BOOK EXCERPT PASSAGES Wars of Succession — the Road to Ruin in Canadian Book Publishing

BOOK EXCERPT PASSAGES Wars of succession — the road to ruin in Canadian book publishing

Roy MacSkimming

The arrival of the Chapters big box superstores in 1994, and their acquisition of SmithBooks and Coles, created a dominant player in Canadian book retailing whose predatory pricing practices soon drove many long-established independent booksellers out of business. Then Chapters CEO Larry Stevenson created Pegasus, a distribution division that demanded a wholesale discount from publishers for fulfillment to Chapters and Chapters.ca. To make things worse, even as books disappeared in the Pegasus supply chain, Chapters swamped publishers with returns, while neglecting to pay its bills on time. By 2000, the entire food chain of Canadian publishing had been poisoned. By the time Heather Reisman of Indigo stepped in with her hostile takeover of Chapters, Canadian publishing was in a state of financial chaos. In this exclusive excerpt from The Perilous Trade: Publishing Canada’s Writers, Roy MacSkimming tells the cautionary tale of Chapters, and how Larry Stevenson put Canadian book publishing on a road to ruin.

L’arrivée en 1994 de la chaîne de librairies Chapters, puis l’acquisition par celle-ci de SmithBooks and Coles, ont créé dans l’industrie canadienne du livre un géant dont la stratégie de prix vorace a bientôt provoqué la faillite de nombreuses librairies indépendantes établies de longue date. Le PDG de Chapters, Larry Stevenson, a ensuite fondé une division distribution baptisée Pegasus, qui exigeait des maisons d’édition un rabais sur les prix de gros pour avoir droit de cité chez Chapters et Chapters.ca. Pire encore : pendant même que les livres disparaissaient du circuit d’approvisionnement de Pegasus, Chapters inondait de retours les éditeurs tout en négligeant d’acquitter ses factures dans les délais prévus. Dès 2000, toute la chaîne de l’édition canadienne était contaminée. Et quand Heather Reisman, de Indigo, s’est emparé de Chapters par suite d’une prise de contrôle hostile, l’industrie était en plein marasme. Dans ce passage exclusif de The Perilous Trade: Publishing Canada's Writers, Roy MacSkimming retrace le tortueux parcours de Chapters et explique comment son président a mené l’industrie canadienne du livre au bord du gouffre.

hapters Inc. has transformed Pathfinder Capital and Canadian With lightning speed, Stevenson then the Canadian retail book mar- General Capital Corporation were bought up the other national book- C ket so radically that it’s star- captained by a Canadian Forces para- store chain, lowbrow Coles, from tling to recall the corporation has trooper turned smooth-talking Southam. He merged the two and existed only since 1994. But before its Harvard Business School grad named renamed the corporate entity red and yellow logo and saturation Lawrence N. Stevenson, Larry to his Chapters, with himself as CEO and advertising made its brand as ubiqui- friends. He and his fellow acquisitors former Ontario premier David tous as McDonald’s, Chapters was just started by buying middlebrow Peterson providing a patina of politi- a bunch of venture capitalists looking SmithBooks, formerly W.H. Smith of cal respectability as chairman of the for an industry to take over. They Canada, in 1994. The chain had pro- board. found it in the sedate, unsuspecting, duced only modest financial returns SmithBooks had already absorbed underperforming world of Canadian after its purchase by Winnipeg’s the Melzack family’s upmarket but book retailing. Federal Industries five years earlier. overextended Classics chain in 1985.

