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Amazon’s price war with Walmart
October 20, 2009 | 7:47 am
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By Stephen Windwalker
Amazon’s Price War with Walmart:
It’s All About the Kindle,
But It Could Render the Organizational Structure
Of the Book Business Meaningless
By Stephen Windwalker
Author and Publisher, Kindle Nation Daily
Back in 1953, after he got his gold watch from H.P. Hood & Sons, my grandfather gave up the life of a milkman and moved from Everett, MA to East Dixfield, ME to semi-retire as proprietor of the East Dixfield General Store & Esso Filling Station. Once a year or so he would fall into a full-tilt gas price war with Sharon’s Chevron station, which was located a few hundred yards down the road. Mr. Sharon would take his price down to 11 cents a gallon. My grandfather would change his sign to read 10.9 cents. Back and forth they would go for days and sooner or later they would each get into single digits.
Gramps tried to explain the economics and marketing principles behind this death-spiral of decreasing prices and increasing losses. He may even have said something about "making it up in volume." But I was in single digits myself, and let’s just say that neither he nor I possessed the language or acumen of a Jeff Bezos. What I can tell you is that these price wars became a pretty big story among the very limited citizenry of East Dixfield. And the same people, as consumers, made out pretty well.
These outcomes of buzz and consumer benefit are similar for the price war that sprang up last week between Amazon and Walmart, which has driven both retailers’ prices down to the $9 range for pre-orders of the November hardcover releases by Stephen King, James Patterson, Sarah Palin and others that will dominate the bestseller lists this holiday season. Because the two mega-retailers have taken their prices far below a key breakeven economic threshold — the wholesale cost of these books — their muscle tussle has the potential, if it lasts more than another day or two, to supersede the Kindle Ascendancy of Dan Brown’s The Lost Symbol as the number one story of 2009 in the book business.
How could this be? How could the number one book business story of 2009 be about something that has nothing to do with the Kindle and ebooks?
It’s simple. This story is all about the Kindle and ebooks.
By establishing and holding $9.99 as the expected bestseller price point for the two million or so people who read Kindle books, Amazon is dramatically changing the culture of pricing expectations among book buyers. When it moved last week to set pre-order bestseller prices a penny above that $9.99 price point, Walmart was directly and explicitly competing with the Kindle Store.
The speed with which Amazon then took up Walmart’s challenge made it clear that Amazon was not surprised, had already prepared its response, and stands ready to throw down whatever is needed in a long-term joust that could bring the entire publishing industry either to its knees or into conformity with the $9.99 Kindle bestseller price point. Amazon is playing a high-level game of market jiujitsu here, in which it had to wait for a competitor’s move before it began pushing hardcover prices into line with those in the Kindle Store. Making the first move to reset hardcover prices would have opened Mr. Bezos’ concern to charges of quasi-monopolistic practices. But now, if the price war creates chaos and destruction throughout the physical or print book trades, the blame can be placed on Walmart and the Kindle will likely remain standing, stronger than ever.
So that’s the huge irony here: the Amazon-Walmart hardcover price war is, at some elemental level, all about the Kindle. In politics, you know that you’ve achieved a critical level of notoriety, for better or worse, if you can be the number one topic of discourse at a meeting when you aren’t even in the room. That’s what’s going on here: the Kindle is the straw that’s stirring the drink, and it’s not even in this particular drink.
But the Kindle connection is not the whole story here. There’s another element that is even more wild and outrageous: at least for now and for these 10 bestsellers, Amazon and Walmart, between them, have totally blown up the organizational structure of the book business as it has existed in the U.S. for decades.
For about half a century, individuals have bought books retail from bookstores, and bookstores and libraries have bought books wholesale from wholesalers and publishers. Depending on order quantities and special offers, this structure has been supported by a fairly logical discount structure in which, using Stephen King’s new hardcover price of $35 for the sake of illustration,
- publishers (P) would offer a discount of 40 to 55 percent to retailers, for a wholesale price of $15.75 to $21;
- wholesalers (W) like Ingram and Baker & Taylor would buy from publishers at a 55 percent discount ($15.75) and offer retailers discounts in the range of 40 to 42 percent ($20.30 to $21) along with the additional convenience of next-day delivery and easier returns;
- retailers (R) might discount as much as 30 percent, for a retail price of $24.50 to $35; and
- online retailers (O) might occasionally deepen discounts to as much as 46 per cent, for an online price as low as $18.90.
As long as the logic of the discount structure meshes with the logic of the supply chain, the organization of the book business, given sufficient consumer demand, is on secure footing. But even before this week’s price war, the lines had already started to get a little fuzzy when O began offering the general public better discounts than R could get from W or, in some cases for small bookstores especially, from P.
Now, with Amazon and Walmart offering this same bestselling Stephen King book to the general public for $9 and $8.99 with a 30-day return policy and free two-day shipping on any order exceeding $25, the organizational structure of the book business is meaningless.
What do I mean by this sweeping assertion? Well, the only economic logic for any supply chain is that the real wholesaler of choice is the supplier that offers the cheapest prices. For these books, that’s no longer Simon & Schuster or Ingram or Baker & Taylor; it’s Amazon or Walmart.
In this utterly disorganized marketplace, what should the thousands of independent bookstores do? Sit back passively and let the Amazon-Walmart contretemps destroy their holiday business? They are already in a weakened state for a variety of reasons, but how can they possibly compete with a $9 price point for bestsellers that cost them $15.75 to $21 wholesale?
Of course, they can’t compete É unless they are willing to engage in some guerilla warfare of their own. How would that work?
