2.0 Trading Partners

• 2.1 The Book Supply Chain in Canada's English-Language Market
• 2.2 An Introductory Note on the Participants in the Supply Chain
• 2.3 Distributors
• 2.4 Sales Representation
• 2.5 Wholesalers

2.1        The Book Supply Chain in Canada's English-Language Market

In some respects, the different players in the supply chain defy easy classification. Some firms play multiple roles (e.g., publishers that are also distributors; booksellers that are also wholesalers), and services offered may be packaged in varying combinations for different clients.

For the purposes of this paper, we will classify individual firms by their primary role(s) in the industry. Similarly, we will define a few broad categories of participant in the supply chain as illustrated in Figure 2 below.

Figure 2. Major sales channels and trading partners in the book supply chain¹. 

Figure 2 illustrates the key sales channels, and the major roles within each, for the domestic book market. We can make a few broad observations based on this illustration:

1. The major participants in the supply chain are (a) publishers, who acquire rights to titles and prepare them for sale; (b) distributors, who perform a range of order processing, warehousing, fulfillment, and collections functions; (c) sales representatives, who sell to and support customer accounts; (d) wholesalers, who sell to retail accounts; and (e) customer accounts, including retailers and institutions.
2. Publishers, through their sales and distribution systems, may sell directly to retail and/or institutional accounts, or may sell to wholesalers who service these accounts.

As noted earlier, it is not unusual that an individual firm will occupy more than one of these categories. In particular, there are those publishers that self-distribute and provide their own sales representation. These are generally the larger publishing houses, such as HarperCollins Canada, whose scale of operation allows them to maintain their own distribution systems and sales teams, or more specialized publishers with a well-defined market niche and, often, a limited reliance on large national trade accounts.

Edmonton-based Company's Coming Publishing, with its focus on direct sales to non-traditional retail, and Victoria's Orca Books, with its emphasis on the library and school market, are good examples of this latter category.

Controlling sales and distribution within the publishing house in this way can be thought of as an ideal state for many publishers. As US publishing consultant Thomas Woll has said, "No one cares as much about the success of a publisher's books as the employees of that house. Books will get much more individual and focused attention from house reps than from others."

In-house control of sales and/or distribution also has the effect of connecting publishers more directly with their customer accounts, and this generally means more ready access to sales information, greater awareness of promotional opportunities, and improved capacity to gather market intelligence.

Nevertheless, most publishers will contract for some combination of sales representation and distribution services. This approach remains the norm in Canadian publishing, and the reasons are straightforward: the need to manage costs relative to sales volume, the greater market access that larger distributors and sales teams can provide, and the need to manage risk.

2.1.1    Contracting for Distribution

The following figure illustrates the major practical considerations for a publishing house in deciding whether to contract for sales and distribution services, as opposed to managing these key functions in-house.

Figure 3. Advantages and disadvantages of managing sales and distribution in-house. 

As Figure 3 indicates, cost is a major consideration in the publisher's decision. Maintaining a sales team and/or distribution system in-house is expensive—particularly taking into account the considerable investment in staffing, facilities, and technology that the modern supply chain requires. These will be borne by the publisher largely as a fixed cost. Contracting with a distributor for these services converts these potentially significant components of company overhead to variable costs. The publisher pays for only the portion of the system it uses, not the entire facility or the overhead that supports it. The publisher pays commissions only for its actual sales, and is relieved of responsibility for the payroll of a national sales team.

Further, larger retailers will be reluctant to maintain separate accounts with smaller publishers or with those with which they have a modest sales volume. It is more efficient for the retailer (or institutional account) to place consolidated orders with a single distributor or wholesaler. In this sense, distributors play an important aggregating function in the marketplace that allows smaller firms to trade effectively with larger accounts.

Similarly, smaller firms will generally have a lower payment priority for larger accounts, whereas a larger distributor can collect receivables more effectively and predictably. This in turn generally means a shorter receivables period, a stable flow of payments, and a more reliable cash flow for the publisher. 

With these points in mind, we can modify our earlier observation about the ideal state for the publisher being to bring as much of the sales and distribution function in-house as possible by saying that this is dependent on:

1. the relative costs of in-house sales and distribution versus contracting these out;
2. the optimal mix required to serve the publisher's main channels to market.