POLICY OPTIONS 87 FEBRUARY 2004 Roy MacSkimming PASSAGES And so, where a decade earlier there ith the objective of knocking “wholesale” operation called Pegasus had been three bookstore chains, each W long-established independents Inc. The actual core functions of with a different style and product mix, out of the game, the Chapters super- Pegasus were filling orders for now there was only one. The market stores offered bestsellers at discounts of Chapters.ca customers and supplying power of Chapters was unchallenged, 30 percent or more (offers duplicated by books to the Chain’s own stores. But combining the Chapters, World’s Coles and SmithBooks) and featured by claiming Pegasus as a wholesaler, Biggest Bookstore, Coles, SmithBooks, Starbucks coffee bars, comfortable arm- Chapters could demand the higher Librairie Smith, Classic Books, and chairs for browsing, and cheery chil- wholesaler discount from publishers. Book Company brands. Publishers no dren’s play centres. The strategy worked To make the pretense more credible, longer had a significant alternative with stunning efficiency. Between 1997 Pegasus pursued sales to libraries and schools and announced its By the dawn of 2000, it was apparent that the Chapters intention of supplying the business model wasn’t working. For all its dominance, the very independent book- behemoth had grown too quickly: no doubt expanding the stores that Chapters was driving out of existence. market, as Stevenson often claimed, but also far outstripping Until then Canadian the market’s ability to grow. Publishers realized Stevenson publishers had been hadn’t been buying their books so much as borrowing them. ambivalently complicit in the gutting of the retail sec- customer in Canada; if the Chain and 2000, independent bookstores that tor. They’d been happy with the sharp didn’t order a title, that book automat- had been cherished fixtures in their spike in sales resulting from the ically lost access to half the domestic communities for decades fell before the Chapters building boom, yet nervous retail market. And hundreds of inde- Chapters blitzkrieg. Britnell’s (estab- about the unrealistic size of its orders pendent local bookstores faced a sin- lished 1893), the Book Cellar, the and troubled by the loss of so many gle-minded, predatory foe. Children’s Bookstore, Writers & Co., traditional bookstore customers. With With a shrewd, smooth political and ten Lichtman’s stores, all in the advent of Pegasus, publishers’ campaign, Chapters passed lengthy Toronto; nine out of ten Duthie’s stores worst suspicions were confirmed. scrutiny by the federal Competition in Vancouver; four Sandpiper stores in Pegasus demanded from them a Bureau. Despite warnings from the Calgary; Books Canada and Food for wholesaler discount of 50 percent- ACP and protests from the Canadian Thought in Ottawa; and dozens of plus, in place of the 45 to 48 percent Booksellers Association, the bureau booksellers in other cities all went out they’d been giving Chapters. Although found in 1995 that the new retail giant of business. the Chain claimed otherwise, publish- wouldn’t “unduly limit” competition The Chain’s drive for market share ers understood that if they wanted in book retailing. With the formalities accelerated after it emerged from a their books on sale at any Chapters, out of the way, Stevenson adopted a three-year monitoring period imposed Coles, or SmithBooks outlets, they’d take-no-prisoners approach toward by the Competition Bureau. In 1998 it have to ship to Pegasus on its terms. competitors and suppliers alike. He opened Chapters Online (listed, like Since the extra discount points executed his strategy to open Canada’s Chapters Inc., on the Toronto Stock wiped out publishers’ already paper- first book superstores, modelled on big-box out- Physical distribution at Pegasus was as chaotic as its accounting lets operated in the States practices. Thousands of books sat marooned in transport trucks by the Borders and lined up outside its warehouse. Rather than streamlining the Barnes & Noble chains; indeed, Barnes & Noble supply chain, as advertised, Pegasus had created a bottleneck acquired a 20 percent that delayed deliveries by weeks. interest in Chapters. The superstores, at least ten times bigger Exchange) to grab a slice of the expand- thin profit margins, they faced an than an average bookstore, began ing Internet book market pioneered by invidious choice: either absorb the opening in prime retail locations across Amazon.com. Like many e-commerce higher discount, raise book prices, and the country. Within five years, ventures, Chapters.ca proved costly and risk consumer resistance (as Stoddart Chapters had built seventy-one super- unprofitable. It was soon followed by did), or refuse to extend the discount stores throughout Canada; in the same more dangerous developments. and lose the Chain’s business (as period, it closed over 150 of the more In 1999 Chapters converted its Firefly did). Some independent book- than 420 Coles and SmithBooks outlets huge warehouse and distribution cen- sellers, such as Jim Munro of Victoria, as part of its corporate rationalization. tre in Brampton, Ontario, into a mocked the publishers’ dilemma, say-

