HERI Committee Report
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CHAPTER THREE: DISTRIBUTION:
WHOLESALE AND RETAIL
A. RECENT TRENDS IN BOOK DISTRIBUTION
Book distribution is undergoing rapid change in all developed countries. Changes in the way books are distributed are being driven by opportunities made possible by the development of information technologies. There are two visible forms of these changes evident in Canada and other developed countries: the arrival of large box-stores and the growth of computerized systems that when bundled together have made electronic commerce (e-commerce) possible. A simplified flowchart of how books are distributed in Canada is presented in Appendix E.
While there have been large stores (e.g., department and grocery stores) for more than one hundred years, the development of such stores is a recent phenomenon that emerged during the 1970s. These large stores (e.g., Toys 'R' Us, Home Depot, Staples) depend on sophisticated inventory and sales systems that are linked together to form just-in-time ordering and delivery systems tailored to specific markets.
The same computer systems have encouraged the development of electronic commerce. Electronic commerce is a much larger field of activity than the ability to order something over the Internet. A great deal of electronic commerce takes place between businesses. Manufacturers of auto parts have computerised inventory and ordering systems that are linked to those of the large car manufacturers. This allows the car manufacturer to order parts and to specify the way the order is put together and when it is delivered to the factory. Billing systems and payment systems are also linked electronically. Thus, the growth of electronic commerce has led to changes inside companies (e.g., inventory control systems) and to the relations between and among companies.
The computerized control systems that have allowed this to happen have also facilitated electronic commerce; that is, the "dot.com" economy. The most visible element of this is the ability to make a purchase from a home computer (i.e., to order something over the Internet).
Although information technology has had important impacts on large industries such as airlines and car manufacturing, it was inevitable that its influence would spread to other sectors and eventually have an impact on the distribution of books. In the longer term, information technology may even lead to substantial changes in our ideas about books, what they are, how they work and how we purchase them.43
While the creation and growth of speciality superstores such as Barnes & Noble in the United States and Chapters in Canada are a very visible sign of the changes that are currently underway, even more fundamental changes are being brought about by the ability to order books over the Internet.
The most visible, and perhaps most well known, company that has had a substantial impact is Amazon (Amazon.com) which was created in the mid-1990s and now has annual sales of more than $600M (U.S.).44 Although Amazon has focused on growth (and is not profitable overall) the section that sells books is profitable.45 46
Amazon is currently building five large distribution centres to provide speedy delivery of books to customers. To deal with the pressures created by Amazon, independent booksellers in the United States have responded in a number of ways. Recently, independent bookstores joined together to offer a gift certificate (Book Sense Gift Certificates) that can be redeemed at 1,200 independent bookstores in the United States. An on-line ordering system (booksense.com) is expected to be up and running this year.
1. Book Distribution in Canada
Although some publishers distribute their own books to Canadian booksellers and libraries, many use the services of a distributor or rely on any of a dozen Canadian wholesalers. The Copyright Act protects agreements made between publishers and their distributors with measures preventing retailers from trying to purchase or import the book from anyone else, a practice known as "buying around."
Book wholesaling in Canada has recently been described by Mr. Ira Wegman as something that operates "anonymously within the Canadian publishing industry", despite its 40 years of existence.47 Book wholesaling statistics are integrated and combined with other commodities and products in a number of Statistics Canada surveys and are difficult to extract. When asked to provide some analysis of the available data on book wholesaling in Canada, the Distributive Trades Division of Statistics Canada identified the difficulty of retrieving a comprehensive portrait. The analyst regretted the fact that the agency does not have "general flexible systems that can quickly furnish answers to unplanned questions."48
In a recent study, the Department of Canadian Heritage paints a picture of a small but significant book wholesaling community in Canada whose origins go back to the 1950s and the proliferation of Canadian distributors of foreign publications. By the 1970s, a small number of Canadian wholesalers had begun distributing Canadian materials to booksellers in Canada and, eventually, around the world.
