January 25, 2005

Excerpts: Category Killers - Private Labels

By: 800-CEO-READ @ 3:12 PM – Filed under: Management & Workplace Culture

Many category killers are responding by making substantial investments in their own private-label products. Private labels serve several purposes. First, these goods produce a greater profit margin because the retailers dont have to pay the built-in costs for the suppliers shipping, marketing, and advertising. With in-house brands, stores typically have no middleman vendor to pay, and they have more control over prices. By generating better profit margins, the retailer can afford to stock the national brands, which produce a thin profit margin. Second, a retailer can use a private label as a distinctive reason for shoppers to visit one of its stores. Third, the best retailers can market and merchandise their own private labels so well that the consumer believes them to be national brands.
Barnes & Noble has been involved in self-publishing since the mid-1970s. After getting numerous requests for out-of-print books, the company acquired reprint rights for a variety of academic and esoteric titles and sold them for $6.99 apiece. In the 1980s, B&N expanded its publishing projects to richly illustrated coffee-table books on gardening, cooking, and lifestyle. In 2002, B&N bought Sterling Publishing Company, Inc., a Manhattan-based specialist in how-to and crafts books on everything from chess to gardening. The acquisition gave the bookseller a potent national sales force and distribution system that enabled the titles to be sold in rival book stores, as well as gift shops and a wide variety of specialty retailers. B&Ns decision to buy Sterling didnt sit well with competitors; Borders and Costco announced that they would no longer carry Sterling titles.
In 2003, B&N reworked its series of Barnes & Noble Classics with the launch of fifteen titles, including Huckleberry Finn, Middlemarch, Moby Dick, The Odyssey, Dracula, The Red Badge of Courage, Great Expectations, Jane Eyre, The Scarlet Letter, and The Souls of Black Folk, in a variety of formats, including hardcover, trade paperback, mass-market paperback, and eBooks, ranging in price from $3.95 to $9.95. This is an interesting strategy in a category where content and price supersede brand name. Because Barnes & Noble doesnt have to pay the 50 percent markup that a publisher would normally get, the lower-priced self-published books become more profitable. This puts B&N editions in direct competition with classics published by Modern Library, an imprint of Bertelsmann AGs Random House Inc. and Pearson PLCs Penguin Classics imprint. But B&Ns books will have the advantage of being featured throughout its nine hundred stores, displayed with special signs and fixtures.
The bookseller also offers tomes on astrology, food, wine, and popular culture, and co-publishes TV Guide Film and Video Companion, Encyclopedia Britannica Almanac, the MapQuest Road Atlas, and, in a joint venture with Warner Books, Satisfaction: The Art of the Female Orgasm, by Kim Cattrall, star of the HBO television series Sex and the City, and Mark Levinson. In the summer of 2002, Barnes & Noble dropped the CliffsNotes study guides, published by John Wiley & Sons, and replaced them with its own SparkNotes, priced at a dollar less than CliffsNotes.
By the end of the decade, B&N projects its own titles will comprise 10 to 12 percent of its total revenue by 2008, up from 4 percent in 2004. This is part of a crucial strategy in an industry in which new book sales grew only 1.3 percent from 1997 to 2002, according to the Book Industry Study Group.
Another reason that Barnes & Noble was compelled to expand into private-label publishing was the demand of book buyers for lower prices, which they can getparticularly on bestsellersfrom nontraditional booksellers such as Wal-Mart, Target, and Costco. (Ironically, it was Barnes & Noble that pioneered the idea of aggressively discounting best-selling titles as a way to attract customers.) In 2002, some $450 million was spent on general-interest books at mass-merchandise retailers, according to Ipsos Book Trends, up 7.4 percent from 2000. Such books now account for 30 percent of all general trade book sales.
Reprinted by permission of Harvard Business School Press. Excerpt from Category Killers: The Retail Revolution and its Impact on Consumer Culture by Robert Spector. Copyright 2005 by Robert Spector. All rights reserved.