88 OPTIONS POLITIQUES FÉVRIER 2004 Wars of succession — the road to ruin in Canadian book publishing BOOK EXCERPT ing they’d helped create the monster in the first place and were now suffer- ing the consequences. Most publishers felt they had no realistic choice but to play the Chain’s game. Firefly furnished an object lesson in what would happen if they didn’t coop- erate. Chapters responded by returning $1 million worth of books for credit, including titles from Annick, Owl, and the other presses distributed by Firefly.

arry Stevenson became notorious L in the trade for browbeating suppliers over the phone. Anna Porter complained to him that Key Porter’s new book by Allan Fotheringham, who was then crossing the country on tour, had been shipped to Pegasus but still hadn’t reached Chapters stores; if the Chain didn’t get its act together, Fotheringham was going to blast its inefficiency in Maclean’s. In that case, Stevenson replied, he’d return every Key Porter book in his possession. By the dawn of 2000, however, it was apparent that the belligerent business model wasn’t working. For all its dominance, the behemoth had grown too quickly: no doubt expanding the market, as Stevenson often claimed, but CP Photo also far outstripping the market’s ability Heather Reisman and her husband, takeover artist Gerry Schwartz, “outmanoeuvred to grow. Publishers realized Stevenson Larry Stevenson and his management group at every turn,” ultimately buying out hadn’t been buying their books so much Chapters and creating a new retailing behemoth, Chapters-Indigo. as borrowing them, fully returnable, to wallpaper his edifice complex. He’d would wait, sometimes for weeks, for was in trouble again. Sniffing a story, extracted steep discounts and supermar- the books to come back. Often they they discovered that publishers’ ket-type display fees, even charging pub- arrived damaged, bearing the telltale returns from the Chain were running lishers to attend his sales conventions; traces of coffee-slurping browsers, at 50 to 60 percent of sales in early but his numbers didn’t add up to a even though industry standards 2000, instead of the industry average healthy business. Yet the Chapters stock require returns to be in resaleable 20 to 30 percent. And since Chapters/ price had stayed buoyant long enough, condition. Equally disturbing, pub- Pegasus was returning books in lieu breaking $30 at its height, that lishers found the value of the returns of paying its bills, publishers’ cash Stevenson and other company execu- sometimes varied wildly from the flow was drying up. Money that was tives made a killing selling their shares. credit being claimed. Physical distri- trickling in paid for inventory that Mere days after the Globe and bution at Pegasus was as chaotic as its the retailer had purchased 120, 150, Mail’s Report on Business magazine accounting practices. Thousands of even 180 days earlier, instead of the put the grinning, denim-shirted books sat marooned in transport standard 90 days. As the news Stevenson on its cover as “Man of the trucks lined up outside its warehouse. became public, the Chain’s share Year” for 1999, Pegasus began return- Rather than streamlining the supply price sagged below $10. Larry ing books to publishers in unprece- chain, as advertised, Pegasus had cre- Stevenson went on a counteroffen- dented quantities. Receiving a credit ated a bottleneck that delayed deliver- sive, sniping at publishers over the note for a big round sum, indicating ies by weeks. phone and in the media. “Chapters their receivables from Pegasus were By that time, financial reporters Shoots Back at Publishers” ran a typi- being reduced accordingly, publishers had got wind that the book industry cal headline in the Globe and Mail.

