Book Distributors--The Invisible Link

(Andre Huang/photos by Chuang Kung-ju/tr. by Anthony W. Sariti)

For industry insiders, the recent slump in the publishing industry is largely because the wholesalers do not function well. Currently a major shakeup of these wholesalers is getting underway. Success or failure here will decide the fortunes of the publishing industry itself.

Taiwan's neighbor, Japan, is one of the world's most educated countries. The image of Japanese with their heads buried in a book while riding the tram or with a shopping basket in hand buying books at bookstores on the weekends is familiar throughout the world. But perhaps you didn't know that Japan's reading habit stems not only from a passionate pursuit of culture, it is also related to the relatively low price of books.

Japanese book wholesalers are large enough to exploit economies of scale and support the operations of numerous publishing houses and bookstores. The photo shows Japanese publications at the 2008 Taipei International Book Exhibition.

The secret of high prices in Taiwan

The starting salary for a Japanese college graduate is ¥210,000 (NT$63,000) a month. This is 2.5 times the starting salary of a Taiwanese college graduate. However, Seiji Katayama, former general manager of Taiwan Tohan Co., Ltd. who came to Taiwan almost seven years ago, picks up a copy of Here published by Tohan and explains, "In Taiwan this magazine costs NT$99. If you multiply this 2.5 times, in Japan it should sell for the equivalent of NT$249, that is, ¥830. But actually the average cost of a magazine in Japan is about ¥540, or only about NT$160." In other words, calculated with respect to income, the list price for the Taiwan publication is far higher than that in Japan.

As Katayama analyses it, the reason for the comparitively higher list prices in Taiwan, more important perhaps than a small market that offers insufficient economies of scale, and the fact that publishers adjust their list prices upward to compensate for discount-based competition, is that the overall distribution costs are higher than in Japan.

Let's take a look at a comparison of book sale revenues up-, mid-, and downstream. In Japan, the bookstore gets 23% and the wholesaler 10%. The remaining 67% goes to the publisher. In Taiwan, the bookstore gets 30%, the wholesaler 14% and the publisher 56%. In other words, in Japan the market distribution of a book costs only 33% of the overall revenues, and yet the wholesalers and the bookstores still make a profit. In Taiwan, this distribution eats up 44% of revenues, and still the leading bookstore chains continue to lose money, while the wholesalers find themselves in a precarious situation and in turn try to squeeze the publishers' profits.

Why is the distribution cost for publications so high in Taiwan? Against a backdrop of a gloomy business situation for distributors and bookstores alike, the answer does not seem to be that they are too greedy and have hogged all the profits but rather that their operational efficiency is below par.

Most Taiwan publication distributors are mid- and small-size businesses. Generally, their investment in automated equipment is insufficient, and their delivery area extends only to their own local county or city. For the most part, delivery across city or county boundaries follows the traditional pattern of supply through another distributor in the customer's locality, so that the transportation pipeline is long and efficiency is greatly compromised.

Most publishing distributors are also stuck at the pre-information-age level as far as their information systems are concerned, so that they are unable to provide detailed and complete sales information to assist publishers and retailers in the precise allocation of books. In the absence of real-time network links tying together publisher, distributor and bookstore, even the most basic sales information must be transmitted manually. For example, employees must regularly be sent out to bookstores to inquire after sales figures. Only when copies of a book are sold out are replacements ordered. This is certainly a waste of time and energy.

Because most distributors are financially unable to compete with the big chain bookstores that handle their own logistics, publishers of bestsellers give priority to the chain stores in supplying their books. Many small, regional bookstores can only fight to get hold of leftovers from the chain bookstores or find themselves forced to carry books on their shelves that are inappropriate for local reader tastes. Not only does this approach push up the overall book return rate, it has indirectly caused the withering away of the small bookstore in recent years and, in the other direction, has weakened the distributors who have used small bookstores as their base.

For the publishing industry as a whole, the multiplicity of mid- and small-size distributors has led to a duplication and waste of administrative expenses for the bookstores. Katayama explains that if a large distributor can handle everything, then a bookstore need only engage in ordering and return procedures with this one source. However, if there are ten different distributors, then a bookstore must deal with all ten-and with ten different data formats. All of a sudden operations get more complicated. Currently many big publishing houses are bypassing the distributor and dealing directly with the bookstore. In terms of efficiency, this is like adding a number of mid- and small-size distributors. It is extremely detrimental to the notion of raising overall efficiency in book distribution.

Self-damage

More of a problem, Kingstone, Eslite and other bookstore chains are busy setting up their own logistics systems, piling up even more layers on an already complex administrative structure, and so further reducing the efficiency of the book distribution system overall.

"When a chain store in Taiwan receives books, they must be re-registered in its own system, specific labels must be made-all this is a great waste of money. Such a system is hard to imagine in Japan," says Katayama.

