The following is an assignment that I wrote for the Strategic Management unit in my MBA. We were required to produce an industry analysis incorporating strategic management frameworks and tools, such as Porter’s Five Forces and PEST analysis. I’m publishing it here because it might be of interest to booksellers or other strategic management students.
PART A: OVERVIEW
In June 2011, Federal Small Business Minister Nick Sherry told a Canberra audience: ‘I think in five years, other than a few specialist booksellers in capital cities we will not see a bookstore, they will cease to exist’ (The Australian, 14 June 2011).
His controversial comments came shortly after the collapse of Australia’s biggest bookseller, REDGroup Retail, which owned the Borders and Angus & Robertson retail chains. It was a comment that received a great deal of media coverage at the time and caused considerable consternation among the country’s booksellers, angry that a small business minister could be so insensitive as to predict their extinction..
Whilst Sherry’s prophecy hasn’t fully come to fruition, the print bookselling industry in Australia has, indeed, suffered some difficult years since 2011.
On top of the REDGroup collapse, there have been a multitude of independent bookstore closures. The closure of Adelaide’s oldest bookseller, Mary Martin Bookshop (Adelaide Advertiser, 4 September 2012), and Adelaide University’s Unibooks (ABC website, 15 August 2015) are just two local examples.
At the same time, large overseas online-only bookstores, in particular Amazon and the Amazon-owned The Book Depository, have captured significant market share, as consumers come to appreciate the competitive prices, convenience, and vast range of titles available through online shopping.
Australia’s discount department stores – Kmart, Big W and Target – have also eked out a major slice of the print bookselling market in recent years. These firms use cheap new-release books as ‘loss leaders’ to attract people into their stores, in the hope that they will make other profit-producing purchases. Other booksellers are not able to compete with the below-cost-price sale of the latest releases.
Further eroding the market for print books is the emergence of book substitute products in the form of electronic books (or eBooks) and audio books. Amazon and its eReading device, the Kindle, has built a substantial market that is gradually eroding the sales of physical books in favour of their electronic equivalent.
The news is not likely to get better for struggling booksellers. IBISWorld predicts that the bricks-and-mortar bookstore industry will decline at an annual rate of 10.6% over the next five years (IBISWorld Industry Report G4244). That decline is tempered by more positive returns expected in the online shopping industry (including the sale of print books): it shows 16.2% annual growth between 2012-2017, slowing to 9.4% annualised growth between 2017-2022 (IBISWorld Industry Report X0004).
Prognosis for Next Ten Years
The next ten years—like the ten years before it— will see significant movement in the print bookselling industry. In spite of that prediction, we are not likely to see Sherry’s 2011 prophecy come true in the next decade. There will still be opportunities for print bookselling in Australia, in spite of tighter market conditions.
Print book sales will continue to decline steadily, but we will not see the extinction of the print book within the next ten years. eReading technology will improve further, resulting in wider adoption of eBooks at the expense of print book sales. Accordingly, there will be consolidation at the local, national and international level in print book retailing. Many of these firms will not be able to make the leap to eBooks, as that market is, and will continue to be, dominated by the likes of Amazon, Google and Apple. This will result in a reshuffling of market share in print bookselling, presenting an opportunity for incumbents (or even new entrants) to fill the void.
Bricks-and-mortar bookstores will come under the most pressure, with only the very best stores surviving and thriving. Those that succeed will differentiate themselves from non-specialist booksellers. They will offer a highly-curated collection of books that corresponds with the distinct requirements of their target audience. They will be ‘destination stores’ providing a range, fitout and ambience that offers a superior book browsing and buying experience. They will offer intimate customer service and garner deep customer trust and loyalty. They will embrace technology and offer multi/omnichannel selling via websites, mobile devices and in-store. The larger independents, such as Readings (Melbourne), Gleebooks and Abbey’s (both Sydney), are well placed in this regard.
Amazon and other overseas online-only stores will continue to command a significant slice of the Australian print book market, although the imposition of GST on all imported goods and the possible future removal of parallel importation laws will serve to level the playing field, and provide some relief for local sellers. At its inception, Amazon was a bookstore, but now it makes most of its revenue through other products and services (cloud computing is its biggest money-spinner and it has recently signalled its intended push into the Australian grocery market). With Amazon increasingly focusing on other industries, there is an opportunity for astute sellers to capture some of its bookselling market share.
Although IBISWorld predicts that online sales will slow between 2017-2022 (dropping from 16.2% to 9.4% growth per annum) (IBISWorld Industry Report X0004), domestic online-only booksellers, like Booktopia, are better placed than their bricks-and-mortar counterparts to exploit opportunities and capture market share from a consolidating industry. Online firms hoping to grow during the next ten years will need to focus on: brand and reach, online user experience, range of titles, delivery speed and reliability, customer service, loyalty programs and competitive pricing. Successful online bookstores will have a very clear understanding of their market position and how it is differentiated from others in the market.