POLICY OPTIONS 89 FEBRUARY 2004 Roy MacSkimming PASSAGES y July 2000, Chapters was so delin- in November 2000. The wealthy cou- efficient vehicles for making bestsellers B quent in paying publishers that ple became media darlings as they — celebrity bios, happiness guides, some had put the entire Chain on cred- shrewdly outmanoeuvred Stevenson Oprah picks — sell even better. But sell- it hold. Since Chapters by then repre- and his management group at every ing literary fiction, history, children’s sented 65 percent of Canada’s turn. At the end of a four-month bat- books, or regional titles is a different English-language retail book trade, this tle, marked by Stevenson’s foiled matter. To market those genres effec- was akin to publishers taking them- attempt to snooker his rivals by merg- tively requires knowledge, taste, and an selves off life support. It was reported ing with the Future Shop electronics ability to marry customers with the that Chapters owed HarperCollins chain, Indigo’s gamble was crowned right book. That skill, known as “hand Canada over $10 million, much of it with success: first when Chapters selling” in the trade, had always been dating to before Christmas 1999. A few shareholders accepted an enriched the strength of independent book- other firms also had Chapters on hold, offer, and ultimately by rulings in sellers. But by 2000, Chapters had but most were biting their tongues. Reisman’s favour by federal regulators. killed off so many of the independents, Invited to go public before the House of whose aggregate market share had Commons Standing Committee on his time the Competition Bureau shrunk from 60 percent a decade earli- Canadian Heritage, which was conven- T listened more diligently to pub- er to about 35 percent, that Canadian ing hearings into the book trade at the lishers’ concerns. With the aid of pres- literary, children’s, and regional pub- CBA’s request, most publishers lishers lost market share also. remained meekly silent, fearing The prime casualty of Larry Stevenson’s retribution. Notable Stevenson’s Seven Years’ War had omestic publishers had exceptions who gave evidence at been Canadian publishers’ domestic D another problem with the hearings, either in public or Chapters. Consumers browsing in private, were the ACP presi- market. Chapters superstores had the Chain’s bestseller walls or dent, Michael Harrison of proved to be efficient vehicles for new releases displayed face-up Broadview Press, the ACP vice- making bestsellers. But by 2000, on its “power tables” naturally president, Susan Renouf of Key Chapters had killed off so many of assume the books have merited Porter, Karl Siegler of Talon that placement because of their Books on behalf of the Literary the independents, whose aggregate quality or popularity. In reality, Press Group, Patsy Aldana of market share had shrunk from 60 suppliers have paid hefty premi- Groundwood, Sharon Fitzhenry percent a decade earlier to about 35 ums to the Chain to place their of Fitzhenry & Whiteside, and percent, that Canadian literary, books there. Since most Lionel Koffler of Firefly. Canadian-owned publishers Publicly shamed at last, children’s, and regional publishers can’t pay that kind of money, Chapters reached an agreement lost market share also. their books have to make do with HarperCollins and became with spine-out positions on the somewhat more amenable to paying its sure from the bureau, the ACP and the shelves, where a book can easily get lost other suppliers. Problems with payables CBPC entered into a form of collective in a 100,000-title inventory. In a parody and returns persisted, however, until bargaining with Reisman, hammering of the free market, superstore bestsellers late in 2000, when the drama took an out a detailed code of conduct to gov- are decided in advance: they are the unexpected twist. A battle for control of ern terms of trade between the indus- books whose publishers can afford to Chapters, and consequently for the try and the ever more dominant publish bestsellers. Canadian retail book market, broke out super-Chain. The five-year agreement It was scarcely any wonder that between Stevenson and his only serious placed limits, to be lowered in stages, Canadian publishers had begun work- rival, Toronto-based Indigo Books and on the new Chain’s permissible ing the American market so feverish- Music. The smaller but well-financed returns levels and payment periods. ly. But even before the Chapters Indigo, with its chain of fifteen super- The code of conduct reflected a truth debacle, other forces of change had stores, smelled blood. that had never been understood by begun pushing them closer to the Indigo had been founded in 1996 the previous Chapters management: if margins at home. by the entrepreneur Heather Reisman, the book business is waged as a win- with whom Stevenson had conducted ner-take-all military campaign, it fails From The Perilous Trade: Publishing a bitter running feud. Reisman and her for everybody. Canada’s Writers by Roy MacSkimming, husband, the financier and takeover The prime casualty of Larry published by McClelland & Stewart Ltd., artist Gerry Schwartz, CEO of Onex Stevenson’s Seven Years’ War had been The Canadian Publishers. Reprinted by Corporation, launched a takeover bid Canadian publishers’ domestic market. permission of the publisher. with an offer to Chapters shareholders Chapters superstores had proved to be www.mcclelland.com

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