The 1970s saw American wholesalers make "inroads with Canadian libraries and bookstores. By providing tremendous catalogues of titles, detailed databases, and elaborate ordering systems, these companies were able to offer services to their clientele at deep discounts."49 Even so, in recent years, the report continues, there has been a "decreasing presence of American book wholesalers" resulting from recent regulations preventing the practice of buying around and "the weak Canadian dollar."50
The Canadian Heritage report takes up the story in the 1990s, a period that saw Canadian wholesalers working to develop public library clients:
As funding cuts to libraries forced these institutions to reduce costs, wholesalers began to play an important role in the acquisition and maintenance of library holdings. This has resulted in the increasing use of 'automatic release plans' -- pre-approved buying plans in which the wholesaler selects the library's materials.51
More recently, wholesalers have begun to service an increasingly diverse book retail sector, with the emergence not only of book superstores, but also the growth in the kinds of non-traditional retail outlets that have begun to sell books (drug stores, convenience stores, supermarkets etc.).
The late 1990s also saw the formation of the
Canadian Book Wholesalers Association (CBWA), a
13-member organization of Canadian-owned wholesalers based predominantly in Ontario. The
kinds of service they provide clients include one-stop shopping, which for smaller stores
or libraries can result in larger discounts and cheaper shipping costs; the possibility of
a turnaround of one or two days; and the possibility of customized release plans.
Finally, the growth of Amazon has also led to changes in the distribution of books in Canada. Several companies have created online ordering systems (e.g., Chapters Online and Indigo.ca). Because Amazon will deliver books within two or three days, this has become the de-facto industry standard that anyone launching an Internet-based ordering system has to meet.
In order to meet consumer expectations, Chapters examined several different possibilities and finally set up Pegasus, a new company to allow it to offer the same speedy delivery as its competitors. This required an investment of nearly $60 million (Can). Although not yet profitable, this distribution system allows Chapters Online to compete with Amazon.52 Indeed, Larry Stevenson, CEO of Chapters Inc., estimates that his company's book sales over the Internet matched book purchases of Canadian origin made with amazon.com during the final quarter of 1999, at approximately $12 million (Can).53
For some, the battle against giant chain stores seems like a new fight. It is surely, after all, within memory of any but the youngest Canadian of the time when Wal-Mart, Toys 'R' Us, Home Depot and other box stores, the so-called killer category stores, were not around.
Concern about the largeness of some competitors in an industry, however, is not new. At the turn of the previous century and for the first few decades of that century, owners of small, independent, retail stores feared the emerging chains and pushed for measures to limit them. This was especially true in the grocery trade, where the Great Atlantic and Pacific Tea Company (A&P) had, by 1929 in the U.S., over 15,000 stores and sales in excess of $1 billion, which was almost 40% of retail grocery sales.
In Canada, chains stores have had a prominent place in book selling for several decades. The first Coles store opened in 1935 and, three years later, Classics opened its bookstore chain. In 1950, the British books chain, W. H. Smith, opened its first store in Canada.54 In 1995, SmithBooks/LibrairieSmith and Coles joined to form Chapters, then a chain of over 400 stores combined, comprising about one-fifth the total of books stores in Canada.55
The box store is a relatively new retailing phenomenon. Home Depot (one of the largest and best known) is only 21 years old.56 Unlike traditional hardware stores it does not define itself as a store that sells hardware (e.g., hammers). Instead it tries to satisfy a customer need, in this case affordable home improvements. The president of the company says: "We are in the relationship business not the transaction business," this explains why 70% of the store's 50,000 items were suggested by customers.57
The rapid growth of a chain such as Home Depot produces benefits for consumers, in that a large store can offer a wide selection and cheaper prices. However, such rapid growth has driven a number of other chains out of business. For example, Ernst Home Center (founded in 1896) had sales of $572M (U.S.) in 1995 and went out of business in 1996.58
The rapid growth of these large stores has been made possible because of changes in information technology (e.g., the ability to deliver products from a manufacturer directly to Home Depot's 900 stores without having to visit a Home Depot warehouse). The stores have also responded to the needs of consumers. The competitive pressures on other businesses are considerable. Eaton's, once one of Canada's most well-known department stores, went out of business in 1999 because it did not adapt to the changing environment. Canadian Tire, on the other hand, has responded by enlarging and modernizing its stores to stay competitive.