Whilst the print bookselling industry is destined to shrink and consolidate in the next ten years, there is sufficient evidence to suggest that print booksellers can actually benefit from that contraction, through the capture of market share from other sellers. It can do this by having a clear market position and placing emphasis on its brand and reach, online user experience, its range of titles, delivery speed and reliability, customer service, loyalty programs and a competitive pricing model.
PART B: ANALYSIS
Definition of the industry
Michael Porter stresses that defining the industry in which competition takes place is important for good industry analysis (Porter, 2008). This analysis focuses on the ‘print bookselling industry in Australia’, with the following dimensions:
- Products. The product dimension is ‘print books’. The scope of the analysis excludes electronic books (or eBooks), audio books, second-hand books, antiquarian books and other non-physical book formats. Unlike other analyses, online-only retailers are not excluded—this analysis pertains to all booksellers who sell new print books, whether they are bricks-and-mortar retailers or eCommerce retailers. This is appropriate given that the product provided by both types of retailer is fundamentally the same, and the customer group in both cases is also fundamentally the same.
- Customers. The customer dimension is ‘Australian consumers purchasing books for individual use’. The scope of the analysis excludes institutional buyers, such as corporates and educational institutions.
- Geography. The geography dimension is ‘consumption of the products within terrestrial Australia’. This dimension is appropriate given the unique market conditions that exist for bookselling in Australia, including the levying of GST and the existence of parallel importation laws. Unlike other analyses, the provision of print books to Australian consumers from overseas retailers, such as Amazon and The Book Depository, is not excluded. These firms compete directly with local firms and enjoy an advantageous position due to their exemption from unique conditions within the terrestrial Australian market.
The print bookselling industry in Australia is a monopolistic competition industry, characterised by the following:
- There are many print booksellers (see Exhibit A below), there is intense competition and there are no major barriers to entry or exit;
- Individual booksellers differentiate their offering based on a variety of factors, including product range, customer service, marketing, special deals, and delivery methods;
- Individual booksellers make independent decisions about pricing, based on the firm’s unique offering, its market and its cost structure (unlike ‘price takers’, who are obligated to accept the price that is set by the market, regardless of the costs of production);
- Consumers perceive that there are non-price differences between competing booksellers; and
- No booksellers or consumers have perfect information about market supply and demand, or pricing.
EXHIBIT A: Organisations that supply print books to consumers in Australia
Print bookselling in traditional bricks-and-mortar stores is in the decline phase (IBISWorld Industry Report G4244), although online shopping (all goods) is recognised in as being in the growth phase (IBISWorld Industry Report X0004) (see Exhibit B below). Online bookselling is likely somewhere in between in the maturity phase—growth for online booksellers is tempered by an overall decline in the sales of print books.
EXHIBIT B: Industry Growth Phases – Bricks-and-mortar Bookselling, Online Bookselling and Online Shopping
The Macro/Non-market environment
The steady decline of print bookselling is not being aided by the macro-environment in which the industry operates. A quick analysis of the political, economic, social and technological (PEST) environment in which the print bookselling industry operates is provided below.
Political / Legal
Booksellers in Australia have long lobbied the Australian Federal Government on two significant political/legal issues that impact upon the industry’s ability to compete, particularly with overseas retailers:
- Imposition of GST on overseas consumer purchases. Currently, books purchased from overseas stores are not subject to Australian Goods and Services Tax. In effect, this permits overseas sellers to charge 10% less for like-items. From July 2017, all imports will be subject to GST and overseas sellers will be asked to collect GST on behalf of the Australian Government.
- Parallel importation. Under the Australian Copyright Act, Australian booksellers are obligated to purchase bulk orders of books from the Australian rights holder. They are not permitted to purchase cheaper editions from an overseas supplier if rights are held locally. This has the effect of pushing up the price of the local product, ultimately impacting the competitiveness of Australian stores when compared to overseas online stores. Consumers simply bypass this imbroglio by purchasing their books offshore.
The economic climate of the past five years has not been conducive to growth in the print bookselling industry in Australia. This period has been characterised by a weaker global economy, instability in global markets, a drop in consumer confidence, and subdued discretionary spending.
The purchase of books is, for most, a luxury, particularly given the plethora of other media and entertainment options available, and opportunities to source books through less-expensive means (such as the local public library or by illegal downloading the electronic book version).
During this period, the Australian dollar has remained relatively strong, prompting many consumers to make book purchases from overseas online stores, where the Australian dollar delivers greater value. This value is boosted yet further by exemption from GST and favourable shipping costs (eg. The Book Depository offers free shipping worldwide).
