HERI Committee Report

CHAPTER ONE: INTRODUCTION

  ... [The] retail industry is an exciting, fast-paced, but brutally competitive business. It's tough to make a buck. It's driven by hard-nosed, intelligent people who are ruthless at maximizing the value they get from a dollar. The difficulty we face is those people are our customers.¹

There is a wave of change gaining momentum as it moves with increasing force toward all elements of Canada's book industry. This process is a mix of domestic and international forces in large part tied to technological innovations and concurrent shifts in the way books are produced, manufactured and distributed. These changes are imposing new pressures on the economic structure and organization of companies that produce and distribute their materials. Change is equally dramatic at the retail level, challenging traditional conceptions of how products are marketed and how consumers make choices.

Canada is not alone in its need to find effective ways to respond to these forces. Our small, thinly distributed, culturally diverse nation borders the world's largest entrepreneurial entertainment and cultural enterprise. Internationally, ongoing corporate consolidation is enabling a select few to dominate the cultural arena across all creative sectors.

Canada's book industry is by no means immune to these forces. Predominantly foreign-owned transnational corporations increasingly hold the power to influence the literary personality of the countries where they operate, thus enabling a book promoted on an American talk show to speed its way into the top-ten list not only in the U.S., but also in Canada, Britain and elsewhere. Similarly, French-language success stories in Canada and Europe often appear on the same best-seller lists on both sides of the Atlantic.

Television may be one of the most influential, but is by no means the only medium that can drive sales and shape tastes. Most notably, the sudden popularisation and maturation of the Internet has disrupted traditional modes of interaction across the creative continuum -- from the way words and images are created, produced, distributed and accessed, to the way consumers make choices and purchases. This is prompting serious concerns for conventional retailers, who stand to lose not only customers, but their businesses unless they adapt quickly, find new niches, or develop new approaches to customer service.

As a new communications context, the Internet is also wreaking havoc with traditional book reading and buying cultures. For some long-established Canadian booksellers, it is already too late; for others, it has been an opportunity to retool, adapt and flourish.

A. REPORT FOCUS

The purpose of this introduction is to prepare the reader for the chapters that follow. It attempts to identify and disentangle some of the links in the book chain with a view to setting the groundwork for the evidence heard by the Committee. This chapter is also intended to pave the way for the recommendations that stem from the evidence heard. Although this report will address a number of individual components, the Committee is aware that, together, they contribute to Canada's vibrant publishing and literary ecosystem. Accordingly, the recommendations contained in this report are designed to address the long-term wellbeing of Canada's book sector.

1. Background

The Standing Committee on Canadian Heritage began its study of Canada's book distribution industry in December 1999 with briefings from representatives of the Book Publishing Program from the Department of Canadian Heritage, the Canadian Booksellers Association (CBA) and two independent booksellers. As Sheryl McKean, Executive Director of the CBA explained:

Like many other sectors of the economy, Canada's book selling business has undergone tremendous changes in the last ten years. Technological innovation has affected every stage of our business from writer to reader, including publication, marketing, distribution, and retailing. These changes are significant enough to justify a close examination by parliamentarians of the legislation and regulations in place in order to ensure that they still respond to public policy objectives.²

Similarly, Don Stephenson, Director General, Cultural Industries with the Department of Canadian Heritage noted:

We have to understand the impact of fewer independents and more large stores, which is a story that goes across the economy. It's not exclusive to book publishing. It's not exclusive to the cultural industry. We need to understand the effect this change in the structure of the marketplace will have on the production of Canadian content and its reaching Canadian readers.³

Given these concerns, the Committee decided that there was sufficient reason to undertake a background study of Canada's book industry, particularly on the current circumstances of distribution, wholesaling and retailing.