The economics of distribution and the dynamic of the marketplace will mean that, for the majority of publishers, the most effective approach will involve some level of contracting out to specialized distributors, wholesalers, and sales agencies.

2.2       An Introductory Note on the Participants in the Supply Chain

The remainder of this chapter will explore the different types and characteristics of distributors, sales representatives, and wholesalers in the Canadian marketplace.

As we noted earlier, the lines between the different participants in the supply chain are not always clear. However, the basic distinctions that can be made between wholesalers and distributors are that distributors provide services to the publisher for a fee, have exclusive territorial rights² to the publishing lines that they represent, and sell to all types of customers, including wholesale accounts. In contrast, wholesalers buy selected titles from many publishers and distributors on a non-exclusive basis and then re-sell to retail and institutional accounts.

In some markets, notably the US, the incorporation of an in-house sales team can be a further distinguishing characteristic of a book distributor. This is true among some of the largest distributors in Canada as well, but more common is the distributor that operates without an in-house sales team. This means that Canadian client-publishers generally have more flexibility with respect to sales arrangements, and will often contract for distribution services and sales representation separately. With this in mind, we will treat sales teams as a distinct category of participant in the book supply chain, along with distributors and wholesalers.

2.3       Distributors

Leaving aside the issue of sales representation for the moment, Canadian distributors otherwise offer a comprehensive range of services to their client-publishers. These typically include the following:

Basic fulfillment

• Warehousing
• Receiving and processing orders
• Order fulfillment: picking, packing, and shipping
• Data management of inventory and orders for client-publishers and customer accounts³
• Returns receipt and processing
• Invoicing and collection of accounts receivable

Marketing services (may be optional fee-for-service items or bundled with basic fulfillment)

• Publicity
• Sales catalogue
• Trade advertising
• Representation at trade shows and sales conferences
• Administration of co-op budgets

Additional services (generally charged on a fee-for-service basis over and above basic distribution fees)

• Warehousing of publisher overstock
• Packaging and shipping of promotional displays
• Shipment of advance reading or review copies
• Stickering
• Special promotions or title-specific marketing programs

Given the majority market share of imported books in Canada⁴, we should note that these services are often packaged differently for foreign and domestic publishers. Generally speaking, foreign publishers are more likely to contract for a bundle of fulfillment, marketing, and sales services from a single distributor. In contrast, Canadian publishers will often contract separately for distribution and sales representation, and will retain many aspects of marketing support for their titles in-house.

But for that distinction, the participants in this part of the Canadian supply chain can be broadly classified in three categories: (1) publisher-distributors, (2) distributors, and (3) self-distributing publishers.

2.3.1    Publisher-distributors

Publisher-distributors are publishing houses that maintain their own sales and distribution systems. For the largest firms in this category, the distribution part of the business may be spun off as a separate division or subsidiary company with strong organizational and operational ties to the publishing parent.

These publisher-distributors take on other publishers—and in the case of foreign-owned firms, the lists of the international parent—as distribution clients. In such cases, the publisher-distributor has created a distribution system with more capacity than it needs to handle its own titles. Rather than carrying the additional overhead associated with this additional capacity, the publisher-distributor is effectively re-selling the excess capacity to its client-publishers—and, in so doing, is sharing system costs among its distribution clients and generating an additional revenue stream in the process.

Carrying additional distributed lines also allows the publisher-distributor to increase its overall sales volume and market presence. In a relatively flat marketplace like Canada's, the distribution side of the business can therefore be an important source of sales growth.

In fact, a number of Canadian publisher-distributors act as in-Canada distribution agents for foreign publishers. These agency revenues have historically been a critical aspect of the business model for many publishers and distributors in Canada. Some of the oldest publishing houses operating in Canada today—both Canadian subsidiaries of foreign-owned firms and companies founded in Canada—began as distributors of imported titles, using distribution revenues to finance their first original publishing programs. Many others continue to rely today, to varying degrees, on agency revenues from imported lines.

Contemporary examples of distributors in the publisher-distributor category include the foreign-owned firms Penguin Canada, HarperCollins Canada, Random House of Canada, McGraw-Hill Ryerson, Scholastic Canada, and John Wiley & Sons Canada; and the Canadian-owned firms Thomas Allen & Son, H.B. Fenn and Company, University of Toronto Press, Nimbus Publishing, and Firefly Books.