With subdued spending on books, firms have engaged in price-cutting to capture market share, resulting in poor economic performance and, in some cases, economic extinction (eg. Borders and Angus and Robertson).
Whilst it is principally an individual pursuit, book reading can also be a social activity between people with shared interests. Reading groups, author events and other genre-specific fora have long been promoted by bricks-and-mortar bookstores to build community around their businesses. Increasingly, however, this type of activity is occurring online due the proliferation of social media. Online services such as GoodReads and LibraryThing provide large online communities for book lovers seeking engagement with like-minded readers.
From a demographic perspective, Australia’s population is ageing with a significant number of Baby Boomers entering retirement in the next ten years. These retirees are more financially independent than their forebears due to their access to compulsory superannuation. With more time on their hands and with the benefit of an expendable income, there is likely to be continued demand for physical books from retirees, presenting opportunities for print booksellers.
Technology has impacted significantly on the print bookselling industry, a traditional industry with little inherent capacity to reinvent itself.
Not only has technology brought us the eCommerce boom – the online sale of physical goods – but it has also spawned numerous close book substitute products – the electronic book and the audio book – that threaten the very existence of print.
These new products are distributed electronically via the internet, a tool that the vast majority of Australians now have access to through high speed fixed connections in their homes (eg. ADSL2+, NBN fibre-to-the-home or node) and via the 4G data-powered smartphones they keep on their person at all times.
The Five Forces
Porter’s Five Forces Model (Porter, 1979) is useful for categorising industry threats (Exhibit C).
EXHIBIT C: Porter’s Five Forces – Print Bookselling in Australia
There is strong rivalry amongst existing competitors in the bookselling industry. As books are a commoditised product, price competition is intense.
Exhibit A provides a diagrammatic representation of the various booksellers that sell print books to Australians.
Australian booksellers must compete with US retail behemoth Amazon, and the Amazon-owned, UK-based The Book Depository. These businesses have achieved economies of scale and typically sell their products at significantly cheaper prices than their competitors. These sellers enjoy further benefits in this market: they are currently permitted to supply their products into Australia GST-free; they are not subject to Australian parallel importation laws that compel local retailers to source their product locally, often at uncompetitive prices; and they both enjoy cheap international postage contracts that permit free shipping to Australia in a lot of instances.
Domestically, there are a number of online booksellers (namely Booktopia, Fishpond, A&R Bookworld, Boomerang Books, The Nile and Dymocks). Bricks-and-mortar retail rivals include the book chains (Dymocks, Collins, QBD); the discount department stores (Target, Big W, K-Mart) and, to a lesser extent, the supermarket chains (Coles, Woolworths) which are increasingly stocking bestseller books.
Threat of new entry
The barriers to entry for print bookselling are relatively low, but the threat of new entrants for the industry as a whole is negligible. New entrants appear frequently, but almost always as small concerns that operate on a localised scale.
There are much higher barriers to entry for booksellers that seek nation-wide or international scale: the market is highly commoditised; there are established international online bookstores that have achieved economies of scale; there is great uncertainty about the industry’s longevity due to advances in e-reading technology; and the recent poor financial performance of booksellers serves to dissuade companies from entering the market.
In short, the bookselling industry is not overly attractive to new entrants seeking profits.
The most important supplier group to the bookselling industry is ‘book publishers’. There is an uneasy relationship between publishers and booksellers in Australia.
The relative power of book publishers is greatly bolstered by the Australian Copyright Act which forbids local booksellers from sourcing titles from foreign suppliers in situations where the same product is available locally (or will be made available locally within 14 days of its release elsewhere in the world). Australian booksellers are obligated to buy much of their product from Australian publishers. Ostensibly to protect the interests of Australian authors and publishers, these laws result in uncompetitive pricing and permit non-Australian retailers to undercut the prices of their Australian counterparts. Australian consumers are not restricted in any way and have no compunction purchasing titles from foreign suppliers ahead of their Australian release date, and often at a significantly cheaper retail price.
Book publishers have also impinged upon the traditional place of the bookseller by integrating forward into the industry and selling their titles directly to consumers via their own online channels. This has caused a great deal of consternation among booksellers, particularly given the government-enforced protectionism that book publishers already enjoy.
The internet has provided ultimate power to the consumer, particularly when shopping for commoditised products such as books. If the consumer is not satisfied with the offer at hand, a competitor’s website is only a click away (or a bar scan away for those who practice ‘showrooming’ in physical stores). In most cases, the decision to buy a book from a particular bookseller boils down to just one factor – price. Indeed, consumers are able to access comparison engines on the internet, like Booko.com.au, that aggregate prices from a multitude of online booksellers in a single search.