Library of Parliament researchers in collaboration with expert consultants conducted a background study between December 1999 and February 2000. Following from the lessons of that study, the Committee decided in February 2000 to conduct a more focused review of Canada's book industry. Between that time and May 2000, the Committee heard from over 55 witnesses, representing publishers, writers, wholesalers, retailers, librarians, consumers, industry analysts, statisticians and other industry experts.⁴

This study is guided by three key shifts in book industry practices witnessed in recent years, and their perceived direct and/or indirect impacts on the creation, promotion, distribution and availability of Canadian-authored works. These industry shifts are:

1. Innovations in information technology, which have fostered the possibility of new types of computer-mediated commerce (i.e., e-commerce);

2. The arrival of the retail superstore, which is reconfiguring the book retailing and distribution landscape; and,

3. New trends in book wholesaling practices and ownership, which have left some industry stakeholders wondering whether such shifts represent a threat to the distribution and availability of Canadian-authored materials to Canadians.

2. What the Committee Heard

Witnesses strongly encouraged the Committee to look at the entire ecology of books and reading. By this, they meant that the Committee should look at ongoing changes within a context that would include writers, publishers, wholesalers, distributors, retailers, libraries and readers.

Some examples of what the Committee heard included:

• Last year the Book Publishing Industry Development Program ... looked at companies that benefit from their program ... [T]he profit margin before tax for this group ... was less than 2%. I think it's absolutely vital to understand that point if you want to understand that industry. Why is this? We think it's not because we are bad business people; we think it's because we publish books in this country. Fundamentally we have a problem with the environment in which we live.⁵
• There is a desperate need for all government departments to recognize that cultural market places are like no other ... in a cultural market place, there has to be a measure beyond fiscal concern.⁶
• The association wants to see a diverse range of books made available by book retailers to ensure access to diverse cultural offerings. ... We want to see diverse ownership to guard against any possible bankruptcies in the future. The large chains have yet to prove their profitability. As the old saying goes, it isn't wise to put all your eggs in the same basket.⁷
• The real challenge for booksellers of all sizes today is that their competition is international. ... I have independent members who are booksellers ... If anything it's even tougher today that it was ten or fifteen years ago, when the independent grocers or the independent pharmacist or the independent hardware store went through this process. They at least did not have to face large multinational companies working from a low cost base in the United States, out of a warehouse in an industrial suburb. These folks do today. They're going head to head with amazon.com every day.⁸

In contrast:

• We're not the first industry to resist change. Changes have engulfed industries since McLaughlin made Cadillacs in Oshawa. There have been all kinds of changes. The best way, however, in a changing world is to get aboard that change and control it and channel it in a direction that helps people. Publishing and the publishing world is changing. It cannot be stopped, I'm sorry. I've been around long enough to know that.⁹
• I can't predict the future of the booksellers ... I don't know what's going to happen to them. I can't tell whether they'll survive or not, but I can tell you that our experience has been wonderful both with the large and the small.¹⁰
• I remember very well when the business was conducted entirely by small, independent stores, that kept Canadian books on back shelves in small sections, titled Canadiana. They were just another category like gardening or the occult. It was only the advent of Chapters and later Indigo that moved Canadian books -- and thus Canadian authors -- into the mainstream.¹¹
• Isn't a big part of our problem just that it's not so comfortable anymore. It's no longer ... a gentleman's business. It's become much more competitive and there have been good things that have flowed from that. People have pulled themselves up by their bootstraps and there have been changes. There have been positive changes. Publishers have [got] better at a lot of the things they do.¹²

Thus, it was clear to the Committee, that in today's information society, the book as well as the very concept of the how the printed word is produced and distributed is changing dramatically. Indeed, as will be discussed later on in this report, today's hardbound literary classic or mass-market paperback could very well become tomorrow's e-book or downloadable, print-on-demand file.

3. Canadian Heritage Considerations

The mandate of the Standing Committee is to oversee issues and legislation pertaining to the Canadian Heritage portfolio. With respect to the book industry, the Committee's mandate is to monitor the link between the Government of Canada's support to the book industry and the provision of increased choice of Canadian-authored materials to Canadian readers.