2.3.2    Distributors

Distributors do not publish their own original titles, but instead focus entirely on distribution services for client-publishers⁵. Examples of distributors in this category include the Canadian-owned firms Raincoast Books, Publishers Group Canada⁶, Fraser Direct/Jaguar Book Group, Georgetown Terminal Warehouse, and Sandhill Book Marketing⁷; and the foreign-owned Simon & Schuster Canada.

In addition to their core distribution services for Canadian clients, Fraser Direct and Georgetown Terminal Warehouse also do a significant freight forwarding business. This involves clearing consolidated international shipments, mainly from the US, through Canadian customs and then processing this inventory for onward shipping to Canadian accounts.

Along with these major trade distributors, the Canadian supply chain also features a number of educational and scholarly distributors along with those specializing in one or more subject categories such as Dempsey (self-help, personal growth), ABC Art Books (art), BND Distribution (religion), and Fernwood Books (academic)⁸.

Raincoast Books has emerged as one of the country's leading specialist distributors. It incorporates within its operations a full-service distributor (Raincoast Books), a wholly owned distribution subsidiary (Publishers Group Canada), and a trade wholesaler (BookExpress). Each of these operating units provides a different combination of sales, marketing, and distribution services to a distinct client group. However, each also shares a common infrastructure within Raincoast for warehousing, operations, invoicing and collections, ordering processing, customer service, and marketing.

Raincoast has been able to leverage its significant investments in plant capacity and systems by using this infrastructure to provide targeted services to a variety of customer groups. This is arguably a key reason for Raincoast's prominent position in the Canadian marketplace and an important contributor to the operating efficiencies the company has achieved.
 
In another interesting example of how fulfillment services can be bundled to fit the requirements of specific client groups, Fraser Direct also operates the Jaguar Book Group, a group of more than 30 small- to mid-sized publishers with annual revenues of between $500,000 and $1 million each. Jaguar Book Group allows these smaller firms to acquire some additional distribution efficiencies—and lower distribution costs—by consolidating orders, invoices, shipments, and collections under the Jaguar name.

Fraser Direct also plays a part in another innovative approach to small-press distribution in Canada as the fulfillment house for LitDistCo (the Literary Press Group Distribution Collective), a group of 35 Canadian literary presses. Fraser Direct again consolidates orders, invoices, shipments, and collections on behalf of LitDistCo, and LitDistCo takes on some of the administrative work of distributing sales information and payments to member publishers, supporting the member publishers, and carrying out trade negotiations and promotions planning on behalf of the group. Through this division of labour, the small presses in the collective are able to access a full-service distributor at more manageable costs than would otherwise be available.

This is an important feature of the LitDistCo model since, as we will explore further below, one of the great challenges of distribution is the inverse relationship between fulfillment costs and publisher sales volume.

2.3.3    Self-distributing Publishers

Finally, the Canadian-owned sector of the book publishing industry is distinguished by an additional category of distributor: the self-distributing publisher. These firms publish and distribute their own titles, and, in some cases, the titles of one or more subsidiary or affiliated imprints. In contrast to the publisher-distributor category, the self-distributing publisher's original publishing program remains its primary focus and it has generally opted for self-distribution as the most economical and/or best strategic fit for its publishing program.

Both Harbour Publishing and Heritage House are good examples of firms in this category. Harbour distributes its own titles along with books from two other publishers in which it has or has had an ownership interest: Nightwood Editions and Caitlin Press. Similarly, Heritage House distributes its own books along with titles from two subsidiary companies, Touchwood Editions and Rocky Mountain Books.

2.4       Sales Representation

Publishers' sales representatives make regular sales calls on buyers with retail accounts across the country. They sell the publisher's books into these accounts—with orders going to the distributor for processing and fulfillment—and play a critical role in field support for their retail accounts throughout the year.

As such, the degree of effectiveness of the publisher's sales team is a major determinant of success in a number of sales channels, as well as an important source of market intelligence regarding feedback from accounts, changing market conditions, and promotional opportunities. 

