The 2% Solution: Moving Your Bookstore Out of the Red

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On Saturday, June 5, at BookExpo America, ABA CEO Avin Mark Domnitz conducted the two-hour session "The 2% Solution," a comprehensive seminar that suggested ways in which operators of bookstores could address issues related to lack of profitability. "The thrust of the session is to try to go from a negative profitability to a positive," Domnitz said in his opening remarks. "This used to be called a two percent industry…. The thing that struck me about it, is that it is doable."

In looking back at previous ABACUS studies, Domnitz noted that average profitability for independent bookstore participants has dropped over the past 10 years. In 1993, net sales before tax for participants was 1.53 percent; in 1994, it dropped to .60 percent; in 1995, it rose to 1.02 percent; in 1996, it was .72 percent; and, in 1997, the last year of the old ABACUS study, average profitability among study participants declined to .14 percent. The results of the first year of the new ABACUS study, published in 2003, indicated that the average profitability of the 197 participants had fallen further, to –1.67 percent in 2002.

As such, the crux of Domnitz's presentation was to provide a roadmap to illustrate how booksellers can work on sales, gross margin, compensation, and occupancy expenses to help drive that figure from –1.67 percent toward +2 percent. "I hope to start the graph going up again," he said.

Domnitz stressed that this approach to profitability can be used by stores of all sizes.

He noted that there are many ways in which a store can increase profitability, some of them better than others. For one, a store could simply attempt to increase sales, reduce expenses, or increase margin. The problem is, when booksellers choose to concentrate on just one of these areas to move to a 2 percent profit, the task often ends up being far too daunting, if not impossible, he said.

For example, if a bookseller decided to focus solely on increasing sales as way of increasing profits, he or she would have to raise sales by 10 percent without raising total operating expenses just to achieve a net income before tax of 2.12 percent -- probably unrealistic. Or, a bookstore owner might try to concentrate on increasing margin by 4 points to get to 2 percent -- "the hardest thing to do," he stressed -- or he or she might just cut expenses by 10 percent, which is also difficult considering the fact that 80 percent of expenses are "locked in."

The best tack, therefore, Domnitz stressed, is to address the problem on three fronts: increasing sales, increasing gross margin, and reducing payroll and occupancy expenses. This way, "you don't have to change things very much" to drive net income before tax into the black. The presentation outlined, in detail, the many ways in which booksellers can do this to reach the two percent figure.

Increasing Sales. Obviously, booksellers increase sales by bringing more customers into the store or by enticing those who are already customers to buy more, but there are different ways of doing this -- some less expensive than others. One method would be to "develop a plan for advertising using co-op dollars," Domnitz suggested. In addition, booksellers should consider implementing a public relations campaign since advertising can be very expensive, and good PR is cheaper and, in many cases, more effective.

"One good feature article is worth 100 ads," he said.

Another way to increase sales is to build a customer database to bring in new customers, bring back former customers, and bring existing customers in more frequently. "In some ways, technology is the great equalizer," Domnitz explained. "Many of you haven't taken the time to look at your customers.... Information is power -- but never market without permission." To gain permission, the bookseller needs to offer something of value if customers are to trust the bookstore with their customer data -- whether it is an e-mail newsletter or a frequent buyer program.

Increasing Margin. In terms of increasing margin, Domnitz said one way is to bring in higher margin merchandise, such as remainders, sidelines, or used books. Also, move high margin merchandise to high traffic areas. "[But remember], you don't sell as much of [the high margin items]," he warned. "There is an art to selling higher margin items…. The theory of merchandise placement is valid.... Give high margin more space."

Other ways to reduce margin include reducing freight costs by planning buying to meet free freight minimums; reducing inventory shrinkage by using security systems and/or changing the store layout to deter theft; and promoting and selling more gift cards.

Reducing payroll and occupancy costs. To reduce payroll costs, it is important to set a payroll budget. "Don't deal on a employee-by-employee basis," Domnitz said. "Match [employee] schedules to what's going on at the store. Schedule according to store needs, not employee needs…. Use back office staff to cover peak hours and lunch breaks."

Booksellers should also look into whether they can reduce occupancy expenses, but Domnitz warned attendees to "know that rent is going to be a problem before it becomes a problem" (e.g., a superstore is moving to the area in the next year). If the owner believes outside influences will decrease sales, and therefore make paying rent problematic, it is better to seek out the property owner as soon as possible to discuss the situation. "Property owners plan well ahead and do not like surprises," he said. And if you have neighbors with the same landlord, "find out if your landlord has given concessions [to them]…."

Domnitz suggested that bookstores could use the ABACUS study in their negotiations and in discussing how much they can afford to pay per month. He added that booksellers might be surprised at how many property owners are willing to discuss the problem and work out an amenable solution. "Landlords fear bankruptcy," he said, not to mention how much it would cost a property owner to find a new tenant.

To read Domnitz's "The 2% Solution" PowerPoint presentation in its entirety in PDF format, click here. --David Grogan