The UK book retail industry has been facing a decline in sales every year for the past couple of years. It has continued to change and e-books continue to gain acceptance and grow in importance. The technological innovations in how media is consumed by the consumers have changed the landscape in this industry. Big box stores like Barnes & Noble, Waterstones, WH Smith, Borders and others in the UK and USA are scrambling to get in the game as soon as possible and strike the iron while it’s still hot. Iron being the e-books in this case. Some stores have successfully managed a strategically smooth transition or inclusion of the electronic resources for books, while some just can’t seem to keep up. Books, newspapers and magazines make up the segments of the publishing market. According to Datamonitor profile, UK publishing market has been decelerating since 2006 and fell into decline in 2009. “However, the market is likely to accelerate slightly in the forecast period, although growth will remain weak” (Datamonitor 2010). Books sales proved the most lucrative for the UK publishing market in 2009, with total revenues of $5.7 billion, equivalent to 45% of the market’s overall value. Comparatively for the US publishing market in 2009, the total revenues were of $26.1 billion, equivalent to 52.2% of the market’s overall value.
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The performance of the market is forecast to decelerate, with an anticipated CAGR of 0.2% for the five year period 2009-2014, which is expected to drive the market to a value of $12.8 billion by the end of 2014. (Datamonitor 2010) According to Datamonitor 2010 for the US Counterpart, the performance of the market is forecast to decelerate, with an anticipated CAGR of 1.2% for the five year period 2009-2014, which is expected to drive the market to a value of $53.3 billion by the end of 2014. (Datamonitor 2010)
1. Analyse the strategic situation facing incumbent firms within the UK book retail industry. Your discussion should also draw upon the extent to which events in the USA book industry may or may not impact here in the UK?
The strategic situation faced by the UK book retail industry can be analyzed using Porters Five Forces. For the big box retailers, such as Waterstones, WH Smith, Borders, Barnes and Nobles have certainly been historically successful and achieved economies of scale via bulk purchasing and large consumer base. The benefits of bulk purchasing have however decreased due to an increase in online sales and introduction of e-books. For newer technologies, the cost of entry have been relatively low hence Amazon, Apple, e-books have come into the picture and changed the book retail industry landscape completely. The distribution channels are easily accessible and not sown up by the big retailers. Supermarkets and independent retailers have finite shelf-space dedicated to published media, so consumer preference is even more significant in relation to what is stocked (bookstores will dedicate a lot more space to cater for different consumer needs), and this selectivity increases buyer power to an extent. Online distributors are not affected by this issue of ‘shelf space’ and therefore titles can be sold to order (including back-issues of magazines and newspapers) meaning that customer loyalty has increased in this sector. (Datamonitor 2010)
The threat of new entry is relatively high in this industry as there are only a few large players, although their power is decreasing. There is also a possibility of suppliers integrating forward, for e.g. some book publishers themselves might decide to sell directly to consumers via their websites than through the book retailers. With internet, cost advantages are not related to the size of the company anymore. At this stage, differentiation is very important.
The threat of substitutes is very high in this industry. Threat of substitutes = internet, TV, CD-ROM, e-books etc. The Internet allows for a substitution to the physical format of books, newspapers and magazines, with the option of online versions and e-books, with the advantage of updated versions and revisions being much easier and cost-effective to implement. Thus customer preference has changed. Overall, the threat of substitutes is considered to be moderate. Datamonitor’s Analyst opinion on 9th September 2010 article – HMV: where do they go from here? (http://about.datamonitor.com/media/archives/4724) has stated that, the relaunch of HMV Digital and its compatibility with Apple’s iTunes is a sensible move, but one which was long overdue. This and the growth in eBooks, which will benefit Waterstones, are potentially strong areas for future growth which nonetheless will not mitigate the weakness in store based sales and it is here that HMV must give further thought to its future strategy. According to the Association of American Publishers, e-book sales in the U.S. were $313 million in 2009, a 177% increase over 2008.
Since the threat of new entries is likely in this industry, the Competitive Rivalry is most likely to be high. There is the threat of substitute products, and suppliers and buyers in the market attempt to control. For example several online sites allow anyone to upload digital versions of books, research reports, and other printed material to share across the Web. Document-sharing websites such as Scribd (www.scribd.com) have 60 million visitors a month, and is the most popular of several such websites.