As mentioned earlier, publishers organize their national sales representation in a variety of ways. Many publisher-distributors have in-house teams of sales representatives working in territories throughout the country, and so client-publishers of those firms will often have sales representation bundled with their fulfillment services.

Other publishers will rely on independent sales agencies, some of which are formally or informally affiliated with distributors, for national sales coverage. There are a number of well-established sales teams throughout the country, including Kate Walker & Company, Canadian Manda Group, Michael Reynolds and Associates, Hornblower Books, and many other regional and subject specialists as well⁹.

Publishers may also choose to establish a mix of in-house and commissioned sales representation, where the publisher retains some regions of the country, or certain accounts, for its in-house staff. This can be effective in cases where the publisher has a concentration of sales in one part of the country—so that these accounts can be effectively served by a house rep, and there is a sufficient sales volume to support one or more permanent staff.

This highlights the biggest challenge of using in-house sales representatives: the cost. Comparative costs of in-house versus commissioned representatives will vary according to the sales mix, overheads, and local labour conditions for a given publishing house. But, as a rough measure, the salary, payroll, and travel budgets required to support a single in-house sales representative would suggest a requirement of as much as $1 million or more in annual sales to support each full-time in-house rep.

Even so, it has also become increasingly common for publishers to treat so-called national accounts (e.g., such as Indigo or Costco) as "house" accounts¹⁰. This reflects the growing market concentration at the retail level, and the corresponding growth in market share of these large retailers.

The Book Retail Sector in Canada study estimates that Canada's national bookstore chain, Indigo, alone accounts for 44% of the domestic consumer book market. Further, the study notes a broad pattern of concentration in Canadian book retail.

"As is the case in many world book markets, the Canadian consumer book trade is highly concentrated among a relatively small number of players. There is one national bookstore chain in Canada's English-language market, Indigo, and two regional chains that have comparable market power within Quebec, Archambault and Renaud-Bray. Beyond this, the retail market is composed of a number of mass market retail chains, notably Costco Wholesale, that have embraced the book category; a growing number of players in the online channel, led by the web retailer Amazon; and an independent bookstore sector that, while reduced in numbers in recent years and still under pressure, has lately shown some signs of recovery.¹¹"

If there is a positive aspect to this market concentration it is that a publisher can typically address more than 50% of the Canadian retail market through sales calls to as few as three accounts—major retailers such as Indigo, Costco, and Amazon—whether by a dedicated house rep or by other senior staff from the publishing house.

Keeping in mind the maxim that in-house control of sales is an ideal state for most publishers, this type of account split is a sustainable step that more publishers are able to make in today's marketplace. Generally, a publisher that makes most of its sales through traditional book retail will have enough sales volume to justify its interest in dealing directly with major national accounts. The more pressing issue will be whether or not the account itself feels that the publisher's sales volume is sufficient to warrant a separate sales appointment as buyers will generally prefer to see smaller-volume publishers' lists presented together by a distributor's rep or commissioned sales representative.

As this last point illustrates, the choice between in-house and commissioned sales representation is not simply a matter of dollars and cents. The professional sales agencies working throughout Canada have, over a period of years, established close working relationships with retail and institutional accounts.

Needless to say, these publishers' representatives have also amassed considerable expertise and insight into the preferences and practices of key accounts as well as local market conditions in regions across the country. In this sense, the commissioned sales agency is not only a mechanism for sharing costs among publishers, but also a way for client-publishers to access additional expertise and business relationships to help them navigate the supply chain in every region.

2.5       Wholesalers

In contrast to distributors, most wholesalers do not actively sell to accounts via sales representatives. Rather, they receive orders to re-supply retailers, provide efficient mechanisms to consolidate orders for libraries and institutions, and in some cases, manage buying and fulfillment for non-traditional retail accounts.

Broadly, the wholesale supply chain can be categorized into trade wholesale, mass market wholesale, and library wholesale.

Figure 4. Wholesale channels in the supply chain. 

2.5.1    Trade Wholesale

Trade wholesalers have a relatively short history in Canada. The first, Cannon Books, was established in 1975 and closed in 1996. Today, there are two national trade wholesalers operating in Canada's English-language market: BookExpress, a wholly owned Raincoast subsidiary, and North 49 Books. Both are Canadian owned.

