Book sector enters gripping new chapter

THE tills may be slowing on the rest of the High Street but when it comes to books we cannot get enough. Dan Brown's The Da Vinci Code has sold 25m copies and counting, and has boosted Paris locations including the Louvre as tourist hotspots.

Orders are already being taken for July's launch of the next Harry Potter and Richard and Judy's reading list is flying off the shelves. 'Books have never had such a high profile,' says Tom Holman at industry bible The Bookseller. 'It's a golden age.'

It is good news for publishers like Bloomsbury, which has been transformed by JK Rowling's Potter series and is expected on Wednesday to announce record profits of around £16m. But at the front line in the bookshops it is not always such a happy story.

Britain's second-biggest specialist bookseller Ottakar's warned after Christmas that profits, due to be unveiled on Tuesday, would fall short of expectations. The group is likely to make £7m, down from the £9m expected earlier. It recently reshuffled its management to tackle the growing challenge. Independent bookshops are also struggling to make a living.

Books are big business. Last year we bought 205m of them and research group Verdict reckons the market is worth £3.1bn a year. It is growing fast, too.

Over the past five years, retail sales have risen by 4.3% a year on average but book sales have increased by 6.5% annually. Figures from The Bookseller show 11% growth in January this year. Only videos and computer games are growing faster.

Verdict thinks books will continue to outpace the rest of the High Street. The rate is likely to moderate, but that is only because there will not be any inflation. In five years' time books are going to cost no more than they do today.

And there is the rub for booksellers. Just like the rest of the High Street, it is a horrendously competitive market these days. The abandonment of the net book agreement 10 years ago allowed retailers to charge less than the cover price. It opened the door to discounters including the supermarkets and Amazon, which dominates bookselling on the web.

Within four years, says Verdict analyst Nick Gladding, one in 10 books will be bought in a supermarket.

The supermarkets are selling on price alone and because of their enormous buying power they can undercut everyone. But they are only interested in the best-selling titles where high volumes can make up for wafer-thin margins. Gladding adds: 'Every sale to a grocer denies footfall and additional revenues to a bookshop.'

Richard and Judy's reading list is selling at a rate of 100,000 a week - last year's list totalled 4m sales - but turning a profit on those books is getting ever more difficult.

In the jargon of the City, the new Potter title will be as 'dilutive' for bookshops as its predecessors - sales will soar but profits will not follow suit. That is because the industry's biggest players are fighting a pitched battle for a share of what they see as an attractive growth market.

The book trade is unusually fragmented. WH Smith accounts for 14% of the market, about the same as Waterstone's which has fewer than 200 shops. Ottakar's has just 131 outlets. Even including Books etc, Borders has only about 60. By contrast, there are more than 3,000 independents. But that is changing fast.

When James Heneage founded Ottakar's with three shops in 1987, he saw that the market was ripe for consolidation. A chain like his can offer a bigger range than an independent. Thanks to its greater buying clout, it can squeeze much better discounts from wholesalers or, even better, direct from publishers.

Heneage thinks Ottakar's can grow to at least 300 sites. Waterstone's, which is coming to the end of a three-year recovery programme, has identified 120 sites. Borders, which owns Books etc, has ambitious plans to double in size by 2007.

Next week's trading update from Ottakar's will show whether in the new retail environment this kind of growth is enough. And Bloomsbury will have the opportunity to comment on the Office of Fair Trading's view that the supermarkets are treating their suppliers fairly.

Grocers now sell more books than either Ottakar's or Borders while Amazon is relentlessly turning us into a nation of online book buyers. The pressure on even the largest traditional booksellers will remain intense.

WHEN the latest Harry Potter blockbuster hits the shelves in July, Rhona Fox at Not Foxed Books in Nailsworth, Gloucestershire, is not sure that she will even bother.

Small-time booksellers squeezed by huge discounts

With Amazon and Tesco taking online orders for Harry Potter and the Half-Blood Prince at £9.99, she already knows that she will not be able to compete.

A small bookseller like Not Foxed can normally buy at a 35% discount to the recommended retail price. That is the gross margin out of which the shop has to pay its rent, salaries and other costs.

With a blockbuster like Harry Potter, Not Foxed might get a 45% discount if it buys a minimum number of copies in advance of publication. With a cover price of £16.99 a copy, that means it can only match Tesco or Amazon by selling it at cost.

Fox says: 'If you try to sell at a sensible price of, say, £12.99 you're seen as greedy.'

A Tesco spokesman told the Mail that its in-store price will not be unveiled until launch day in July. He added: 'By getting more people reading we've helped grow the market as a whole and that is good news for everyone - especially for specialist bookshops as they will always carry a much wider range of titles than Tesco.'

Bloomsbury said discounts were no bigger for Potter books than others in its range but it described some retailers' price reductions as 'excessive'.