A Chain of Bookshops in Need to Turn a Page

One of my greater pleasures is to walk around in a bookshop and browse books in topics of personal interest, picking a book from a shelf for a short read, then choose another one, etc. If fortunate, I would find a book or two that are worth purchasing for a full read. A bookshop should be a place where one feels comfortable to examine leisurely books he or she considers buying . Even if one enters a bookshop only to purchase a book he found in an earlier visit or on the Internet, he would likely take the opportunity to look around for some other books before exiting.

Steimatzky is a leading chain of bookshops in Israel, established as a family business in 1925. It operates more than 130 stores across the country. Like a solid rock, nothing would seem to be able to shake or break it. The chain of bookshops appeared to hold firmly even in the face of competition from a new chain (“Tzomet Sfarim”) in recent years. Steimatzky could usually brush off new independent bookshops and small chains quite easily. Therefore, when Steimatzky announced it was in dire financial difficulties last month, the news were received with surprise. Not that challenges were missing, but the chain was tackling them (e.g., renovating shops and changing the concept of its front window displays), and there were no visible indications of a fatal threat to the business.

However, another important event occured in the past decade. In 2005 the family sold its bookshop retail chain to an investment fund, Markstone Capital Group. Difficulties were building up with the rise of online shopping and changes in the behaviour patterns of younger generations for passing time, plausibly convincing the veteran owner and CEO Ari Steimatzky not only to retire personally (after 40 years in management) but also to hand over the business to new owners. The new CEO appointed came from the insurance industry, highly experienced in that field, but, like the people at Markstone, she was not familiar with the book market. Hereon, it is suspected that  the problems with the chain’s management have started, or aggravated.

Markstone and Steimatzky both contributed to the crisis in their actions. It appears that Steimatzky has had cash liquidity difficulties for quite a while and relied on cash infusions from Markstone for financing their high operational costs. It is estimated that the losses of the retail chain accumulated to 84 million shekels (~$24 million) in 2011 and 2012 together. Markstone, on its part, used to take loans and register companies it owns as beneficiaries that would share the debt; for example, Steimatzky was in debt of $20 million as part of a $65 million loan Markstone took from Deutsche Bank, on which Markstone’s executives may have not properly updated the retailer’s management(1). The difficulties were somewhat complicated following a tragic road accident in which one of Markstone’s co-owners was killed while riding his bike. Thereafter, the last cheque from Markstone bounced and the debt of the retailer was exposed.

A deal was made in April with Keter publishing house and the office supply and stationary retailer Kravitz to buy Steimatzky in equal shares (pending approval by the antitrust state regulator). Markstone reportedly bought Steimatzky for about 200m shekels (~$50-55m) whereas it is expected to receive for it around 40m shekels (~$11-12m). Negotiations with another publisher failed earlier. It may be noted that Steimatzky took part in establishing Keter in 2005 but the new management decided shortly to quit its partnership in the publisher.

The relatively young chain of bookshops, Tzomet Sfarim, was founded in 2002. It is owned by two publishing houses (Kineret-Zmora-Bitan and Modan) and its CEO (Avi Shumer). If the acquisition of Steimatzky goes ahead, it would mean that high stakes in the two major chains of bookshops in the country will be held by publishing houses. Steimatzky was known for aggressive dealing with publishers; its tactics were often viewed unfavourably. The negative experience of publishers with Steimatzky is considered a key driver for those two publishing houses to start their own chain of bookshops, as they no longer wanted to be dependent on the dominant book retailer. It soon raised, however, new concerns about the privileges Tzomet Sfarim might give books they publish on display and in advertising and promotions. A new law on the publication and trade of books introduces a measure to correct such unfairness by prohibiting a bookshop from allocating more than 45% of shelf space to books from publishers it is linked to.