First, the indies know that Amazon has to pay $15.75 to Simon & Schuster for every copy of the new Stephen King novel that it sells for $9, which means that Amazon will lose at least $6.75 (plus shipping and handling) on each copy. These losses will amount to millions for Amazon, and in all likelihood Amazon is hoping to raise those $9 prices by a few dollars once the pre-order titles are actually released.
The indies know that they have to pay $15.75 to $21 either to the publisher or to a wholesaler like Ingram or Baker and Taylor for their copies. But why would they do that? They can pre-order the same books from Amazon for $9 a pop, with free shipping on any order over $25.
So let’s connect the dots. If indie booksellers pre-order a million copies of these books from Amazon for $9 in the next few days, they will have ample supplies of the least expensive inventory available anywhere, to anyone, for the likely bestselling books of the season. They will be in a far better position to compete with Amazon or Walmart at any price point from $9 up, and they will have arrived at that position by beating Amazon at its own game and forcing the world’s largest online retailer into at least $6.8 million in losses.
If the indies are serious about fighting back against Amazon, this is exactly what they should do. For that matter, the chains and CostCo and Target and Walmart should do the same. If Amazon wants to sell hardcover bestsellers for $9, the rest of the bookselling sector should find out just how many hardcover bestsellers Amazon can afford to sell for $9. Something, sooner or later, would have to give.
Could such guerilla tactics ever take on such scale that they would drive Amazon out of business?
Not a chance, because when the dust settles, Amazon will still have the Kindle.
Meanwhile, whether you’re one of those consumers who might benefit from this price war, or a library or indie bookseller buyer just trying to get the best prices on these titles, here’s a link to the full list. Ordering with the links you will find there may extract another 72 cents or so from Amazon, and I, true to my indie bookselling roots, will donate 75% of any such proceeds to the American Booksellers Association.
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Comments:
All Walmart and Amazon have to do to counter this guerilla tactic is to limit the orders to say, 5 books at a time.
Stephen, one thing you’re omitting is the effect on Amazon customers when they look at $10.00 Kindle versions of $10.00 hardbacks. The whole $9.99 price point thing was supposed to mollify customers who wouldn’t pay high prices for e-books, especially the same as the hardback price. This plan puts Amazon right back in that position, and many Kindle owners, and people considering Kindles, won’t go for it.
So the Kindle isn’t going to benefit from all this price war stuff until its e-book prices start dropping to stay significantly below the hardback prices, whatever they end up at. And if, when the dust settles, Kindle prices have not stayed below hardback prices, Amazon is going to have a hard time signing anyone up for a deal like that.
Steve,
Aren’t there two good reasons the independents won’t take you up on this, at least for now–first, the deal (as I understand it) is on 10 books (possible bestsellers admittedly but just ten books–a pilot project so independents might want to wait and see) and second, “30-day return policy” so turning these two behemoths into your temporary wholesaler runs special risks–will the book take off? will it take off in the next month? will holiday shoppers wait longer than that?
Ned
@Al, yes, and they do have limits in place. That would limit the effects and require a bit of guerilla tinkering, but there could still be a lot of libraries and smaller bookstores stretching their inventory dollars this way. And it’s bound to send chills up the spines of the wholesalers.
@Steve, I think you have a good point: that this suppression of hardcover prices could have a bit of a chilling effect on Kindle sales. Interestingly, one thing that Bezos used to talk about with respect to the customer choice of whether to buy a new copy or a used Amazon Marketplace copy of a print book was that Amazon wanted that choice to be revenue-neutral or profit-neutral for Amazon. They may, in the long run, have the same format-agnostic mindset between Kindle and print, although they are clearly not there yet.
@Ned, yep, it’s a pilot and all that, but I know that indies are distressed, up in arms, etc., about it. It’s certainly unlikely that tactics like this could catch fire with a group that is, after all, composed more of businessmen than you and me and Gordon Cairnie. But it will be interesting to see what they do.
Just curious: did Mr Sharon, having driven your grandfather down to selling gas for less than he paid for it, ever pull up a big tank truck, and buy all your grandfather’s gas? Did your grandfather ever do that to Mr Sharon?
Or weren’t they the evil genius you are?
As far as libraries and indies buying the $9 copies instead of getting them through a wholesaler–you’re forgetting about standing order agreements. At our library we have a standing order with B&T to get so many copies of whatever new book the big authors come out with. For example, we get 4 of any James Patterson, 3 of any Nora Roberts, and so forth. We can’t easily cancel out because we find a bargain on one title by an author and then start it up again. And it kind of defeats the purpose of the standing order anyway–cutting down on book selection time and the paperwork of processing book orders. So really, the only one we could possibly take advantage of is the Sarah Palin book.
Oh, and by the way, for an amusing take on a gasoline price war–check out the old movie A Slight Case of Larceny, starring Mickey Rooney.
I just came across this interesting tidbit from Shelf Awareness:
“Arsen Kashkashian, inventory manager at the Boulder Book Store, Boulder, Colo., writes:
“Perhaps the price wars are really a positive thing for independent bookstores. We are looking at canceling our orders from the publishers on these books and ordering them from Amazon, Wal-Mart or Target. We will save almost $10 per book on some of the titles. I figure we can cut our billing by close to $1,000 and offer our customers significant savings while still maintaining a healthy margin. If these companies want to become wholesalers at a loss why should we discourage it?”
And here’s another. Might we be on to something?
“Deb Sullivan, co-owner of the Book Oasis, Stoneham, Mass., writes:
“As a very small retailer of new hardcover releases, I’m embarrassed to say I might consider buying them from a big box at these prices. Why would I want to be forced into buying case quantities of hot titles when I only want three? With free shipping, I can still sell them at 30%-40% off cover and make a profit while getting customers into my store that will hopefully buy other full price items or more profitable second-hand titles.”