In addition to this, Chen Jih-sheng, general manager of Taiwan's biggest publications distributor, Nung Hsueh, observes: "The original idea behind the chain stores doing their own logistics was to get into distribution; but because they were in competition with other bookstores they were not able to distribute books to them, and only sent the books to their own branches. Added up, this meant higher costs, and also the weaker distributors were driven out of the market."

Because logistics and sales administration were not economic, this consumed most of the chain bookstores' manpower and had a negative impact on the management efficiency of the bookstores. Grimm Press publisher K. T. Hao, who enjoys a reputation as a "boy wonder" in Taiwan's publishing world, says right out that a big problem in the Taiwan publishing industry is that "the supply chain tolerates a total lack of efficiency all around!"

Hao cites the recent dispute involving Eslite. When Eslite demanded publishers share expenses for lost or damaged books in its stores, wasn't this just transferring the problems of its own management onto the shoulders of innocent publishers? As for information expenses related to Eslite's e-commerce platform, people didn't object to these charges in principle, but wasn't the prerequisite for this the ability to provide valid data?

"Bookstores today just swipe the book number and get the price when a customer checks out. They are quite unable to provide data on purchase time and the sex and age of the consumer, as is done in 7-Eleven convenience stores."

K. T. Hao emphasizes that not only should publishing houses and bookstores refrain from doing their own distribution, they should join forces and develop a few large-scale distributors. Only through a professional division of labor and selfless cooperation at every link in the chain can a monetary, material and information flow be effectively provided and everyone be a winner.

Bigger wholesalers?

"Economy of scale" is an idea everyone is familiar with but for many years distributors have been unable to expand. However, the recent slump in the publishing industry has led the chain bookstores to force changes in their terms of business and surprisingly this has facilitated an industry reorganization. Locus Publishing chairman Rex How wrote an analysis saying, "The pressures created by the inability of many small publishing houses to deal directly with the bookstore chains has led to the need for joining together under a distributor that acts as a buffer."

Another angle is that under the pressures of an economic slump, the publication distribution industry has long begun a quiet reorganization. Nung Hsueh, with the highest market share (12%), had a growth rate in turnover last year of 16.8% despite the overall economic slump. On the one hand, this was the result of transferred business after the collapse of Interzone International, Taiwan's third biggest distributor. It was also the result of investments in recent years in the active expansion of automated equipment and in raising operational efficiency. In 2003 Nung Hsueh set up an 8,300-square-meter warehouse and logistics center in Nankan, Taoyuan County. Beginning in 2004 the company set up a joint e-business platform that greatly enhanced their service capabilities in terms of both logistics and information flow.

In addition to investment in software and hardware, Nung Hsueh promoted the concept of setting up a larger wholesale organization with shared information and joint logistics and invited broad industry investment. To date, seven publishing houses and distributors have given their support. A public announcement is expected by the end of this year on starting a new strategic alliance for the publishing industry.

Rebuilding the weak link

Squeezed between publishing companies that are bypassing the wholesalers and chain bookstores that are sticking their feet into logistics, Chen Jih-sheng describes the mid-stream distributors as the weak part between two ends of a dumbbell, in urgent need of strengthening. But, aside from the efforts made by leading suppliers like Nung Hsueh, what other forces are capable of helping to rebuild this weak link?

Looking at the Japanese experience, the creation of the companies Tohan and Nippan, who account for 70% of all publications distribution in Japan, came about through the joint efforts of government and industry.

During World War II the separate companies of the Japanese publications distribution industry were forcibly integrated and merged into one company that fit into the wartime economic structure, and the foundation of a publishing industry structure with a single large wholesaler was thus laid. After Japan's defeat in the war, under the policy of the US military aimed at breaking up the traditional political-economic groupings, the big wholesaler was for a time split into nine different companies. Nevertheless, it didn't take long for a more integrated structure to return with the collective support and encouragement of the publishers.

"Only given the efficiency of a big wholesaler can the operations of multiple small publishers find support, otherwise only large publishing houses would remain. Today all Japanese publishers are invested in either Tohan or Nippan, forming a close-knit community of mutual interest. No one publishing house, however, may own more than a 5% stock share. Everyone is on an equal footing and no one is able to manipulate things for their own private gain.

Now, let's look at Taiwan. The mid-stream of the publishing industry is made up mostly of mid- and small-size businesses, integration is difficult and the government provides no strategic support for the publishing chain. Luckily, a crisis is also an opportunity for change. The current publishing "winter" has forced the up-, mid- and downstream sectors to put in motion a trend favoring a number of reorganizations and alliances. If this trend can be continued and deepened and the joint, united power of publishing houses, wholesalers and bookstores can be enhanced, then there is no reason not to look forward to a new lease on life for the publishing industry in Taiwan.