Tzomet Sfarim has turned within a few years into a serious challenger. It paved its way into the market primarily through discounts it offered on books. Deals like “two for the price of one” or “3 for 2” are not strange to chains of bookshops worldwide. But Tzomet Sfarim provoked everyone when it offered for instance “four books for 100 shekels” (i.e., each book for about £4). The discount is not necessarily deeper than the 50% one gets per book in a deal of “2 for 1” yet it induces consumers to buy many books, more than they may probably have time to read, and thus boosts sales volume quickly. Steimatzky responded angrily but nevertheless reciprocated with similar deals. This readily started a vicious price war. In contrast to expectations that Steimatzky as the senior and dominant retailer and brand will win, it was at disadvantage. The board of administration of the new competitor was modest whereas that of Steimatzky was expansive, and hence expensive, eventually less fit to tolerate the loss of income from extensive discounts. The deficits and cash flow problems of Steimatzky have been attributed in the business press to the price war on the one hand and its excessive administrative and operational expenses on the other hand.

  • The pervasive discounts evoked criticism about lowering the value of literary work. They outraged authors who complained their income (royalties) from their new books was squeezed and diminished. The law on books recently legislated in response sets new limits on discounts for new books during an “introduction period” and afterwards.

The retail chain of Steimatzky grew mostly in the 1980s and 1990s. New bookshops often replaced independent ones, taking them in as franchisees, and by forcing them out of business. But since 2006 the number of their bookshops actually decreased from 150 to 134. The size of the chain may have created a burden of supervision and operational costs that contributed to its difficulties, requiring to close some of them, but it does not seem to be an immediate cause of the recent crisis. Meanwhile, during the same period Tzomet Sfarim expanded from 42 to 87 bookshops and became a much more significant player in the book market (annual revenue of 300m shekels vis-a-vis 380m shekels for Steimatzky). This time it was Tzomet Sfarim that through their discounts grew at the expense of independent bookshops. Now the two retailers control, about equally between them, 70%-80% of the market.

Steimatzky and Tzomet Sfarim sell books online on their websites, as well as some publishers do. The retailers may have lost some of the local market to overseas online booksellers like Amazon, but that is likely to be only for books in foreign languages, especially in English. First, Amazon and others like it have very little if any to offer in Hebrew. Second, both retailers already concentrate their business on Hebrew books, which Israelis read the most, and offer a relatively small selection of books in English (e.g., some bestsellers, history and politics, art and design). Thus, the overlap between the Israeli retailers and foreign e-tailers should be relatively small. There is a need for Steimatzky, however, to develop and enhance the linkage between its online store and physical bookshops (e.g., buy online, collect in-store; celebrating the design of bookshops with photographs on the website) in order to protect both channels locally but primarily secure traffic of customers in its physical stores.

Under its current management, Steimatky bought a music and video chain of stores (“Tzlil”). Soon after, however, the stand-alone music and video stores were eliminated and their products (mainly CDs and DVDs) were incorporated as a sub-category or department within existing bookshops, though in a small-scale and -scope of offerings. The music & video branch of retail is knowingly in trouble around the world and one may question the justification of adding these product categories to their main business. Yet, joining books with music and video and other entertainment products has become an accepted logic by retailers in different countries to compensate for loss in demand in one category or the other, and expand their variety of products under the same roof (e.g., the French retailer Fnac that offers a range of culture and entertainment products, including books, CDs & DVDs, and electronics like mobile devices and related gadgets). That move can work in favour of Steimatzky rather than against it in this era.

Joining the businesses of books and music & video within the same company can bear risks. The most remarkable story in this regard belongs to the British chain of bookshops Waterstone’s. In that case it was the music & video chain HMV that bought the bookshop chain and put its survival into great risk. The stores of these chains were kept separate but the financial difficulties of HMV in its original business inflicted on Waterstone’s, and certainly did not help it to tackle its own challenges. At first they started closing bookshops to finance some of HMV’s debt and to lower costs, but that was not enough. Eventually, and mainly in hope to save HMV, the Waterstone’s chain was sold  in May 2011 to Russian investor Alexander Mamut. Notably, the new owner appointed as its managing director the owner of a small chain of traditional Edwardian-style bookshops (James Daunt) who has been well entrenched in the book retail business. The bookshop chain appears to be doing well in its process of recuperating and is thinking forward about the design of bookshop environments for the future. It is opening these days its first new bookshop since 2008.

