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GORDON BECK, GAZETTE / 5kb Nicholas Hoare carries books that Chapters doesn't.

GORDON BECK, GAZETTE / 8143b The Nicholas Hoare bookstore on Greene Ave. Hoare keeps returns down by buying low volumes of books that are not available in chain stores.

When Chapters sneezed in public last month, company executives quickly denied that Canada's biggest bookseller was catching a cold.

An alleged dispute with HarperCollins over payments and big returns of unsold books had already been resolved, they assured, and company losses in two consecutive quarters were explained by seasonal sales and by the cost of starting up an Internet book company, Chapters Online, and a wholesale bookseller, Pegasus.

Nonetheless, the process whereby Harry Potter and other books find their way to store shelves suddenly took on some drama.

Returns of unsold books have been part and parcel of the Canadian book trade for many years, so much so that the cost of expected returns is calculated into the retail price of a book. Publishers must face the uncertainty of waiting until February to learn the size of returns from their most active financial quarter - the fall-return-to-school and pre-Christmas season - when a major house can make as much as 70 per cent of its annual sales, according to McClelland & Stewart publisher Douglas Gibson. In the case of some publishers, increased returns have begun to be disturbing.
Gazette  3891b
Dardick: Jump in book returns worries him.

"It's a little worrisome to me," said Simon Dardick, publisher at Montreal's Vehicule Press for the last 27 years. "In 1999, my book returns averaged about 24 per cent. Chapters was about half a per cent below that, so they were very good. But in the first four or five months of this year, it jumped up to 65 per cent over-all, of which Chapters in one month was 98 per cent and in another was 101 per cent! I imagine they went back to their stockrooms across the country and reduced their stock."

A Chapters spokesman recently admitted that after averaging between 28- and 32- per-cent returns over the last five years, returns this year "have been slightly higher than average," in part as a result of a new inventory policy - providing stores with more titles but fewer copies per title. Chapters, whose initial investment in Pegasus was $50 million, is hoping that Pegasus will reduce both the turnaround time for book orders and the amount of returns.

"It's a bizarre business, book publishing, where buyers can make returns," said Dardick. "They can't do it within three months, but they have to do it within a year, for a complete, 100- per-cent credit. And of course, when we get our books back, it's taken right off my next cheque. We have to credit Chapters immediately."

Dardick recalls a period six or seven years ago when returns averaged 15 to 20 per cent.

Monique Smith of the Association of Canadian Publishers said industry-wide statistics on returns are not available, but several publishers believe that today's average is at least 30 per cent.

That figure is getting close to the point where "you're beginning to lose as much as you make," according to Nicholas Hoare, owner of four upscale bookstores in Toronto, Ottawa and Montreal.

Hoare said his returns have been about 11 per cent, a number that is among the lowest in the business. He achieves this by buying low volumes of mainly British books that sell out because they are not as easily available in chain bookstores like Chapters.

Hoare considers that the high returns from Chapters are bad for Canadian publishing. He criticized Chapters before a Canadian Heritage Committee in Ottawa this year, citing its distributing arm, Pegasus. Chapters owns 82 per cent of Pegasus.

Publishers usually give bigger discounts to wholesalers, especially when sales are in bulk.

"It was a blatant power play on the part of Chapters to convert the publishers' perception of a retailer to a wholesaler," said Hoare, noting the discount advantages given to a wholesaler.

"The starting average discount is 40 per cent for booksellers and 50 per cent for wholesalers and everything in between. If you are a Chapters and buying in bulk anyway, you're going to get a better deal than 40 per cent, but not 50 per cent, except in freakish instances."

Talon Books of Vancouver, which its publisher Karl Siegler calls the largest independent press in Canada, is one publishing company that does not do business with Pegasus, although Chapters bookstores account for about 30 per cent of its Canadian sales. Talon deals with General Distribution Services of Toronto, one of about a dozen large book distributors in Canada. Hundreds of smaller distributors operate as well, some selling as little as one book a year.