Due to the increased popularity of online resources and e-books, the book publishing industry is facing even more competition. The main player in this market is the consumers whose spending is dependent on the demand and the titles stocked at the retail outlets, thereby putting pressure on the retailers to stock titles that are in demand, provided they have shelf space. It’s also dependent on factors such as economic growth and employment levels, which will affect on how and what they buy.
The rationale for the American chain store has not translated to the UK, says Paul Smiddy. There are tough lessons to be learned. “One used to be able to rationalise Borders’ existence as a format in the US: cheap shed space enables a category-killing offer. But in the UK it was forced to use not-so-cheap shed space. Indeed, cheap sheds in this country are only located in those parts where few members of the page-turning classes dare to tread. So Borders had to plump for your average retail park, with rents to match.” Referring to the Datamonitor reports attached in the appendix, the future seems bleak for the publishing industry. The UK publishing market has been decelerating since 2006 and fell into decline in 2009. However, the market is expected to accelerate slightly in the forecast period, although growth will remain weak.
2. Identify the main competitors within the book retail industry, and organise them into strategic groups. Discuss both the key success factors and mobility barriers pertaining to each strategic group. Do you think these factors and barriers will change within the next five years? If so, how and why? If not, why?
According to Wang & Kumbhakar (2009) the concept of strategic groups was first introduced in the work of Hunt (1972), Caves and Porter (1977), and Porter (1980), and it was used to explain the observed heterogeneity of firms’ conduct and performance within industries.
The industry’s major booksellers include WH Smith, Waterstone’s, Amazon.co.uk, Blackwell and Book Club Associates. There is one gap in the list of bookshops – Borders – which closed at the end of 2009. Sales of mass market books are now dominated by three types of retailer: supermarkets, high street bookselling chains and online booksellers (Keynote, 2010).The supermarkets such as Tesco, Sainsbury’s and ASDA also play a significant role in this sector; there remain many independent bookshops, but their number is contracting year-on-year. (Source: OverDrive, Inc., Cleveland, 216/573-6886; http://www.overdrive.com.)
According to Keynote Bookselling 2010 report there are nine types of bookseller.(Industry Concentration from Keynote 2010 Report in Appendix). Three strategic groups can be identified in the book retail industry.
One group consists of the flag retailers. These are large and medium sized book retailers with established brands, some of them strong. Historically they have dominated the book retail market and have competed using services, vast selection and alliances in the book retail industry. The large players within this group are Waterstones, WH Smith in the UK and Barnes and Nobles, Borders in the USA. All are historically strong but suffering recently due to lack of sales and impact of e-books and internet business model stores like the Amazon.
Second strategic group is of independent book retailers, coffee shops, and superstores etc that also sell books. They offer low prices and other complementary products and services. In the US, Borders and Barnes & Nobles are Value innovators who have tapped hidden opportunities by defining the total solution that buyers seek. They’ve “created book superstores that focused on lifelong learning and discovery where the product includes the pleasure of reading and intellectual exploration as well as the book itself. These superstores provide a large selection of books, as well as knowledgeable staff, armchairs, reading tables, sofas, coffee bars and classical music to enhance the buyers total book buying experience (see their book retailing value curve below).
Third consists of low cost internet business models such as Amazon. They offer rock bottom prices, convenience of not having to leave home, sometimes free shipping and option of buying cheaper used books via third party sellers. Online bookselling is growing, so is the selling of books by supermarkets. E-books and e-readers are gaining in acceptance. In strategy terms they are very aggressive competitor and price wars are the norm. According to Dinlersoz and Li (2006) examples of strategic use of shipping options are ubiquitous in on-line markets. “For instance, in an attempt to lure and lock in consumers, Amazon.com started a new program in 2005 called “Amazon Prime”, which gives consumers unlimited two day shipping for a fixed annual fee”.(Dinlersoz, Li 2006)
Key success factors for these strategic groups:
Datamonitor Reports state that although the trade is suffering in 2010, there are some grounds for optimism for e.g. two discount chains, The Works and British Bookshops & Stationers, are proving profitable. Many booksellers are embracing more innovative strategies and product formats to ensure the viability of their businesses.