2. Changing Dynamics in Book Distribution and Retail
To the concern of traditional book retailers, the creation of Chapters with its chain of specialty superstores has made it a dominant industry player, with estimates of its market share ranging from less than 25% to 70%.59 It seems, however, that Canada's independent booksellers have always operated in a highly competitive environment, long before the emergence of department stores, catalogue sales, bookstore chains, box stores and electronic commerce.
In 1884, when Toronto merchants started giving away free books to anyone who purchased a pound of tea, conventional booksellers cried foul. Things got worse in 1891 when Eaton's offered a popular series of books imported from Britain for 19 cents, postpaid anywhere in Canada. As George Parker points out in his history of the book trade in Canada, since these imported books cost 18 cents wholesale in Toronto and postage cost 3 cents, "Eaton's must be losing 2 cents, but of course no retailer could buy these books from foreign jobbers in such bulk and receive the special large discounts that were given to department stores." Parker also points out that to make matters worse for the independent booksellers, the catalogues of Eaton's and the Bay also offered "the authorized provincial textbooks at a 20 percent reduction, including free postage."60
According to the Department of Canadian Heritage,
by early 2000, there were 4,298 independent bookstores in Canada. There are, however, some
wide variations in the criteria used for counting bookstores in Canada.61 These stores were open for business alongside 70 Chapters
superstores, 261 "traditional" stores in the Chapters chain, 14 Indigo
superstores, and 25 stores in the
Renaud-Bray chain in Quebec. These stores were also in competition with campus bookstores,
book clubs and non-traditional book retailers such as Costco, Wal-Mart, and large regional
grocery chains.
In February 2000, Chapters Inc. announced an almost 40% drop in third-quarter profits as a result of higher marketing costs, lower than anticipated sales in the chain's superstores and continued losses from its Internet sales. Shortly after this announcement, Indigo Books, Music and Café dropped its plans to go public "citing current negative investor perception of the retail book market in Canada."62 According to the National Post, Indigo founder Heather Reisman says that she believes there is room in Canada for approximately 80 profitable superstores, whereas Chapter's CEO, Larry Stevenson is of the opinion that "there's probably room for between 110 and 125 superstores in Canada." This is in contrast with the "125-150 he had estimated when Chapters went public 3? years ago," notes the Globe and Mail.63
According to a 1994 study prepared for the creation of Chapters, in 1991, 54% of book buying took place in bookstores, 16% from book clubs, 8% in second-hand bookstores, 4% each from mail order, supermarkets and drug stores.64
Data from 1996-97, as can be seen in table 3.1, show a very different kind of breakdown of publishers' sales to various kinds of retailers.These statistics, however, do not include any sales over the Internet, which is rapidly becoming an increasingly important retail outlet for Canadian publishers.
In her study of online book selling in the U.S. in 1999, Anita Hennessey notes that key players in an industry can sometimes be unaware of the real source of competition. She writes:
With publishers and booksellers already rife with concerns over the survival of the independent bookstores, and the independent's battles with the chain superstores, little attention was paid by them early on to the wealth of possibilities available through online book selling.65
Later in the same study, Ms. Hennessey raises the issue of growth in Internet sales not as additional sales, but as sales re-directed from more traditional outlets. Writing about the experience of booksellers in the U.S. she notes, "With the news of overall sales of book units down 2%, it is still too early to determine if book sales simply shifted from traditional outlets like bookstores, to the Internet."66 With respect to the Canadian context, Larry Stevenson of Chapters acknowledges that the growth of Chapters Online in the past year has cannibalized sales from within the chain.67
Increasingly, consumers have more access to reviews, background materials, and sample passages to read. The recent phenomenon of book groups and online chat sessions with other readers or authors makes for a highly discriminating book buyer. Oprah Winfrey can literally launch a formerly unknown writer's career with a single appearance on her show. Before he retired, Peter Gzowski had, on a smaller scale, a comparable influence on the sales of the work of Canadian authors after they were featured on his CBC radio show Morningside.
Overall, these changes in business opportunities and the extent to which consumers are well informed will continue to have an important impact on the level of competition in the distribution and sale of books. In the book publishing and selling industry this seems to be taking the form of the consolidation of traditional retail and Internet activities.
