Wed, Nov 28, 2001 page24

• Barnes & Noble, publishers set to battle over prices

  CHOOSING SIDES The book retailer says that most of of its competitors are getting better prices and the company's CEO is aiming to do something about that

  • NY TIMES NEWS SERVICE
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  Leonard Riggio, chairman of Barnes & Noble, is sometimes described as the most powerful figure in the book business. But that is not how he sees it.

  Even though Barnes & Noble is the biggest bookstore chain in the country, Riggio has recently complained that publishers offer better wholesale deals to other kinds of retailers, like warehouse or specialty stores.

  In a recent conference call with Wall Street analysts, Riggio made what sounded like a threat: that Barnes & Noble might take unspecified "decisive actions" to "persuade our suppliers to be fair to us," possibly as soon as early next year.

  In a subsequent interview, Riggio clarified his intent. "It is clearly not a threat -- I never threaten publishers," he said.

  By decisive actions, he said, he meant conversations, "substantive negotiations with publishers to make things better for both of us."

  Still, the negotiations are likely to be bitter, partly because they will take place during a tough time in the book business. Both retailers and publishers are feeling the pinch of a slump in consumer demand.

  Both sides are trying to squeeze every penny from each sale. Barnes & Noble is under particular pressure from investors after it disclosed earlier this month that its earnings for the year will fall below expectations.

  Reasons for the shortfall include an accounting mix-up, soft book sales and its failure to win anticipated concessions from publishers. Barnes & Noble's stock fell 35 percent on the news.

  Continuing litigation

  Deals by publishers and booksellers are among the most contentious issues in the industry. For the last decade, independent bookstores have filed a series of antitrust lawsuits against publishers and the national chains Barnes & Noble and Borders arguing that the chains shake down publishers for unfair deals that are not made available to small stores.

  The independent booksellers' continuing litigation kept both publishers and the national chains on tiptoe in their price talks. In April, however, Barnes & Noble and Borders reached a favorable settlement to end the independents' most recent suit, and now both publishers and booksellers have returned to the bargaining table with renewed determination.

  Riggio told the analysts on the conference call that he hoped for better terms next year, with more news in January.

  "Because of the court cases, for the last seven years, we haven't even spoken to publishers about terms," Riggio said, in a telephone interview, "So we have been reviving our discussions with publishers -- that is what I am talking about with decisive actions."

  This time, however, Riggio sounds a bit like his former antagonists at independent stores, arguing that publishers are offering better terms to someone else at Barnes & Noble's expense.

  "If he feels it is unfair that terms are being offered to some retailers and not others, then he is on our side," said Oren Teicher, chief operating officer of the independents' American Booksellers Association. "We welcome him to the cause" (Riggio, however, has not said there have been violations of antitrust law).

  Wall Street analysts expected that the resolution of the lawsuit would help free Barnes & Noble to use its market power to win lower prices from publishers, but that has not happened yet, Danielle Fox, an analyst with J.P. Morgan, said in an interview after the call.

  Responding to analysts' questions, Riggio sounded almost exasperated. "They keep talking about power and I guess, you know, how powerful can one be with their hands tied behind their back?" he said.

  Retailers of everything from linens to hardware routinely haggle with suppliers over terms and prices, but the book industry imposes special constraints. Bookstores can seldom substitute one publisher's book for another's, nor can publishers sell a different, less expensive edition of a new book to one store and a more expensive version to another, as a toolmaker might do with hammers. "Each publisher has, in effect, a monopoly over each title they sell," Riggio told the analysts.

  The news media's attention to the book business can be a problem, too, Riggio said. Trying to pressure a publisher for a bigger wholesale discount off the cover price by limiting new orders of its books can create a public outcry about curtailing freedom of expression.

  "If we call a single publisher and basically tell them, as you say, if we have power, then if we dare say we change our purchasing activity based on their discount, the first call you get the next morning is the press," he said.

  Most of all, Riggio said, "it was befuddling" that other retailers had received better terms than did bookstores.

  "We're puzzled as to how they can take the market that is their biggest marketplace and charge us a higher price than their marginal markets," he said.

  Riggio and each of the largest publishers declined to discuss their talks. But people involved said there were several long-running debates over the size of the wholesale discount, charges for shipping and the size of publishers' payments for promotion in the stores.

  For one thing, Barnes & Noble's executives want to pay the same, lower prices for books as distributors because its own extensive warehouses handle internal distribution to its 600 stores.

  Another dispute involves discount retailers like Wal-Mart, which stock fewer titles and often return more books than the bookstore chains.

  Barnes & Noble executives argue that the company deserves a price break for its lower return rate and for supporting the publishers by selling little-known or older titles.

  Bones of contention

  Publishers, however, disagree on every front. They argue that Barnes & Noble remains at heart a bookstore chain and that it does not warrant better prices than other stores.

  Analysts were divided on Riggio's chances for success. Riggio's principal source of leverage is the potential promotion of other, more profitable merchandise, including the many books published by Barnes & Noble itself, at the expense of other publishers' products.

  However, at the end of the day, the company is totally dependent on publishers for the most popular titles.

  Riggio would not discuss the on-going negotiations over the terms being discussed. But he did talk about the cover prices publishers charge for their books, and suggested in the process that Barnes & Noble might not be as important as some of its smaller rivals claim.

  "If a publisher puts a price on a book which we think is too high or not a good price for the consumers, we have a right to say, 'Hey, we are not going to buy 100,000 or 500,000 -- we don't think the book will sell at that level,"' he said.

  "We have a right to not put the book in a big stack at the front of the store. I don't feel we are obliged to promote a book," he said.
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