Friday, December 11, 2009

The future of book retailing

On the surface 2 contradicting and rather striking news items emerged over the last 2 weeks. First there was the message that Borders UK went into administration. Apparently the company had suffered from increased competition from online retailers and supermarkets. Just a week later rumours appeared that Amazon was looking for physical outlets in the UK. So after Borders UK fails to make money out of  brick&mortar shops, Amazon (still 100% online) seems to be moving into b&m?

Amazon opening outlets in the UK may appear as a thumbs up towards the retailers heavily depending on their b&m stores: apparently e-tailers cannot cope without b&m shops. Even if Amazon makes such a move  the conventional retailers are still light years away from companies like Amazon. e-tailers typically work with margins <15%, retailers on the other hand need >25% to sustain their organisations. Many of the book retailers have by now moved into online sales as well but their cost structures did not change. On the contrary: moving into e-tailing requires considerable investments in IT and personnel over a longer period of time without getting immediate returns.

Amazon on the other hand will continue to dominate online sales and will only open physical stores in small numbers initially. They will continue to do so only if the shops really add value to their online business. For Amazon b&m shops are an extension of their successful online business. For the conventional retailers their b&m core business is being threatened and their move to online is a difficult step into a new world dominated by strong players and different rules.

What's next? The future looks bleak for b&m retailers. e-books will make things worse for conventional retailers. It is obvious that consumers will buy e-books via internet, the domain of Amazon. Digital natives becoming the dominant consumers in the coming 20 years is another powerfull force towards e-tailing. Retailers will have to start making changes quickly now they still can. Moving to a cost structure that is more in line with their online-only competitors is key to their survival even if that means making drastic cuts in the number of their physical outlets. Else there will be more companies following the path of Borders UK.

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