Published on 03/02/2016 by Punchmedia

Book Store Industry Struggles as Amazon Expands

In a time where here in Australia we've seen the closure of many bricks and mortar book stores over recent years, online book retailing giant Amazon.com Inc is expected to open 300-400 stores across the US in the near future.

Such an expansion, which Amazon itself has not confirmed, would position the world's No. 1 online retailer as a competitor to booksellers such as Barnes & Noble Inc.

Amazon recently opened its first bookstore in Seattle's University Village, where visitors also able to test-drive Amazon's Kindle, Fire TV and other devices.

In Australia, bookstores have fought to stay afloat, with the industry’s revenue estimated to contract by an annualised 10.6% over the five years through 2015-16. A host of issues have plagued industry operators during this period, including falling sales volumes, downward pricing pressure, strong competition from online operators and external players, and a shift in the buying habits of consumers.

Profitability has trended downwards due to the erosion of product margins. Industry performance has also been affected by fluctuations in real household discretionary income, consumer sentiment, the IT and telecommunications adoption rate and trends in internet and catalogue shopping. In 2015-16, industry revenue is expected to fall by 3.3% to $1.7 billion.

Performance Drivers

Operators have faced difficult trading conditions over the past five years. Instability in global financial markets and uncertainty across the domestic market created volatility in consumer sentiment, limiting consumer spending on non-essential goods. Combined, these factors produced difficult trading conditions for operators and led to softer industry sales. Discretionary income has trended up over the past five years. Cuts to the official interest rates reduced debt repayments for consumers, leaving them with more money to spend on discretionary purchases. However, fluctuations in consumer sentiment have limited these benefits for industry operators, as fear about the state of the Australian economy has caused consumers to rethink their purchase decisions.

Industry Revenue

Industry revenue prospects have been affected by a shift in the buying habits of consumers and increasing competition from online-only players and external businesses such as discount department stores. Growth in the IT and telecommunications adoption rate has led more shoppers online, attracted by the cheaper prices of books compared with traditional bricks-and-mortar retailers. Industry revenue during the past five years has also been affected by existing parallel import restrictions (PIR), which prevent domestic booksellers from importing books that can be supplied by local publishers. As international online bookstores are exempt from these restrictions, they can often sell books to Australian consumers for significantly cheaper prices. Their ability to charge lower prices is further enhanced by their exemption from collecting GST on purchases less than $1,000. There have been numerous inquiries into PIR, as bookstores have argued for its removal. A 2008 Productivity Commission review found that Australian consumers paid an average of 35.0% more for books than consumers overseas. However, for now, PIR remain in place.

Consumer Trends

Trends in IT and telecommunications adoption by consumers have influenced demand for books over the past five years. Growth in internet connection rates has increased access to the internet and facilitated online purchases, and many industry operators have responded by establishing their own online stores to capture an increasing share of the market. Industry revenue has also benefited from growth in e-reader and e-book sales, which have gained popularity as an alternative to print. However, growth in IT use by industry operators has done little to mitigate the loss of sales to international online bookstores, which offer competitive pricing and efficient delivery systems.

Profitability

Difficult trading conditions and growing industry competition have challenged operators’ ability to remain profitable over the past five years. Competition has been particularly fierce from external players, such as discount department stores, which are able to make bulk purchases due to their economies of scale. As a result, they have been able to offer consumers affordable pricing across a broad range of books. This has helped to make them increasingly popular, especially during key selling periods such as Christmas and Easter. Product discounting during these key selling periods has eroded revenue away from industry operators. Industry profitability is expected to trend downwards over the five years through 2015-16, as difficult conditions reduce product margins and increase operating costs. While profit margins on products such as e-books and e-readers are likely to remain intact, the lacklustre performance of the print book segment has eroded industry profitability. Niche or specialist bookstores have performed better over the past five years, due to their dedicated customers and weaker competition.

Store Numbers

The tough operating landscape for bookstores has led to consolidation by businesses, as operators have closed stores or exited the industry entirely. Both enterprise and establishment numbers are expected to decline over the five years through 2015-16. A reduction in store numbers has led to lay-offs and diminished employment across the industry. However, wage costs as a share of industry revenue have increased over the past five years. The rise can be attributed to the introduction of the General Retail Industry Award in 2010, which is likely to have increased wage costs for operators.

punchmedia

Curtis is a leading expert in the business-for-sale industry, serving as a senior content creator at anybusiness.com.au.

With a career spanning over fifteen years, Curtis has accumulated extensive knowledge in the domain of business sales, acquisitions, and valuations. His deep understanding of market dynamics and his ability to translate complex industry jargon into accessible insights make him a trusted resource for entrepreneurs and business owners looking to buy or sell businesses.

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