One of the commenters on the blog asked last week about consignment selling, because, he believes, a number of publishers are entertaining it. (I am not personally aware of that, but it doesn’t seem unreasonable that they would be contemplating it.) This is a subject I’ve paid some attention to over the years, partly because I had a hand in creating a business which puts the books of many publishers into specialty retail chains on a consignment basis, and has been doing so for well over a decade.
Of course, we’ve had pretty widespread (but not universal) returnability of books in the US market for the better part of a century. (It might be worth noting that Britain has ubiquitous return privileges now, but returns were not the norm when I first became aware of the UK trade in the early 1970s.) But it is not the same thing for a bookstore to buy books from a publisher with the right to return them as it would be for the store to receive books on consignment although much of the logic behind the two is very much the same.
Consignment underscores that the inventory risk is mostly with the publisher, as well as timing the store’s responsibility to pay to the date of their sale rather than to the date when goods were shipped to them. But just like there is variation in sale-and-return terms that is material, so there is with consignment terms.
Under the sale-and-return convention that governs the sale of most books today, here are some important variables.
1. The discount off the retail price.
2. Whether the store pays the inbound freight or the publisher does. (I am not aware of a publisher who pays return freight.)
3. Whether the amount credited for a return is equal to the amount the store originally paid for the book or, as is often the case, just a little bit less.
4. The payment terms: how soon after shipment (which is usually the invoice date) the publisher expects to be paid.
All of these except the amount credited for a return would also be variables in a consignment arrangement. Saying “consignment” doesn’t promise a particular discount, doesn’t imply anything about who pays freight, and doesn’t in and of itself stipulate a speed of payment.
The point is that saying “consignment” isn’t saying enough to describe the commercial relationship. What’s the discount compared to the sale-and-return discount? How often and how soon after the sale is made is the store obliged to pay?
The reason that stores ask for consignment is that they believe it will improve their cash position and enable them to carry more inventory. In fact, there are circumstances in which consignment would speed up payment. When hundreds of thousands of copies of a new novel from a perennially bestselling author land at Barnes & Noble, they’ll sell a large number of them long before the 60, 90, or 120 days they’re going to take to pay the publisher. If consignment called for weekly payments for sales made through the prior week (which is a reasonable formula), the cash flow on hundreds of thousands of sales would be worse for the chain than it is in the current paradigm.
For consignment to be an advantage to the store, one or more of three things must be true. Payment must be delayed after the sale is made, payment must be infrequent, or the store must be permitted to carry many books that it would otherwise have deemed too slow-moving to be worth the investment.
Consignment will add responsibility for publishers, just like the agency model, which also changed the buy-sell relationship between publishers and retailers, did in the ebook world. Consignment inventory is owned by the publisher, not by the store. It is possible that consignment could create “nexus” and possible tax liabilities for the publishers in locales they’ve never heard of.
Of course, consignment would have been a great advantage to the publishers if the inventory Borders possessed had been consigned because publishers would have been entitled to take it back. Under sale-and-return terms, Borders “owns” that inventory, even if the invoices for it haven’t been paid. Lots of unpaid-for inventory is now being sold at fire-sale prices, making it more difficult for publishers to sell replenishment inventory of those titles to stores which are in sound financial health and paying their bills.
From the store’s point of view, consignment terms are all about cash flow. Publisher, however, particularly those whose results are reported in a public company, also think about the balance sheet. When publishers print a book (as I understand it; I’m not an accountant) and put it in their warehouse, it is on their books valued at the unit cost of manufacture. When they ship it to a store and invoice it, the value of the book as an asset grows to the price they invoiced. If they consigned it to the store, its value would remain the manufacturing cost until it was sold.
What that adds up to is that any publisher switching to consignment terms would take an apparent “hit” to their financials. It would be a one-time hit because once the new system took hold, books would steadily be moving from inventory-value to sales-value. And there would be a longer-run balance sheet benefit that large returns wouldn’t suddenly erase value. (This would happen because the returned inventory had been valued at the publisher’s sale price; now it will be valued at cost of manufacture if the returned stock is returned to inventory. If it isn’t, and it often isn’t, it’s a write-off.) It might be a lot to explain to shareholders or senior management that very large slugs of sales were substantially delayed in being recognized.
The store, on the other hand, would suffer no comparable impact. Under sale-and-return, they had the books at their cost on their balance sheet, but they were also debited for the cash they paid or owed. With consignment, they recognize neither the value of the books nor the payment for them until they’re sold, when they book the sale and also recognize the obligation to pay.
Consignment would definitely give the stores an apparently infinite return on inventory investment; there would be no inventory investment. The only limitation on how much stock the store would want is the available space to display it. The incentive to be rigorous about monitoring inventory really shifts from the retailer to the publisher or distributor.
Retailers have been striving for consignment terms, also called “pay on scan”, for years because, overall, inventory investment is one of the major working capital requirements for most of them. When we set up the distributor mentioned above in the late 1990s, we used consignment as a way to “guarantee” a store’s margin and their ROI. The retailer gets a fixed margin based on the retail price. The distributor makes all the inventory management decisions — shipments and returns — and pays the freight to ship the books in and out.
One other wrinkle of consignment is that “shrink” — inventory disappearing without going through the cash register — becomes a shared problem because it delays payment until inventory is ultimately reconciled. That is only really forced to happen when the publisher or distributor takes a complete inventory (rare) or calls for the return of a book that hasn’t been reported as sold but the store finds it isn’t there.
Under sale-and-return, the store pays for what is shipped to it. Shrink is entirely the store’s problem. This is an important concern to any publisher contemplating moving to consignment.
Another reason — and a good one — that publishers resist consignment is that they have a much-less-certain accounting of what they are owed. They are depending on the store’s POS system capturing every sale, with the differences being made up on a very delayed basis when inventory is taken or returns are requested and not found. Orders by a retailer of the same books from another source — if the consignment relationship isn’t a sole-source relationship — can seriously complicate the record-keeping.
If it is true that a number of publishers are contemplating a consignment model, that’s a good thing because it would demonstrate creative thinking is occurring where it is required. As we have said over and over again, shelf space at retail is going to be an increasingly vexed issue in our business in the months and years to come. Anything publishers can do to make it easier and more attractive for owners of brick locations to put books on their shelves is going to be needed and appreciated. Consignment, properly done and properly positioned, can be helpful, but it isn’t a panacea and it requires a lot of consideration of the details of implementation.
Consignment terms for retailers, I must admit, is one of the few important topics not being discussed at either our “eBooks Go Global” conference at BEA on May 25 or our “Global Perspective on Digital Change” conference in London on June 21. If you’ll be in the vicinity on those dates, click the links and check out the programs. We’re very excited about what we’ve been able to put together.