Threat of substitution
The threat of substitute products—a product that performs the same or similar function as an industry’s product by a different means—represents a significant risk for print bookselling.
In recent years, the delivery of books via electronic means (the eBook) has become mainstream, largely on the back of Amazon’s Kindle eReader device. These devices make physical books largely redundant—they are light and easy to carry; they hold entire libraries of books; and books can be purchased wirelessly and accessed instantaneously. Although recent reports suggest that the eBook market has stalled, it is likely that eReading technology will improve further and, in time, this will serve to further cannibalise the market for print books. The big winners in eBooks will be Amazon, Google and Apple, all companies that are able to leverage their established software ecosystems to build a ‘walled garden’ around their customers and minimise the prospect of switching.
More widely, booksellers compete with providers of other forms of media and entertainment, all of which are capturing a greater share of the consumer’s leisure time: free-to-air television, pay TV, cinema, video-on-demand services (eg. Stan and Netflix), illegal torrenting, social media (eg. Facebook, Instagram), mobile devices, messaging tools (eg. Snapchat, Wechat), online video (eg. YouTube), spectator sports and gaming are examples of modern-day activities that conspire against the traditional pastime of reading a physical book.
Critical Success Factors
The following are identified as critical success factors for individual firms operating in the print bookselling industry in Australia:
- Niche focus and curated range. The big players in the bookselling industry aim to be ‘everything to everybody’ and they are able to sustain this position with huge marketing budgets and universal brand capital. Smaller booksellers do not have this luxury and therefore must deliver a more niche offering and curated range of titles that appeals to a smaller market segment. These market segments could be geographical areas or thematically-focused (eg. children’s books).
- Inventory cost control. Given the vast number of book titles available in the market, inventory cost control is a critical element for booksellers who carry significant stock on hand (noting that many online booksellers reduce their inventory risk by drop-shipping or trans-shipping products from the originating supplier only upon receipt of a customer order). Book sellers need to ensure that they select stock that is turned over quickly in their stores. Book sellers also need to ensure that they negotiate the very best possible terms of trade with publishers and distributors. Favourable terms can be obtained through book chains (eg. Dymocks) and buying groups (eg. Leading Edge buying group).
- Brand and reach. Booksellers that intend to operate nationally (or internationally) against entrenched incumbents must achieve brand recognition by investing heavily in paid advertising and other forms of exposure (eg. content marketing, social media, electronic Direct Mail etc.). In many cases this will be uneconomical.
- Multichannel/omnichannel retailing. There is an increasing trend towards multichannel (using multiple channels, such as physical store and a website) and omnichannel retailing (combining the retail experience across multiple channels – eg. click and collect, in-store mobile phone experiences). Customers are increasingly expectant of both physical and digital engagement with brands.
- Customer service. In an industry that is extremely price competitive, the provision of quality personalised customer service is a key differentiator. For example, Kmart’s small range of new release titles are very cheap, but they do not provide any level of customer service to support their range —their sales people are not typically bibliophiles who can provide book recommendations. This is a strength of the specialist bookseller.
- Trust, reputation and loyalty. The building of trust, reputation and loyalty among customers are critical factors for bricks-and-mortar stores seeking to retain their customers from the allure of online shopping. Loyalty programs are an appropriate way to encourage repeat business.
- Experiential factors. Bricks-and-mortar booksellers of the future will be ‘destination stores’ providing a range, fitout and ambience that offers a superior book browsing and buying experience.
- Delivery speed and reliability. A major factor for online bookstores is speedy delivery of the item to the purchaser. There are likely to be significant changes in delivery technology in the coming ten years (eg. drone delivery, driverless cars).
- Seasonal performance. Booksellers often live and die by their performance at certain times of the year. The most important time is Christmas. It is critical that booksellers are geared up appropriately for this buying period.
The Australian, ‘Bookshops to be wiped out inside five years, Small Business Minister Nick Sherry predicts’, 14 June 2011, http://www.theaustralian.com.au/arts/books/bookshops-to-be-wiped-out-inside-five-years-small-business-minister-nick-sherry-predicts/story-e6frg8nf-1226074957190
Adelaide Advertiser, ‘Adelaide’s oldest bookseller, Mary Martin Bookshop, collapses owing $1.4 million’, 4 September 2012, http://www.adelaidenow.com.au/business/historic-bookseller-mary-martin-bookshop-collapses-owing-14-million/story-e6frede3-1226480620876
IBISWorld Industry Report G4244 (2016), Newspaper and Book Retailing in Australia
IBISWorld Industry Report X0004 (2016), Online Shopping in Australia
Porter, Michael (2008), ‘The Five Competitive Forces that Shape Strategy’ in Harvard Business Review, January 2008.