During its deliberations, this Committee heard many impressive Canadian literary and publishing success stories from the past thirty years. Some 10,000 English and French language titles are typically published in Canada each year, and just under half of these are written by Canadians. Reading remains a popular and common leisure activity among Canadians who can also access these materials from a network of 21,000 public libraries.

Despite the growth and the national and international acclaim for Canadian writers and writing, the majority of Canadian-owned publishing ventures would simply not be profitable if it were not for support from the Government of Canada. This places great pressure on publishing houses when they make their selections. As Dr. Shirley Thomson of the Canada Council for the Arts wrote in a letter to the Committee:

The Canadian approach encourages diversity of voice, experimentation and risk, and this capacity for research and development -- supported by the Canada Council for the Arts -- is behind the success of Canadian literature. It has also allowed Canadian literature to come virtually out of nowhere, in competition with publishing industries that are huge or have been active since Gutenberg.¹³

Witnesses from the publishing industry spoke to the Committee about the fragile nature of their business. They spoke about their limited access to capital, low profitability and the way rapid technological and market changes have the potential to overwhelm them. But publishers were not the only ones with serious concerns about their future. Canada's independent booksellers also see themselves as fragile elements in a threatened ecology. As Ms. Holly McNally, owner of
McNally-Robinson Booksellers, a regional independent book chain based in Western Canada, observed:

[I]ndependent bookstores are linked in a cultural chain, region by region, across this country. Canada is, after all, a culture of regions. .... This is a cultural chain offering diversity -- hundreds of different bookstores offering diverse cultural choices to Canadians. This chain represents bookstores that are rooted firmly in their communities, where they focus sharply on their own constituency of readers, writers and publishers.¹⁴

There was a time when independent booksellers faced competition primarily from department stores, book chains and book clubs. Added to that list today is even fiercer competition from convenience stores, supermarkets, big-box stores and e-commerce. Although offering more consumer choice, these new sources of competition have changed the book selling landscape in Canada. The Association of Canadian Publishers expressed it this way:

Canadian book publishers recognize that Chapters [the book superstore] is now firmly a part of the Canadian book industry. Publishers also acknowledge the impact that the emergence of superstores has had on book retailing in Canada. Their presence, and that of other chains has expanded the book retailing space in Canada. They have also contributed to the recent growing profile of books in Canada.¹⁵

At the same time, other witnesses, particularly smaller independent booksellers, made serious claims regarding alleged aggressive business practices and the long-term intentions of larger competitors such as Chapters, Indigo and Quebec's Groupe Renaud-Bray. For example, "Quebec authors are very worried by what is happening today with big box retail stores as well as by changes that have been noted in the Quebec and Canadian publishing industry in general."¹⁶ However, as Ms. Carole Morency of Groupe Renaud-Bray, a chain of 25 superstores, explained:

[Independent bookstores] are accusing the Groupe Renaud-Bray of engaging in some rather nasty tactics because of its size. All we are trying to do is to build a strong organization capable of running a sound business and of growing still further.¹⁷

Historically, the cultural chain of independent bookstores has not been well served by a timely, efficient, wholesale or distribution service at the national level. Consumers were often advised that a book could be ordered, but it might take eight weeks for delivery. Over the years, various reports on the book industry have identified distribution, re-stocking, or fulfilment as weaknesses in the overall Canadian system that need addressing.¹⁸

In its brief to the Committee, Chapters explained the crucial importance of being able to rely on an effective system of distribution and fulfilment:

At the time of the merger [of SmithBooks/Librairie Smith, Prospero, The World's Biggest Bookstore and Coles], Chapters knew that it could not build 75 superstores by the turn of the century without a solution to this industry problem. All observers agreed that Canada needed this capability. Chapters' strong preference was not to invest to build this distribution capability itself. Thus Chapters met with U.S. wholesalers, Canadian wholesalers and several Canadian publishers to encourage them to set up a national wholesale capability. The explosion of the Internet highlighted the need for this capability. No one was willing to make the sizeable investment needed and thus Chapters was compelled to take the lead investment role.¹⁹