"When Pegasus signed Random House, they decided that they at last had every significant publisher in Canada on their list," said Siegler wryly in a recent interview. "Their definition of significant is actually quite telling."

Chapters orders Talon books in relatively small volumes, Siegler said, and sells most of them, so that returns are small. He said that this situation would change drastically if he suddenly bought into co-ops - premiums that publishers pay to put their books in advantageous display areas in Chapters stores. Front-of-store displays cost most. End-of-aisle displays and face-out displays cost more, too.

"In an independent bookstore, the owner-manager decides what to feature and what not to feature, and they don't charge the publisher to do that. Talon Books as a matter of principle has refused the co-ops," said Siegler.

Siegler said that if he bought into co-ops, "then the conservative Chapters' orders for my books would suddenly skyrocket. Instead of ordering 50 copies, they would suddenly order, say 700, because they need more books to display."

Chapters Reduces Its Risk

But Siegler noted that if only 100 of the 700 books were sold, the rest would be returned to him for refund and he would still have to pay the full cost of the co-op premium. In this way, Chapters has managed to reduce its risk of selling books.

Sometimes Chapters provides free co-ops. Lobster Publishers, which began publishing books for children and teenagers about three years ago in Vancouver, has had its Canadian cities travel guides displayed face-out at the cash without a premium charge.

"Chapters has been a huge supporter of these guides and we've not had to pay for display - so far," said Lobster publisher Alison Fripp.

Fripp said that Lobster's recent returns have been extraordinarily low - about 4 per cent - while its print runs remain substantial, never less than 5,000 copies.

"So returns haven't affected us. What has affected us is the amount of orders. Chapters has not ordered as much as they normally order, but neither has Indigo nor have the independents. It's hard for me to pinpoint the reason for the less-than-wonderful spring that we've had. It seems that the whole industry is cautious."

The exception, she said, was not a bookseller but a warehouse-store operation, Costco, which "has taken a huge order of our books. They take a much bigger discount, but they take volume. Wal-Mart and Zellers, too, are becoming good customers."

Fripp said a book has to have foreign-rights or movie-rights potential, or scholastic potential - the possibility of spinoff. "If we can't find two additional sources of revenue other than the bookstore, then we have to look very hard before we publish a book.''

"At one point, when you had W. H. Smith and Coles, I could sell to one or the other or both. If one of them didn't buy, I could at least knock on the other door," said Dardick of Vehicule Press. "Now if Chapters decides not to buy a title or to buy just 60 copies, I'm almost in the position of deciding whether to publish the book or not."

At Ease With the Big Distributor

One downtown Montreal bookseller, Richard King of Paragraphe Books, is at ease with the notion of a large bookseller like Chapters acting as a wholesale distributor. Like Nicholas Hoare, Paragraphe competes with Chapters by carrying a different inventory. In the case of big returns, King thinks that booksellers should not shoulder the blame.

King said that he orders "way more" than he needs for a fall release, because he knows that he has no hope of being resupplied and, except in the case of best-selling authors, he cannot tell in advance whose books will do well.

"There's nothing wrong with our publishers as publishers - they're the best - but they are not good distributors," said King, who has offered publishers to tap into his database to keep track of how sales of their books at his store are doing. Some distributors like Pegasus and North 49, he said, fill orders within 24 or 48 hours.

"If they can give us good service, why can't the others?" said King, who is a member of Pegasus's board of directors. "Why do we have to order hundreds of copies instead of ordering 10 and then 10 more a week later? So when an item stops selling, you're going to have maybe ten too many instead of a hundred."

Despite vagaries in its accounting and distribution system, Canada's book industry appears to be doing well over-all. According to Statistics Canada, retail sales by English-language book firms increased steadily from 1992 to 1999, when they reached $728 million. In that year, chain bookstores accounted for the largest part of sales, about $267 million, or about twice that of independent bookstores.

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