Each maintains an inventory of between 3,000 and 4,000 strong-selling titles, books that are "must have or hard to get," as one of our respondents put it—in other words: titles that are in demand but for which there is limited available inventory in Canada, meaning that retail accounts may have difficulty replenishing store stock from the distributor.

While initial store orders for new titles will generally be filled by the distributor, trade wholesalers act as re-suppliers to ensure that bookstores (mainly independent booksellers) as well as non-traditional retail accounts are able to quickly fill re-orders of fast-moving titles. They may also play a role in shipping online retail orders directly to customers.

The trade wholesaler's focus on independent retail highlights another practical aspect of book distribution in Canada. Most distributors consolidate shipments on a couple of levels. Many require accounts to meet a minimum order size. And many consolidate shipments geographically by shipping to a given region on a specified day or days during the week. The trade wholesaler therefore plays a key replenishment role for smaller retailers with orders below the required minimum, or for those that cannot wait for the next shipping window from the distributor.

In contrast, large retail accounts, including national chains, generally order directly from publishers and/or their distributors. Because of the importance of these accounts, and the size of a typical order from a major retailer, their orders will be shipped promptly and so they rely less on trade wholesalers for reorders.

Compared to other national markets, trade wholesalers account for a relatively modest share of book sales in Canada. In the larger US market, for example, a major wholesaler like Ingram is able to achieve considerable economies of scale and has emerged as a major player with nearly 1.4 million titles in stock. In terms of relative market share, the wholesale channel accounts for more than 25% of trade book sales in the US, but is generally estimated at less than 10% in Canada.

2.5.2    Mass Market Wholesale

The Book Retail Sector in Canada estimates that 20% of the consumer book market is accounted for by the non-traditional retail sector (i.e., non-bookstore retail). Many of Canada's mass market and non-traditional chain accounts, including Wal-Mart, are serviced by a mass market wholesaler.

Canada's two major wholesalers of books and periodicals in this category—Canadian Mass Media Inc. (CMMI) and The News Group, both Canadian owned—provide buying, inventory management, category management, and merchandising services for major non-specialist retailers in the mass market, grocery, drug, and convenience sectors.

Both firms are major players in the supply chain for books. CMMI buys all of the books for the nearly 300 Wal-Mart locations throughout Canada, and The News Group supplies nearly 8,000 retail outlets nationwide, including major grocery and drug chains such as Loblaws, Shoppers Drug Mart, and Overwaitea/Save-On. The News Group claims to be the second-largest buyer of book inventory in Canada, after the market-leading Indigo chain.

Publishers and distributors selling to CMMI or The News Group accounts will present new titles and plan promotions with the buyers within these organizations, and to a lesser extent, directly with the retailer in the case of very large buys or other major initiatives.

For the publisher, the advantage of this sales model is that the wholesaler provides a range of specialized merchandising services to the retail account that the publisher could not typically manage itself. This means that publishers can access the demanding mass market channel at a much lower cost than they would be able to otherwise. Similarly, the wholesaler's participation means that these large retailers can feature an actively managed book department without having to manage the large number of SKUs¹²—one for each title in inventory—that are associated with even a modest book selection.

2.5.3   Library Wholesale

In comparison with other types of book wholesalers, Canada's library wholesalers provide additional value-added services for their institutional accounts. These firms receive title information and review copies from publishers and select the books that they will present to their public and school library clients. Selected titles are presented to libraries through a series of thematic seasonal catalogues, and in the case of school libraries, in listings that correspond to curriculum requirements.

These wholesalers provide an efficient ordering mechanism for libraries, allowing for consolidated orders, invoices, and shipments of books from many different publishers. Further, library wholesalers offer a range of services customized to the needs of individual libraries and library systems, including processing (even laminating) and cataloguing of new books.

There are a number of established library wholesalers operating in Canada's English-language market today, including S&B Books, Coutts Library Services¹³, Libra Information Services, Library Bound, Library Services Canada, Skylight Books¹⁴, and United Library Services. All of these, with the exception of Coutts, are Canadian-owned.

Another established wholesaler, National Book Service, announced in March 2008 its plans to cease operations by mid-2008. NBS cited declining school library budgets as a major factor in the decision to close. Library funding is no doubt a key aspect of the market context for library wholesalers, as is increasing competition from American suppliers and the shift in library acquisitions budgets from print to electronic resources. Nevertheless, the sector has appeared relatively stable—as has much of the Canadian wholesale sector—in recent years.