Today, traditional bookstores, whether independent or part of a chain, are competing with virtual booksellers. It is common for consumers to order books online and have them sent out within 24 hours. As Mr. Larry Stevenson noted in his remarks to the Committee:

The fastest growing book retailer in Canada in 1999, however, was not Chapters, but Amazon [a U.S.-based electronic commerce Web site]. Yet Amazon does not collect GST, does not employ one person in Canada, does not pay a dollar of taxes in Canada, and does not pay Canadian agencies for their books sold to Canadian consumers.²⁰

It is apparent, therefore, that in light of the evolving nature of today's book sector -- whether in Canada or internationally -- efficient stock management and a large, accessible inventory have become key components for the smooth functioning of the industry's business chain.

4. Industry Canada Considerations

Size definitely seems to matter in this debate. Several witnesses asked the Committee to intervene by recommending changes to the Competition Act, so that the Competition Bureau might play a more interventionist role in Canada's book industry.

In studying the complex ecology of the book industry in Canada, however, the Committee does not want to divert its focus to what the National Librarian describes as:

... the battle of David and Goliath. I appreciate the dilemma faced by the independents in their battle to exist in conjunction with these big-box retailers. But it is in the business world and each business must find its market and cater to it.²¹

Books are cultural artifacts. But they are also products that are produced and sold like many other products. Although the Heritage Committee is interested in the cultural dimension of the book industry, it is inevitable that there will be overlaps with the concerns of the Industry Committee.

B. METHOD

To develop the strongest possible understanding of the Canadian book distribution industry, the research team began its study in December 1999 by contacting government agencies, including the Department of Canadian Heritage, the Canada Council for the Arts and Statistics Canada. The study team also contacted key industry stakeholders (e.g., the Canadian Booksellers Association). Some of the information requested, included:

• Longitudinal data on federally-funded publishing grants and programs.
• Available information on the outcomes of federal grants on publishing in Canada.
• Longitudinal data on the number of Canadian-authored titles and their sales.
• Publisher viability before and after federal subsidies.
• Information on the current state of wholesaling, distribution and retailing practices in Canada and elsewhere.
• Relevant data on domestic and international book buying and selling patterns.
• Longitudinal data on independent booksellers.
• Relevant data on electronic commerce and its impact on book distribution.
• Data on the evolving nature of market share in Canada's book selling industry.

Due in large part to the cooperation of the groups listed above, a great deal of industry-related statistical information was obtained. At the same time, significant gaps in the available information on the past and present state of the Canadian book industry were noted. Therefore, to gather further information, database and literature searches as well as telephone interviews and meetings with a selection of key industry stakeholders were conducted, as required.

C. ORGANIZATION OF THE REPORT

On the basis of the information gathered, six focussed questions were developed:

1. Based on the available evidence, what can be said about the state of book publishing, distribution and retailing in Canada?

2. Based on the available evidence, what information is lacking on the state of book publishing, distribution and retailing in Canada?

3. What are the potential implications, impacts and challenges of current industry trends (e.g., new technologies, electronic commerce)?

4. What industry trends and challenges do we need to better understand and monitor?

5. What kind of relationship exists between various industry organizations, associations and other industry players?

6. What role can the Government of Canada play to best serve the interests of the Canadian book industry?

As can be seen, each question relates to the Committee's concern with the implications of changes in technology, retail practices, and distribution methods. Not surprisingly, witnesses raised many more issues and concerns along the way. There were also a number of important areas, especially relating to statistical information, for which no data were available. This report addresses some key gaps and suggests remedies. Overall, the Committee believes that it has weighed the concerns raised by witnesses and has identified a number of crucial areas for policy development and action for various actors across Canada's book publishing chain.