There are several pieces of legislation that are relevant to the current study of the book industry in Canada. These include the Competition Act, the Investment Canada Act, the Copyright Act and the Excise Tax Act. The cultural implications of these Acts as they relate to Canada's book industry are discussed below.
Recent developments in the book industry in Canada that have attracted the attention of the Competition Bureau include increased market share of retail sales by Chapters and vertical integration of a new wholesaler (Pegasus) and a retailer (Chapters). To date, neither has warranted a call by the Commissioner of Competition for a full investigation, although it is incorrect to assume that the file at the Bureau is closed. Since the focus of the Heritage Committee is cultural, Appendix F discusses the role of the Competition Bureau in its application of the Competition Act, while this section speaks to the related cultural implications of market share and vertical integration.
There was some suggestion made before the Committee that the Competition Act should be expanded to include cultural considerations. The Deputy Commissioner of Competition appeared before the Committee and gave his views on such an inclusion, arguing that support for culture should be handled outside of the Act.
In our discussions with some members of the Canadian bookselling industry, the issue was raised as to whether or not the bureau's analysis under the Competition Act included some consideration of cultural concerns. As I indicated earlier, the act is a law of general application with a clear and targeted focus on competition. Consequently, it does not deal with other public policy issues such as, for example, the nationality of ownership or the need to promote and maintain cultural objectives. Such an approach is consistent with the anti-trust approach taken by Canada's major trading partners.
...
When governments decide that a particular industry requires some form of special or preferential treatment, this is accomplished through the introduction of specific programs or legislation targeted to the particular industry concerned. Those activities of the industry that would fall under direct regulation resulting from such specific legislation would be exempt from the scrutiny of the Competition Act.68
Two specific issues that relate to Chapters and touch the Competition Act are Chapters' market share as an indication of market dominance and the vertical integration of the retailer Chapters with the wholesaler Pegasus. The sections below deals with these issues in more detail.
There is little question that Chapters is the dominant retailer in the Canadian book industry, but considerable debate still exists about the size of that dominance. In other words, the question remains: What proportion of the book market in Canada is held by Chapters? As noted earlier, estimates range from under 25% to 70%.
The precise estimate is not without significance, as it can determine the stance of the Competition Bureau towards Chapters:
There are no hard and fast rules as to the relationship between market shares and dominance. However, the bureau's general approach in evaluating allegation of abuse of dominance is as follows. A market share of less than 35% will generally not give rise to concerns of market power or dominance. A market share of over 35% will generally prompt further examination by the bureau. A market share greater than 50% in the case of a single firm will prima facie be considered dominance.69
At the time of the merger of SmithBooks and Coles in 1995, the Competition Bureau estimated that the two together had about 50% of retail book sales in Canada. Several witnesses argued that Chapters, as a result of the merger, would certainly have more than 50% five years later and after building scores of superstores.
The key here is that the estimate by the Competition Bureau of Chapters' market share is based on a relatively narrow definition of the market for books. Since 1995, many non-traditional booksellers have entered the marketplace; these include Costco, Wal-Mart and some of the larger supermarkets. In addition, the sale of books on the Internet is booming; last year, Internet sales represented about 2% of sales in Canada (about 4.5% in the U.S.), but sales are growing rapidly and some experts forecast that the Internet may eventually represent 20% of book sales.
The Canadian Booksellers Association used an extremely narrow definition in calculating its estimate of Chapters' market share. At one time, the Canadian Booksellers Association believed that "Chapters already controls 70% of the retail market in Canada".70 At the 7 December 1999 meeting of the Committee, the President of the Canadian Booksellers Association was asked about Chapters' market share and lowered the estimate: "It's my understanding it's 55%. I get that number from publishers with whom I have conversations. They say, 'This is how many books we're shipping to them'."71
In its brief to the Committee for the 24 February 2000 meeting, Chapters contested the use of publishers' shipments to Chapters as a measure of market share for four reasons: (1) the statistic excludes publishers' direct sales, (2) the statistic excludes imports for the titles published or represented by the publisher/distributor, (3) the statistic ignores publishers' sales to wholesalers and (4) the share of a sample of publishers is not necessarily equal to the share of the market.