According to (Dinlersoz, Li 2006) Enbysk (2005) refers to a report by JupiterMedia Metrix, which found that 45% of the e-retailers studied made profit on shipping fees, 45% incurred a loss, and 10% broke even. Therefore evident for internet book retailers, shipping is one of firm’s characteristics that they can bank on. According to Clay, Krishnan et al (2002), because of the rise in price comparison search engines, it would be impossible for e-retailers to not charge the same price, therefore firms will prefer not to compete directly on price which will result in low profit but rather differentiate themselves.
Mobility Barriers are structural factors that protect successful firms from invasion by adjacent competitors (Caves and Porter, 1977). They are internal (to the industry) entry barriers which delineate boundaries between different strategic groups, and they may be contrasted with the external entry barriers discussed in traditional economic theory which deter outside firms from entering any part of the industry. (Harrigan 1985)
In the book retail industry most bookstores have successfully managed to incorporate e-retailing into their business model, while still also having brick and mortar businesses. The articles below shows WHSmith also moving into e-retailing format: “OverDrive, Inc. has announced that its partner WHSmith Online, a division of U.K.-based book and magazine retailer WHSmith, has launched an eBookstore that is the first online bookseller to offer e-books in the Palm Reader format. More than 4,000 Palm e-book titles from leading U.K. and U.S. publishers, including HarperCollins, Random House, Simon & Schuster, McGraw-Hill, St. Martin’s Press, and Time Warner, are available for immediate purchase and downloading from the WHSmith eBookstore (http://ebooks.whsmith.co.uk).”- OverDrive.com (WHSmith Online Launches Palm Reader eBookstore. Information Today, 87556286, Sep2002, Vol. 19, Issue 8)
The switch for many book retailers from just a brick and Mortar business model to e-retailing is inevitable. “The digital book industry is growing at a record-breaking rate. Sales for 1Q 2010 were $91 million, which is a 200% growth rate.” (EBooks Coming of Age as Digital Sales Skyrocket. Information Today, 87556286, Jul/Aug2010, Vol. 27, Issue 7) One of the issues that book publishers face is obtaining insurance cover, which also proved to be the start that broke the back of many retailers including borders coming into the UK market, therefore book publishers unable to obtain insurance means no suppliers for the retailers. (BORDERS SKIRMISH By: Smiddy, Paul, Bookseller, 00067539, 8/14/2009, Issue 5395)
Diversification can hardly be the answer. According to Paul Smiddy’s Article titled “Borders Skirmish” Across the UK, album sales are down 8.3% year to date, DVDs down 7.7%. One wonders what suitable products, other than coffee and greeting cards, can be inserted into Borders.
Organizations such as International Digital Publishing Forum (IDPF) supports open standards to help the publishers go digital. The group is well-known for the XML-based EPUB that has been the chosen standard for many e-books. (Ebooks Coming of Age as Digital Sales Skyrocket. Information Today, 87556286, Jul/Aug2010, Vol. 27, Issue 7)
Another issue facing the book retail industry and will subsequently affect their pricing strategy is business terms and pricing with the big publishers such as Hachette Book Group, HarperCollins Publishers, Macmillan, Penguin Group, Random House, and Simon & Schuster. The publishers have now instituted what is now called the agency model, replacing the decades-old wholesale pricing. According to the above article, “the sudden shift to the agency pricing model, these six publishers is setting the sales price and has taken away the distributors’ creative pricing edge. Prices are now fixed, and all distributors must sell the titles at this fixed rate. To further add burden to distributors, they must also become tax collectors.” (EBooks Coming of Age as Digital Sales Skyrocket. Information Today, 87556286, Jul/Aug2010, Vol. 27, Issue 7) This move to the agency model was in direct response to Apple getting into the business with iBooks.
Another factor affecting the industry is the eBooks and international rights, as eBooks have no geographical boundaries. As the speaker from OverDrive stated, “a large eBook content distributor, pointed out, on a routine day, eBooks are delivered to more than 170 different countries. Once an ebook is loaded on a server, that book can go anywhere in the world”.