The Standing Committee received many briefs, heard from many people in the industry as well as from individuals across the country. Their comments, observations, and recommendations have been carefully considered for this report. The Committee hopes that the recommendations contained here will lead to a more efficient and effective system of publishing, wholesaling, distribution and retailing in Canada. It is the Committee's belief that it is possible to encourage and support a more competitive business environment for Canada's authors, publishers, wholesalers, distributors and book retailers.

The many issues, themes and concerns described in this chapter have helped guide the structure of this report and are addressed, where appropriate, in the five chapters that follow. These are:

Chapter Two: Production -- An overview of book publishing in Canada and the role the Government of Canada plays in this cultural industry through the Department of Canadian Heritage, and at arm's-length through the Canada Council for the Arts. This section addresses the amount of publishing activity in Canada, its diversity and its profitability.

Chapter Three: Distribution -- How books are distributed, sold or returned in Canada through a complex network of wholesalers, distributors, exclusive agents, and bookstores. The legislative framework around publishing, including copyright, investment, tax, and business practice issues.

Chapter Four: Authors and Creators -- Authors and creativity lie at the heart of any discussion of the printed word. This chapter looks at how Canadian authors are paid and how their works are protected from improper exploitation here in Canada and around the world.

Chapter Five: Libraries, Access and Preservation -- Canada's public and institutional libraries play an essential role in the book industry, serving as intermediaries between Canadians and their literary heritage.

Chapter Six: Considerations for the Future -- This chapter examines publishing beyond the traditional book. It explores the implications of printing on demand (POD) and of electronic books (e-books). This final chapter will also address some strategic options for government action designed to assist an industry that is experiencing such remarkable change.

 

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¹ Mr. Peter Woolford, Senior Vice-President, Policy, Retail Council of Canada, 29 February 2000.

² Ms. Sheryl McKean, Executive Director, Canadian Booksellers Association, 7 December 1999.

³ Mr. Don Stephenson, Director General, Cultural Industries, Department of Canadian Heritage, 7 December 1999.

⁴ It is important to point out, however, that this is not a representative sample of all key industry stakeholders. Witnesses were selected on the basis of relevance to the study and their availability. Some individuals who were invited, declined to appear, whereas some contacted the Committee, requesting to be included.

⁵ Mr. Michael Harrison, President, Association of Canadian Publishers, 2 March 2000.

⁶ Brief submitted by The Writers' Union of Canada, 21 March 2000.

⁷ Mr. Georges Laberge, Director General, Association des distributeurs exclusifs de livres en langue française, 24 February 2000.

⁸ Mr. Peter Woolford, Senior Vice-President, Policy, Retail Council of Canada, 29 February 2000.

⁹ Mr. Claude Primeau, President and CEO HarperCollins Canada Ltd, immediate past president Canadian Publishers' Council, 2 March 2000.

¹⁰ Mr. Howard Aster, Publisher, Mosaic Press, 13 April 2000.

¹¹ Letter to Chair, Mr. Peter C. Newman, Author, 27 March 2000.

¹² Ms. Jacqueline Hushion, Executive Director, Canadian Publishers' Council, 2 March 2000.

¹³ Letter to Committee, Dr. Shirley Thomson, Director, Canada Council for the Arts, 17 January 2000.

¹⁴ Ms. Holly McNally, Owner, McNally-Robinson Booksellers, 29 February 2000.

¹⁵ Brief submitted by the Association of Canadian Publishers, 9 May 2000, p. 7.

¹⁶ Ms. Carole David, Writer and Professor, Union des écrivaines et écrivains québécois, 21 March 2000.

¹⁷ Ms. Carole Morency, Communications Director, Groupe Renaud-Bray, 24 February 2000.

¹⁸ "Fulfilment and Operating Practices in the European Book Industry," Industry Canada, 1996.

¹⁹ Brief submitted by Chapters, 24 February 2000, p. 14.

²⁰ Mr. Larry Stevenson, President and Chief Executive Officer, Chapters Inc, 24 February 2000.

²¹ Mr. Roch Carrier, National Librarian, supplementary answers to questions raise by members on 2 March 2000.