Even if all publishers were included, however, the estimate could be biased upward if the shipments did not adjust for returns and if Chapters returned a higher proportion of shipments than did other booksellers (which is, in fact, the case). Indeed, the returns issue injects a further level of uncertainty into the calculation of market share.72
A related problem has to do with changes in the traditional book market. Indigo Books, Music and Café, which did not exist in 1995 and now has 14 superstores, probably had sales in 1999 in the range of $70 million. In addition, Renaud-Bray, Canada's largest French-language book chain "has decided to venture into the English language ... and may consider opening stores outside Quebec. The company is keeping an eye on Toronto, Paris and possibly New York City."73
Chapters prefers a broader definition of the market for books, one that would include non-traditional outlets. In his appearance before the Committee on 13 April 2000, the President and CEO of Chapters noted that a Save-On-Foods in British Columbia had 2,600 square feet in its store devoted to books, with 9,773 titles; the nearby SmithBooks had 7,338 titles. Surely, he argued, Save-On-Foods should be considered a competitor in the book market and included in any definition of the market.
At the same meeting, support for this position was provided by a Committee member who noted that a small independent book retailer in Collingwood, Ontario told him that he had gone out of business when the local Loblaws grocery store expanded and introduced an in-store book retailing section.
In his second appearance before the Committee, the President and CEO of Chapters provided his estimate of Chapters' market share based on an inclusive definition of the book market in Canada:
Many studies have been done over the past ten years on the size of the Canadian consumer book industry. In no study has the market size been shown to be less than $1.3 billion, and that was back in 1990. We believe that the Canadian consumer book market in 1999 was somewhere between $2.3 billion and $2.6 billion. If you exclude Chapters' sales of non-book products, which are respectively 18% of our sales, it means that Chapters' book sales in this fiscal year will be around $520 million, which would imply that we have the market share of somewhere between 20% and 23% of the consumer book market in Canada.74
He then conceded: "If one accepts the narrow definition of the market, clearly our market share would be higher, ... as opposed to the 20% to 23% that we define on the broader definition."75 No matter what estimate is used for Chapters' market share, however, the words of an official from the Competition Bureau should be kept in mind: "Acquiring a dominant position in the market is not illegal."76
The issue that probably generated the most heat
during the Committee's hearings was the relationship between the book retailer Chapters
and the book wholesaler Pegasus. In May 1999, Chapters announced the formation of Pegasus
Wholesale Inc. and the appointment of Dennis Zook as its president. At his 24 February
2000 appearance before the Committee, Mr. Zook put the initial
start-up costs for facilities, equipment and systems at over $15 million and total
investment by Chapters since the formation at over $50 million. Chapters now owns 82% of
Pegasus.
The President and CEO of Chapters was proud of having established Pegasus. "Chapters has helped ensure a strong future for the Canadian book industry by investing to set up a national book wholesaler, Pegasus," stated Larry Stevenson.77
Lest this be thought too altruistic, he noted that an efficient, full-service wholesaler was imperative for Chapters, if it was to compete not only as a traditional bricks and mortar company but also online. He explained:
... Chapters could not compete with Amazon and provide Canadian consumers a Canadian online alternative without the fulfilment capabilities of Pegasus. ... We do not believe that consumers will choose a website that asks them to wait six to eight weeks for a book when most of these books are available in days from U.S. alternatives.78
The Deputy Commissioner of Competition from the Competition Bureau appeared before the Committee and noted:
Is vertical integration an anti-competitive activity under the Act? The answer is no. Vertical integration is not an anti-competitive practice; in fact, vertical integration can represent a
pro-competitive and efficiency-enhancing strategy by a firm. However, should vertically integrated firms engage in an anti-competitive act, the Bureau would not hesitate to intervene.79
Nevertheless, there were fears expressed in the media and before the Committee that a majority share in Pegasus could put undue power into the hands of Chapters, paving the way for possible abuse of a dominant position. It was claimed that an independent bookseller that did deal with Pegasus, could be disadvantaged in several ways. For example, Chapters could -- it was argued -- receive preferential service, and could obtain information about the operations of its rivals.
