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My Careen as a Bookseller (10) :: Engineering a death spiral

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In 2009, I decided to speak out against the recommendation of that year’s board of directors of the People’s Co-operative Bookstore Association to close the store down, at a time when it still had around $150,000 cash in its reserve fund.

Anybody who has ever wanted to start his or her own small business — certainly anybody who’s ever wanted to start a bookstore — will see what was wrong with the picture that the bookstore’s board was trying to present to the co-op members. A person will sometimes give up their career as teacher or whatever, and re-mortgage the house they’ve just spent twenty-five years paying off, so that they can fulfil a lifelong dream of running their own business, with $100,000 or $150,000 in the bank to work with. Here, we had a well-established bookstore, unencumbered by significant debt, with that much cooling in its reserve fund; and it was closing?

A little time spent looking at the store’s financial statements revealed some bad signs. The board’s response to a decline in sales was to attack the largest expenditure item in the budget — it directed Ray, the manager, to order fewer books. But this resulted in the store’s actually buying fewer than the minimum number of books it needed to keep its doors open. The store’s board was not merely lacking entrepreneurial spirit: it didn’t understand literally the first thing about running a bookstore, which is that can’t sell what you haven’t bought.

It’s true that the People’s Co-op had been operating at a loss for years. Consistent operating losses, of $10,000 to $30,000 every year, were drawing this down the store’s massive reserve fund at an alarming rate — it was surprising how quickly a third of a mil could turn into a quarter of a mil, and no time at all before it seemed inevitable that the store had just a couple of years left in the fund, and on the clock. It was as if it was a normal thing for a small shop on Commercial Drive to lose so much money, and have a reserve fund to make it good year after year.

The narrative constructed around the store’s long, slow decline was the 140-character one that everybody is familiar with by now. What with Amazon, e-books, and The Chains, books were over, people were stupider than ever, failure of whichever independent bookstore was imminent / inevitable, it was all hopeless, blah blah blah. As a member of the trade, I understood that whatever kernels of reality this account contained, it left out too much. Here’s what was wrong with the picture that the bookstore’s board was trying to pass off to the membership.

Sales had been declining in recent years, that seemed true enough. But sales at the People’s Co-op were modest, minuscule really compared to the sales of some other Vancouver retail stores where I knew the figures. They were about a quarter of what Duthie Books on West 4th, which closed in 2010 (an orderly closing; the store had not failed), was posting. They were a similar fraction of what Granville Book Company’s sales had been before it had closed five years previously. Commercial Drive wasn’t West 4th, and it wasn’t Granville Mall; but it wasn’t Tobacco Road either, and there was no reason from its location that it could not sell a lot more books. It seemed to many of us that it was limiting itself by striking a pose as a shop of a particular, narrow political stripe. It would have to reconceptualize itself as a neighbourhood bookstore, and offer to serve a broader community of leftists, environmentalist, social activists, &c. (There had been, over the decades, much talk about this move, though not much was ever done.) There did not seem to be any reason to accept the store’s modest sales as an unchangeable given.

Rent — the biggest bugaboo for a bookstore, or any retail affair for that matter — took up a little more than 10 percent of the store’s turnover. That was a little more than what you want to pay; but if the store was doing the business it could and should be doing, it was a pretty reasonable amount; rent wasn’t the problem. I was pretty certain that the store’s decline was due to the fact that its shelves were being starved of stock; and we had ample means to address that problem.

A bookstore like the People’s Co-op takes in almost all its money from the sale of books. But it spends its money in two different areas. Of course, it has to buy books. But it also has to pay certain costs regardless of whether it sells one book, or a million books in a year: staff salaries; rent; light; heat; the computer system it relies on to track inventory; etc.: all of these together constitute operating overhead, “the nut”. In 2009, the store’s “nut” was around $12,000 to $15,000 a month.

The question a business like the People’s Co-op Bookstore has to ask itself is this one. Given that the store’s overheads costs are $150,000 a year, say, how many books does the store need to sell to cover its costs? Well, a typical discount on books the store purchases from its suppliers is 40 percent; when the store buys a book, it pays the supplier 60 cents on the dollar, and when the book is sold, the the store gets the other 40 cents to apply to its own expenses. The formula would be 10/4 x $150,000 — the store’s sales would need to be about $375,000, at those levels of overhead.

Now, it would seem obvious that in order to sell $375,000 worth of books at retail, you’d have to buy them first: about $225,000 worth. And that’s where the store was cutting its own throat. By 2009, the store’s purchases had fallen to around $180,000 a year,  and were declining steadily, by about $10,000 per year. The store had put itself into a downward spiral, guaranteeing operating losses that could only rise as the extent of under-purchasing grew. Yet it had the means to rectify the situation sitting in its reserve fund.

In preparation for this upcoming AGM, which would surely be a fateful one for the co-op, I read the Co-operative Association Act, the provincial statute that governs co-ops in the province, and learned a couple of useful things. For one thing, in the event that a co-op had assets at the time it decides to wind itself up, the proposal to spend the store’s last $90,000 on a buy-out for its employees had to be put to the members. And there was no such motion going to the AGM — no word at all about the disposal of the $100,000 or so that would be remaining in the store’s reserve fund. Just a simple motion: to close the store forever on March 31, 2010: the year of the Co-op’s 65th anniversary, which it had no plans to celebrate.

I was far from the only person wondering about some of these questions, and the 2009 AGM of the People’s Co-op Bookstore was the best-attended in many, many years.

Continue reading My Careen as a Bookseller (11) :: The First Step in a Long, Long March

Start from the beginning: My Careen as a Booksellers (1) :: Before It All Began