Steimatzky does not have today a flagship library-like bookshop as found in many Western cities. These are usually multi-storey, multi-category bookshops that occupy buildings on main streets or in central shopping districts. Even cities similar in size to Tel-Aviv have such a bookshop (e.g., Waterstone’s bookshop on Deansgate St. in Manchester). A flagship bookshop in Tel-Aviv could occupy two or three floors (e.g., 200-300sqm each) and offer a variety of book titles in Hebrew and English, and perhaps in French, along with a section for music and video (particularly classical and jazz music). The scope of book selection across categories and variety within categories is crucial to the quality of customer-reader experience and increasing the likelihood that shoppers don’t leave without purchasing or ordering books. Operating such large bookshops can be expensive, but a flagship bookshop of this type should also be viewed as an investment in the retailer’s brand equity. It demonstrates prowess of the retailer, richness and professionalism. Tzomet Sfarim recognised the importance of such an asset and opened its “Library” bookshop in the centre of Tel-Aviv, although it occupies only one level and is “hidden” in a shopping centre rather than visible on main street.

The final issue addresses the new form of electronic books (e-books) that can be read on e-reader devices. It has been predicted that the future of reading lies there, and thereof it poses a major threat to physical books. Steimatzky has invested and participated in the launch of an e-reader that specially supports also the display of books in Hebrew (called “e-vrit”) but left the venture in just a year. Book retailers in other countries offer their own-branded e-reader: Barnes & Noble (Nook), Fnac (Kobo), as well as e-tailer Amazon (Kindle).

Tim Waterstone, founder of the British bookshop chain, recently criticised and even ridiculed the projections about the expected death of physical books; he supported his claim that physical books are here to stay on figures that suggest that e-books may be reaching saturation and his confident belief that people in the UK who love reading will continue to prefer books in print. He noted that consumers in Britain spent in 2013 £300m on 80m e-books but £2.2bn on 320m physical books (2). Managing director Daunt agrees and relies on a report by Enders Analysis and Bain & Co. which predicts that the share of e-books out of total book sales will reach 35% in two years but will grow “very slowly” after that. Daunt comments: “An equilibrium has been reached. The place of e-reader within people reading patterns has been established. That figure leaves us perfectly able to survive with the 65%.” He further expressed his belief that the physical book is more pleasurable to hold and read (3).  Steimatzky’s decision to quit its engagement with a Hebrew-support e-reader may have been pre-mature but it is plausible that they won’t need it. Still, they should re-examine their approach to e-readers because e-books will continue to hold a substantial stake in consumer reading.   

The conduct of top executives at Steimatzky and Markstone in the past eight years exhibits a mixture of complacency, over-confidence, and nonetheless confusion. They took upon themselves to improve and develop a business in a domain in which none had deep familiarity and experience. The CEO wanted to make changes in the company, and show the way to the whole market, without the endorsement of a credible and respected figure in the field and industry. Consequently, it was easier to attack and dismiss her as an outsider. Steimatzky under her leadership initiated strategic moves, and then abandoned them after a relaively short period. It also appears that she has set the wrong priorities for the company to deal with. The actions of Markstone at the same time suggest that they treated Steimatzky as a “financial asset” in their portfolio with disregard to the substance of the business in which they invested.

The future of Steimatzky would not be guaranteed without confronting a crucial question: What should the bookshop of the future look like in order to be inviting and attractive to book readers to hang around? Steimatzky may concentrate on books and reading or take the broader view that spans culture, education and entertainment. Three routes to enhancing shopper experience should be examined: (1) a space that makes patrons feel comfortable to stay and explore the shop; (2) a place to meet and socialize (incl. an in-store coffee shop); (3) connecting physical and digital products and services in a larger space: physical (bookshop) and virtual (Internet and mobile).

Ron Ventura, Ph.D. (Marketing) 

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