of choice for booksellers focusing on new books, as opposed to rare and used books.

TBM BookManager Ltd. was created in 1986 in Vancouver by Michael Neill, then co-owner of a family-run chain of bookstores. Today, BookManager is located in Kelowna, BC, and the BookManager system supports more than 400 retail bookstores, mail order firms, and small- and medium-sized publishers and distributors.

The BookManager system integrates ordering, receiving, returns, accounts payable, inventory control, customers, vendors, point-of-sale, invoicing, accounts receivable, and a host of other book industry-related tasks. It also offers users a template-based and customizable online WebStore. A user's entire active BookManager inventory can be automatically uploaded to the web daily. For BookManager users, WebStore is free and is integrated with their existing business operations, making it a hassle-free option for online retail.

Approximately 70 booksellers—representing all provinces—regularly update their BookManager websites, which appear on Bookmanager.com, with stock updates. Canadian consumers are able to reserve and order books from their independent bookseller of choice.

Of BookManager's online sales option, one study respondent concluded that on the whole, it is well worth exercising: “Given the price—free—booksellers that aren't operating a website would be silly not to use it. It leads to 5–10 inquiries per month that would not happen otherwise.”

Some prominent independents that have opted for this approach to online sales include:

• Black Bond Books (BC)
• Vancouver Kidsbooks (BC)
• Inside Story (NS)
• Collected Works (ON)
• Mabel's Fables (ON)
• Bonder Bookstore Inc. (QC)
• Livres Babar Inc. (QC)
• Book & Brier Patch (SK)

A full list of BookManager WebStores is available on the BookManager website: http://bookmanager.com/tbm/?q=h.stores

Publishers With e-Commerce

Publishers, whether they are large multinationals or small independents, are also faced with the opportunities and challenges of selling direct to consumers using online channels. For the most part, publishers are using custom, installed e-commerce systems tied to their back-end administrative and fulfillment operations.

Unlike independent booksellers, Canadian publishers and distributors have been driven by major retailers, such as Wal-Mart, Costco, Amazon, and Indigo, to make technology updates to how they store bibliographic data and metadata (e.g., covers, descriptions, and author bios) and how that data is exchanged with the major retailers.

Since publishers are already investing in these standardized means of electronic delivery to their retail partners, they have the means to also make that data available to Canadian consumers on their own websites. That said, as of summer 2007, only 30% of the 125 publishers listed in the Association of Canadian Publishers member directory have e-commerce-enabled sites.

Buying Practices and Title Availability

In Canada, the terms of trade and buying practices for online booksellers are largely modelled on those for bricks-and-mortar stores.

For bricks-and-mortar retailers with online sales, the buying process for the online channel is integrated into the general buying process. For small independents, stock is made available in-store and online, but there is little differentiation in the size of the order placed for a title appearing only in-store versus a title appearing in-store and online.

For those publishers and distributors selling into the major retailers, Amazon and Indigo, the process is as follows.

Indigo

The bricks-and-mortar buying team at Indigo orders with the online channel in mind and the online team reviews the orders.

• Online stock requirements are taken into account by bricks-and-mortar category managers who place all orders for the chain in their subject category.
• Key titles for the online channel are identified by both bricks-and-mortar category managers and the online team.
• Category buyers and online team members ensure the appropriate levels of stock for strong online titles are held in the Indigo Distribution Centre (DC).

The main role of the online team is to act as online merchandisers. They are subject-matter experts who review key titles in their subject area to ensure product listings include key information such as cover, description and author biography; that editorial content is produced if necessary; and that stock is available and held in the DC. Stock held in the DC is an important factor in the online shopping experience because it is related to the reported delivery times on Chapters.indigo.ca. For customers, the decision to buy online is based on availability, price, and delivery time, and is influenced by associated editorial content, such as the cover image, descriptions, reader reviews and quotes, and other enhanced information.

Amazon

The buying process is more simplified at Amazon.ca, in large part because it is an online-only retailer. Amazon fulfills customer orders in a number of ways, including through their US and international fulfillment centres, through fulfillment centres operated under co-sourcing arrangements (i.e., in cooperation with distribution partners), and through other third-party fulfillment arrangements. These multiple mechanisms for fulfillment ensure that customer orders are quickly shipped.

The system first checks to see if the title is in stock in an Amazon fulfillment centre. If a title is not available directly from Amazon, the order cascade (i.e., the automated process of selecting a fulfillment centre for an individual order) is determined by availability and historical turnaround times for each vendor.

These fulfillment mechanisms are visible to the consumer in a number of ways. Up-to-date inventory availability information is listed for each product, as well as delivery date estimates and options for expedited delivery. The shortest delivery date estimates are from Amazon fulfillment centres with delivery times from other centres increasing depending on how far down the cascade Amazon must go in order to fulfill the order. Amazon.ca has one buyer who focuses on ordering stock for the Amazon warehouse and fielding publisher requests⁵.

Amazon.ca also has online editors who enhance the site content, in particular the main pages for each book category. Despite all titles being listed on the site, the online team is generally most interested in titles forecast to sell 50 copies or more in the first eight weeks of publication. These titles, or those that have already established a strong sales history, are more likely to be stocked in an Amazon fulfillment centre. Books available in an Amazon centre will generally ship more quickly than those found at centres further down the shipping cascade. This is a significant distinction as better availability translates into faster shipping times, and, it is believed, better sales.

