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Bookstore Economics 101

It will be interesting to see what the physical retail bookstore landscape looks like a year from today. Mark your calendar. We’ve had over a year of varying degrees of physical store closures and limitations. Much optimism is circulating that a form of shopping in stores will return. But how much and will it be enough?

To help understand the economics of bookstores, I’ll take a quick look at some of the things that make selling books out of brick-and-mortar stores difficult. So put on your math cap, and let’s take a ride.

This article focuses on the bookstore, not the publisher or writer. I spent over a decade in the Christian bookstore business; and while that was a long time ago, the economic principles are the same.

Let’s start with a $10 book (retail price). I’m using $10 because it will make the math a little easier to follow. [Yes, books retail for more these days; but doing math for retail prices of $13.99 or $26.99 is harder to illustrate!]

The bookstore buys the book for $6.00 (or 40% discount off the retail price) from the publisher (who calls that $6.00 the net price). Note that this discount varies between 40% and 50%.

When the book sells to a customer, the store then makes a $4.00 profit ($10.00 – $6.00 = $4.00).

(Still with me?)

If the store discounts the book during a 20% off promotion, they have to sell two copies to make that same $4.00 profit. But often a 20% off sale is not enough to double the sales volume. Why? Because a high-volume operation like Amazon.com is happy to sell that $10.00 book for $6.50 (35% off) every day. They can do this because they plan on selling 10 copies at the discounted price and clear $5 in profit. This pricing strategy has a chilling effect on the ability of the local store to compete. The industry calls this a “volume” business model.

An operation like Amazon can do this because they have a different expense structure than your normal store-front bookstore.

Remember, the publisher is obligated by law to offer the same discounts to the same vendors based on the volume of their purchases. So don’t believe the myth that Amazon is buying the above book for $3 and selling it for $6.50. (This law is the Robinson-Patman Act of 1936.)

In my heyday as a bookseller, our store did nearly $2 million in annual sales. That sounded like a lot until I discovered that the local Price Club (a precursor to Sam’s Club and Costcos) did $1 million PER WEEK in sales. High volume, low prices. Their sales crushed the local independent stores because they simply didn’t have the volume in sales to compete solely on price. And Price Club was not reliant on a single type of product line to generate their sales. They did not care if they sold a Bible or a set of new tires. Now we have Amazon that carries all the same products found in the bookstore (not just ten bestsellers) but also sells nearly everything imaginable (including a $31,000 safe). A one-stop-shop.

Let’s go back to that store that made a profit of $4.00 for the sale of a $10.00 book. Here is a list of some expenses that the $4.00 in profit covers:
Rent
Salaries
Utilities
Telephone
Advertising
Office supplies
Shrinkage
Bank charges
Taxes
etc.

Shrinkage? That fun line-item is about 3% of sales. It includes shoplifting, employee theft, and paperwork errors. Believe it or not, one of our Christian bookstore’s biggest areas of “shrinkage” was leather-bound Bibles.

Bank charges include the percent that the credit-card company charges to process your purchase. This can range from 1% to nearly 3% of every credit-card sale.

Our store did a training video to show new employees how this all worked. We started with a $10 bill in the palm of a hand received for the sale of the book we mentioned above. When all expenses were deducted (cost of the book, rent, salaries, etc.) there were two dimes left in the palm of the hand. There is very little room for error for the storefront retailer.

See why your local stores are having a tough time in this online age? A good friend of ours had her bookstore for 32 years. When the economy soured in 2008 and the city built a light-rail track in front of her store, her sales during Christmas plummeted 40% compared with her previous year. She went bankrupt.

To counter the online pricing wars, some stores are becoming boutiques where books are not as critical to their profit margin. A store may have a larger gift or greeting-card section–items with which they do not have to compete with Amazon. Others create community spaces with coffee shops and hold local events to draw people to the store. But it is a huge struggle because it is hard when the profit margins are thin.

Another friend of ours had a store for nearly 30 years, but a competitor moved close by that was part of a large chain. And then the landlord wanted to increase their rent by 30% with escalating rates during the life of the lease. They had survived the economic struggles of 2008-2009, but this lease was the last straw; and they could not continue operating.

Will the bookstore industry fade away as the computer stores have? Will we find fewer places where we can browse for selections, or will book sales move entirely online?

Time will tell!

But if you see this as a downer of a post, remember that book sales themselves are just as healthy as ever. Publishers have found new places to sell their books. And many authors have seen the need to be authorpreneurs to get their books into as many hands as possible.

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