Will Target Put Amazon.com Out of Business?

I’ve actually been pondering this question for a while. I haven’t done any significant amount of numbers research, but it does look quite possible. I mean, Target should go after Amazon.com since Amazon has infringed on many of Target’s more profitable markets. Unlike most of the other brick and mortar chains in “blue collar to low end white collar” shopping world, Target has a reputation for having stores which are clean and bright and workers that actually feel a sense of pride about working there. Walmart, on the other hand, has states attempting to get legislation banning it from opening any more stores, not to mention documentaries put out about the horrors of the company, along with news stories about illegal alien cleaning crews…not going to be the type of chain anyone wants to see get bigger.

Kmart, what can one say about Kmart? For many of us, it was the place our parents had to shop. The chain was big in many areas which had been factory towns at a time when the factories were closing down due to jobs being sent overseas (sound familiar?) This was long before they had “Big K” and “Super Kmart” locations. It was a place you went for blue collar basic clothes, dress clothing which was mostly polyester, and cheap-enough-to-let-the-kids-play-with sporting goods supplies. Both JC Penny and Sears had better dress clothing, not good, but better. Along came a movie named “Rain Man” and Kmart became the definition of un-cool. It began to crumble financially, then somehow, Sears, a company which invented the catalog business then went bankrupt at it, had enough money to buy Kmart. Not too many weeks ago there was a story on the WBBM noon business wire about Sears being in financial trouble yet again. It’s kind of sad, because the addition of appliances and what could now actually be called a valid tool and automotive section has helped the larger Kmart locations at least look like they could be turning around.

In order to do something different, you have to have vision. It took a while for me to understand why Target got into the $9 hardcover book fight with Walmart. I’ve come to the conclusion that the retail analysts you hear interviewed on business radio and TV simply don’t have a clue. Target isn’t after Walmart because Walmart will implode on its own. There are too many lawsuits, too many news segments, too many documentaries, and too many governments passing “living wage” and “big box store” laws aimed directly at Walmart for Walmart to remain a viable company. Few companies in this world have a lower reputation for employee respect than Walmart. Quite simply, the days are numbered for that company. When the economy comes back all of the way Walmart will simply go away. It’s done the “dine and dive” on too many taxing bodies and retail site owners.

A visit to the Kmart web site doesn’t show any evidence that they have gotten into the $9 hardcover fight. I don’t expect they will. I firmly believe Walmart did it as some flash-in-the-pan marketing tactic, in part to take news cycles away from the Bruce Springsteen music CD backlash. Given Walmart’s reputation I cannot see a lot of independent author/publishers doing an exclusive deal with Walmart. They have a long history of shafting their vendors and you can even find articles about it in magazines like Kiplinger’s. A store with a good reputation, like Target, could make the entire thing work.

I’ve kind of covered the economics before, but you might not have understood. As an independent self-published author, I can get a 5.5 x 8.5 hard cover book with dust jacket of roughly 400 pages printed for around $4 per copy if and only if I have an ink print run of roughly 5,000 copies. Under the current author-publisher-distributor-bookstore model, I would front the entire print run for over eight months before I saw a dime from a book store. I would also be paying a lot of shipping charges for returns from chain store locations. The $20K for the print run would have an additional $8-12K in marketing expenses along with $2-4K in shipping. I would be financing that one way or another for at least eight months before I received payments from the book stores which may or may not cover the cost of the print run, let alone the other expenses. The list price on that book would be $24. The distributor would take a 55% discount which would mean $10.80 per copy (less withholding for potential future returns) would get sent to me. Anywhere from 5%-20% of that print run is going to come back “damaged” if it was stocked in an actual retail store. Trust me.

At the end of eight months on store shelves approximately 4,000 copies would be in sellable condition, the rest would have to be given away or pulped. So, I would take up to $36K out of pocket for eight months in the hopes of receiving $43K back and netting a whopping $7K. For the sake of argument, we will assume I had the cash on-hand and wasn’t financing part of this on a credit card at 20%. Publishers want a “run-away-best-seller” not just so they can make a fast buck, but because they want less than 5% coming back as returns.

Let us take a look at the $9 hardcover market. I still have the printing costs, but there are no returns. There is a one time freight shipping cost of less than $1000 to ship to a Target (or other chain) distribution center. Terms are net-30 or net-45 depending upon how negotiations went. I sell the books for $6/copy and get paid for all of them. $30K - $21K = $9K in under two months. Granted, I would be doing a lot less marketing. I would probably be willing to spend about $2K (what most major publishers actually spend marketing a new book by a new author) on getting reviews done, but the rest of the marketing would be up to the retail chain which has its own massive Web site and is creating sale flyers every week.