Although both Amazon.ca and Chapters.indigo.ca have buyers and editors concentrating on online editorial content, it does not mean they are selectively listing titles; all available titles are listed in the databases. What the online teams are doing is concentrating on getting those titles in front of consumers—similar to front-table placement at the store level. Co-op funds are used to support this process by securing front-page placement or main-page category placement for specified titles, inclusion in specialty pages or online boutiques, inclusion in email marketing campaigns, and the creation of editorial content supplied by the publisher or by the retailer's online team.

The only variation in the buying process and terms of trade between Amazon.ca and Chapters.indigo.ca is how the two retailers approach co-op advertising. Amazon.ca, with a single buyer, sets an expectation for co-op spending and offers guidelines and suggestions for the types of placement that may work best, but the publisher is responsible for deciding on how the co-op funds will be spent. Chapters.indigo.ca has a greater focus on editorial content and often approaches publishers with a co-op request. In both cases, the publisher is responsible for the amount of funds spent and how they are allocated. However, Indigo's approach is influenced by an active group of online merchandisers and editors.

Co-op advertising and publishers' abilities to provide enhanced content significantly improve a title's performance. According to BookNet Canada, titles with a cover image and descriptive content can outsell a title without by a margin of 8:1.

Issues and Emerging Trends

Pricing Transparency

Online marketing and sales result in transparencies to both consumers and retailers, who can easily compare price, delivery times, and stock availability. Consumers and retailers can shop around for the best (cheapest, fastest) supplier.

However, the immediate benefit of lower prices for consumers gives rise to the prospect of a longer-term negative effect for publishers. Deep price discounts at retail tend to create pressure for additional trade discounts from publishers, which further constrain the profit margins and profitability of publishing firms.

As noted elsewhere in this paper, discounted pricing in the online channel:

• exerts pricing pressure on all retail channels;
• lowers the customers' perceived value of the products, especially bestsellers and new releases;
• results in narrower margins for suppliers, which in turn restricts their ability to invest in product development or marketing.

The Impacts of Technology on Established Publishing Models

Decades of technical innovation have made the retail sector, in particular the online channel, what it is today. The various advances in business-to-business technology and business-to-consumer technology have amplified the problems of discounted pricing and supply-chain management, but they have also improved certain business processes. Online book purchases, for example, involve advanced logistics systems for order shipping and tracking, and are enabled by sophisticated product databases and rich product information in the form of various levels of standardized bibliographic data. These advancements support basic bricks-and-mortar business operations as well as those involved in online sales.

Advances in technology will continue to affect business at all levels. The emerging areas of interest for traditional publishing firms are in digital rights management, e-books and electronic publishing, and web-based marketing opportunities. Within online retail, further advances are likely to come in the form of more powerful search and filtering technologies, and improvements in the marketing strategies used to reach niche audiences.

With market challenges also come market opportunities. For instance, visionaries such as Chris Anderson, author of The Long Tail, view the Internet as a mass market with millions of niches. Anderson argues that the opportunity for online retailers and publishers is to stop focusing only on the bestsellers. He indicates that there are far more niche goods than hits, and the cost of reaching those niches is falling dramatically due to a combination of improvements in distribution, technology, and broadband accessibility.

The opportunity for Canadian publishers and retailers then is continued investment in the research and development of supply-chain management and technology and the more aggressive use of the Internet as an online marketing and sales channel. The challenge to Canadian success in this channel is the dominance of US global retailers who bring to the channel decades of expertise and greater financial resources. Without Canadian investment in the online channel, the majority market share held by Canadian vendors may very well dwindle, likely limiting Canadian access to Canadian-authored and published materials.

A Concluding Note on the Online Sales Channel

Many of the patterns and principles of the bricks-and-mortar world apply to the online sales channel as well. Location is important, as expressed in the role played by major online brands (which operate in practice as online “addresses”). So is selection, in terms of available titles, the way in which they are featured, and the shipping times at which they can be conveyed to customers.

Online booksellers have played an important part in entrenching price discounts on new books—a consumer expectation that now extends to bricks-and-mortar book shopping as well. With widespread discounting and a vast selection of listed titles, online booksellers represent a serious competitive challenge to all book retailers. At the same time, the online sales channel brings real benefits to consumers, in the form of more price and selection options, and to publishers, for whom it represents a way to efficiently connect with readers (either directly or through an intermediary, such as Amazon).

This study has shown that the Internet accounts for only a small percentage of consumer book sales at present. These are early days in the history of online bookselling, however, and it remains to be seen how this channel will develop. But this much is clear: social and consumer behaviour has shifted online to the point that the Internet has now emerged as both a mass medium in its own right and as a legitimate platform for the sales and marketing of books. As the channel develops, it will have a major bearing on consumer awareness of books, the selection of titles available, and the ways in which book retailers in all channels compete for business.

As such, online bookselling is both a constructive and a disruptive force. It provides new choice and valued services to consumers, and it is a new sales channel for publishers; yet it breaks down conventional boundaries related to territory, trading information, and roles within the supply chain.