2.5.4    Specialty Wholesale

To these three main categories of book wholesalers, we could add a fourth and final category: the specialist wholesaler that has a particular subject, regional, or niche focus. There are a number of such firms operating in Canada today—such as Accent Technical (technical guides), B. Broughton (religious titles), and Crown (government publications)—and one in particular that warrants additional notice for its unique role.

Markham-based Fairmount Books specializes in reselling publishers' overstock to both bookstores and non-traditional retail. "Overstock" refers to excess book inventory that has been sold to Fairmount at a deep discount, especially in the case of remaindered stock (i.e., books that the publisher feels can no longer be sold and that have been liquidated at extremely low prices¹⁵). This stock is in turn sold at deeply discounted retail prices. The publisher's goal in such cases is to recover some cash value from stock that has little or no holding value: it is not likely to be sold and is in fact likely to incur additional carrying costs if the publisher continues to hold it in inventory.

As we will see shortly, there is mounting pressure throughout the supply chain to manage both store and warehouse inventories more effectively, and in particular, to remove as much surplus inventory from the supply chain as possible. This creates an opportunity for credible wholesalers, such as Fairmount, that have demonstrated they can handle such inventory well. It also creates an abundance of low-cost book product for retailers and consumers alike.

The handling of remaindered inventory and other overstock is not without controversy. There is some indication that the Canadian supply chain absorbs a disproportionate share of imported overstock, particularly from the US (and, in the case of Quebec, from France). This excess inventory can weaken the market for Canadian rights-holders¹⁶, and at the very least, is an abundant supply of low-cost product that competes for the attention of Canadian book buyers.

2.5.5    Distribution Centres: The Supply Chain Within The Supply Chain

In addition to the range of wholesalers and distributors we have described above, Canada's largest national accounts, notably the national chain Indigo, maintain their own internal distribution centres. Such centres are commonly referred to as a "DC" within the book trade, and the largest of these greatly exceed the scale of the largest wholesalers or distributors in the country. Publishers and distributors are required to ship all orders to the DC, and these inventories are then processed into consolidated shipments to individual retail outlets throughout the chain.

We can understand the DC as a wholesaler that does not sell books, but nevertheless is a key logistics mechanism within the supply chain. In a concentrated marketplace, the degree of effectiveness and operations of any such major distribution point has a profound effect on the overall efficiency of the supply chain.

The significant point here is that there is a natural bias in such distribution systems toward centralization and standardization. While some publishers may ship directly to individual stores—with the permission or direction of the account—a large retailer will try to maximize the inventory volumes handled through the DC as much as possible. The goal is to lower distribution and processing costs, achieve more frequent store deliveries, and move stock to store shelves more quickly.

Such systems, however, also tend to ignore granularity in the marketplace and this can give rise to other types of inefficiencies. A centralized Indigo DC, for example, means that a BC-based publisher cannot directly re-supply a Vancouver Indigo store with a hot title in the weeks before Christmas. Instead, they would have to ship any additional required stock to the DC in Ontario, from where that same stock would then be shipped back to the store in Vancouver.

Regardless of the DC's degree of efficiency, the result is that a delivery the publisher could have made locally within the hour will instead take several days or even weeks to travel back and forth across the country before landing back on the shelves of the Vancouver store. It will cost more to do so, in terms of direct handling and shipping costs, and sales will be lost while the store is waiting to receive its stock.

This phenomenon illustrates a couple of interesting points about the Canadian supply chain:

1. There are some natural inefficiencies that arise from the east-west supply chain that we described earlier.
2. When market share is heavily concentrated, as it is in the Canadian book trade, it is difficult to effect broad system improvements without the active participation of the nation's largest retailers.

As a counterpoint to this, large retailers can themselves effect major system improvements that can benefit trading partners throughout the supply chain. For example, Indigo has invested heavily in its distribution and inventory systems in recent years, most notably in its implementation of the SAP system in 2004, and anecdotal reports suggest that this has had a positive impact on processing and shipping times, and on the stability of ordering and inventory patterns.

Notes

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