4. Assess the prospects of Kindle to succeed in the UK market, given the multi-purpose use of the iPad.
Product design portfolio choices of firms are a key factor for entry into new markets and the incumbent reactions are critically dependant on it. (A. Giloni et al. 2008)
According to Steve Smith’s Eye on digital Media: The iPad’s “IN-BETWEEN-NESS.”, the chief complaint with iPad along with “no camera or voice capability” is that a consumer’s iPhone/BlackBerry/Android phones already have similar applications and functions and “and that the “in-between-ness” of the iPad (neither cell phone nor laptop) is a key barrier.” But “Because of its size and superb graphic quality, the iPad is a near-perfect delivery mechanism for magazines and newspapers.” (Rebecca McPheters – Why, Short-Term, The iPad will reign 24/1/2011)
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According to Rebecca McPheters in the above articles has stated that E-readers (e.g. Kindle) are much better suited to books than they are to magazines and newspapers. Apple has one huge advantage over Asus, HP, and other PC makers. The iPhone OS, iTunes, and the App Store provide an ecosystem that makes it easy for users to buy and consume content seamlessly. (THE IPAD CHANGES EVERYTHING. By: Copeland, Michael V., Fortune, 00158259, 3/22/2010, Vol. 161, Issue 4)
Kindles key attributes and positive functionalities include readability, comfortable to use, and fast page loading and many more. Although selling 7 million kindles, comparatively less than Apple’s 15 million iPad sales, kindle has allowed Amazon to stake out an early lead in e-books. Since 2010, it has sold three times as many e-books as hardcovers, and it dominates the fast-growing new market. (How Amazon Keeps Cranking. By: Cendrowski, Scott, Fortune, 00158259, 2/28/2011, Vol. 163, Issue 3). “By creating the hardware, they almost created the industry,” says Morgan Stanley analyst Scott Devitt. According to the above article, what might help Amazon outsell iPad and dominate the eBook industry via its Kindle is its Innovations, attack competitors head on (In a Morgan Stanley survey of 50 products, Amazon sold items for 6% less on average than Wal-Mart and 9% less than Best Buy) and Focus on Service.
Amazon’s Total Revenue in billions:
Electronics and other general merchandise [gadgets, apparel, home goods, etc.]
Media [books, DVDs, music]
REVENUE CHART SOURCE: COMPANY FILINGS. PERCENTAGES ADD UP TO MORE THAN 100 BECAUSE OF ROUNDING. (How Amazon Keeps Cranking. By: Cendrowski, Scott, Fortune, 00158259, 2/28/2011, Vol. 163, Issue 3 – FIRST: WORLD’S MOST ADMIRED COMPANIES | TOP PERFORMERS- NO. 5)
Although Amazon doesn’t divulge company’s financial information, its best selling product according to the company has been Kindle. According to report published by Richard K. Miller & Associates , driven by the popularity of the Kindle wireless e-book reader, from Amazon, the e-book format has now started to take hold.
Chatterjee and Sugita (1990) have discussed that the pioneer faces the risk of costly new product failure because the potential demand is not known with certainty. (Chatterjee, Sugita, 1990)Therefore the iPad could be a flop. There are good reasons tablets haven’t caught on (remember Apple’s Newton?), and already many observers have dismissed the iPad as an overgrown iPod Touch. (THE IPAD CHANGES EVERYTHING. By: Copeland, Michael V., Fortune, 00158259, 3/22/2010, Vol. 161, Issue 4)
The pioneer versus follower issue has received extensive research attention in economics, marketing
and business strategy (Bain. 1956; Levitt, 1966; Porter, 1980; Scherer, 1980).Kindle entering the UK market is a potential gamble. The pioneer enjoys an initial period of monopoly, until competitors enter. (Chatterjee, Sugita, 1990) More importantly, there are theoretical arguments, as well as empirical support, in favour of long-run first-entrant advantages that, in effect, post barriers to subsequent entry (Chatterjee, Sugita, 1990). Chatterjee and Sugita have stated sources of these advantages include the opportunity to position the product to appeal to the most profitable segments, lower cost in the presence of experience curve effects and the benefit of superior consumer information under preferential uncertainty(Chatterjee, Sugita, 1990).
Nevertheless Trends and Studies have shown that readers have endorsed the eBook platform and are demanding more titles. According to “EBooks Coming of Age as Digital Sales Skyrocke, Jul/Aug2010, Vol. 27, Issue 7” Serious readers may stay with the Kindle for the E Ink and the simplicity while others are choosing the iPad instead. No matter which platform a reader selects, the acceptance of the eBook as a format is here to stay.
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