The downside for Target is they would have to hire 5-10 “readers” at the corporate level. These people would have to actually read at least a few chapters of every submitted book and decide what to stock on the shelves. I believe currently much of the stocking requirements are driven by automated reporting from book sales rating services much like the recording industry has/had for record sales.

Of course, Target (or the chain store that does it) could take it one final step. They could strike right where Amazon lives. The country has many printing firms which use actual ink and specialize in book print runs of less than 50,000. If target had the readers making choices, and the self-publishers had everything ready to go, Target could simply sign a contract with the self-publisher, pay $2.25/copy to the self-publisher for every copy they print, and contract directly with a printing house. They would probably need to contract with one near each distribution center, get them unified in equipment, and split the print runs across each location to minimize shipping costs. You know Target (or the chain which does this) is going to get a much better price than the self-publisher for printing. The printing will be done with actual ink so it won’t be a tacky and disgusting POD book like many being sold on Amazon today.

In truth, once Target finishes heading down this path, I see Kmart/Sears following suit. Anyone who has shopped those two chains knows that they are both used to having exclusive slices of overlapping markets. For those of you who don’t have to do your own shopping, let me spell it out: If I want Irish Spring scented Speed Stick, I have to get it at Kmart. The powered or talc scented stuff I have to get at Target, or the other way around. Both chains carry the product line, but each store appears to have certain scents you can only get there. As consumers, we are used to having to make more than one stop to get everything we need.

There are certainly more than enough self-publishers out there for both Kmart and Target to have a couple thousand titles which are only available in print form at their store. The really bad stories would be relegated to using POD and being sold on Amazon. The ground breaking works of fiction would most likely still sell via the traditional channels since there would be a much higher rate of return. Of course, we are only talking about general fiction and young adult book types here. Reference, research, professional, etc. would all still do best going through regular channels, since the margins are usually higher on those, I don’t see that changing. Fiction, however, is quickly becoming a commodity.

Oddly enough, the timing is just about right for Target/Kmart to make a play into the general reading market. There are a lot of print shops that would drool to get the business, and eBooks are poised to take the bottom end of the market out. The paperback novel is quickly heading the way of the buggy whip. Quite simply $9 hard cover and $4 or less ebook pricing will vaporize the $4 paperback market. (Out of politeness, I won’t say what it will do to the $10+ paperback market.)

One or both chains should have no trouble adding ebook sales to their Web site. I just received an announcement from what used to be ShortCovers. They have changed their name to Kobo and spun off from their parent company. I found this paragraph interesting in the announcement:

Through its new strategic partners, Kobo has distribution in the U.S., Canada, UK, European Union, Australia, New Zealand, Hong Kong and other territories. Core to Kobo’s strategy is making eReading available through partners everywhere and as such, the company will be working to enable a broad range of retailers, device manufacturers, and operators who will benefit from our leading eReading service.

I don’t know what all of the ins and outs are with the deal. I do know that Borders is one of the investors, which struck me as odd given the above paragraph. Perhaps they have come to the conclusion that it’s better to take a small cut than try to lock the market? I don’t know. It definitely sounds like the new company is looking to add more retailers and views itself more as a bundled service they could offer than a competitor.

I do know that Amazon has had a ToolCrib site selling tools to customers. I also know they have some other site selling housewares since I was searching for a wall lamp on-line and that store came up. Everybody knows they have been into books, movies, and video games for a while. I haven’t dug to find what else they sell, but when they branched out to compete with other retailers in traditional markets, they basically offered up the challenge for those retailers to venture into Amazon’s market.

The real question I have right now is: Will Barnes & Noble create their own on-line video rental business to compete with Block Buster and Netflix, or will Target do that too? You see, most of us already have to go to Target and Kmart to buy things like pit stick, socks, and undies. We could drop off our rentals while picking other things up. There would only be outbound shipping charges for the rental service. These chains have a lot of 24hr locations now. For people like me in the boonies, returns might not be so easy, but being able to drop them off and midnight and know they were scanned into the system at the same time would be nice. I would think it would reduce the number of damaged DVDs as well.

Barnes & Noble has a different problem if they want to go into the rental business. The “drop off” feature won’t have the 24hr benefits. I would hazard a guess they would move towards more of the traditional video rental business, not because it would make money directly, but because it would keep customers in their stores longer. BN doesn’t stock milk, eggs, and undies. Not a lot of people read books today. Most people who buy movies from a retail store (instead of on-line) tend to buy them from a store they are already in.

Ah well. It will be interesting to see if Target takes the gloves off and tries to drive a stake through the heart of Amazon in 2010. The chain certainly has the financial muscle and marketing savy to take them out, especially if Kmart follows suit. Of course, the natural extension of exclusive titles is for each chain to have its own book club.