Chapters and Pegasus, in their written briefs and appearances before the Committee, attempted to answer each concern. Of overriding significance was the fact that Pegasus was a new wholesaler. Independent booksellers could continue to use whatever distribution channels they used before Pegasus. Pegasus, according to its President, had no exclusive rights to any titles and had no intention of obtaining any, meaning independents would not be forced to deal with Pegasus. As a wholesaler, Pegasus claims that it is asking only for the traditional discounts that a wholesaler operating on its scale would receive. It also provided the Committee with some evidence that the discounts it has been after are established wholesaler discounts.80
The President of Pegasus made the point that he would like to attract retailers in addition to Chapters to his firm, and that he could not afford to give Chapters preferential treatment (say, in the delivery of the most popular books) or divulge client information to Chapters. If he did so, the independent retailers would not deal with him and he would lose profits. Although Chapters is the majority owner of Pegasus, the operations of the two are separate, and the remuneration of Pegasus executives is based on the profits of Pegasus, not the profits of Chapters. In addition, as will be discussed in Chapter Six, it is worth noting that the CEO of Chapters indicated several times before the Committee that he would prefer that Chapters be a minority shareholder in Pegasus. Furthermore, at the beginning of June 2000, Chapters Inc. announced that it had hired Merrill Lynch Canada to examine options for Pegasus, including its sale to others.81
Several who appeared at Committee hearings pointed to a merger that had been proposed in the U.S. between the giant retailer Barnes & Noble and the giant wholesaler Ingram, as a source of lessons for Canada. The proposed merger in the U.S. was abandoned, according to some press reports, because the Federal Trade Commission (FTC) was about to rule against it (the parties abandoned the merger before an FTC ruling, so no official report or analysis has been provided by the FTC).
In a 15 November 1999 letter to the Canadian Booksellers Association, the Competition Bureau explained its position with respect to Pegasus and noted that the proposed merger in the U.S. was fundamentally different from Chapters/Pegasus. The Bureau stated that the establishment of Pegasus by Chapters involved a reorganization of assets already owned by Chapters, not the transferring of control of an independent wholesaler to a retailer.
The Competition Bureau did however review Chapters/Pegasus and concluded that the creation of Pegasus by Chapters did not contravene the Competition Act:
While the creation of Pegasus does not create competition law concerns, any business activity engaged in by Chapters or Pegasus is subject to the Competition Act. Given the significant market presence of Chapters and the evolving business activities of Pegasus, the Bureau is continuing its investigation and monitoring developments in the market.82
The Committee appreciates and understands the many concerns witnesses have voiced with regard to the issue of competition, market share and vertical integration in Canada's book industry. It agrees with the position of the Department of Canadian Heritage and reminds the reader that the Department does not focus on issues of competition. For these reasons:
The Committee recommends that the Department of Canadian Heritage establish a permanent inter-departmental mechanism with Industry Canada to ensure that the Competition Bureau is made aware in a timely manner of any negative trends affecting the creation, production, distribution or sales of Canadian-authored books. Representatives charged with this responsibility would be required to report to the Standing Committee on Canadian Heritage within six months of the Government's response to this report and once a year thereafter.
As the book industry in Canada becomes more concentrated, however one measures market share, the Committee wonders whether there is growing potential for abuse of dominant position, an abuse that would imperil numerous independent booksellers. Given these concerns:
The Committee recommends that the Departments of Canadian Heritage and Industry Canada get together to determine how the Competition Act could be strengthened to protect the Canadian book industry.
Further comments on the Chapters/Pegasus relationship will be made in Chapter Six.
There was some concern expressed before the Committee that recent trends in the Canadian book industry would, in some way, open the door to foreign ownership. Mention was made several times of the possibility that Barnes & Noble, the U.S. giant retailer that has a 7% investment in Chapters, might find a way to merge with Chapters and take over its operations.
The President and CEO of Chapters argued before the Committee that this was not a possibility.
First of all, I'm not talking to Barnes & Noble at all about any merger whatsoever. Number two, they have no role in governance. In fact, I'm a direct competitor of theirs, and barnesandnoble.com is a fierce competitor of Chapters.ca. We do not share any information with them that is not available in a public forum. It's a public company. They're an investor that I treat no differently than I'd treat Investors Group in Winnipeg. They are not on the board and they are not involved in the management of this company.83
Officials from the Department of Canadian Heritage appeared before the Committee and explained the role the Investment Canada Act would play in any attempted takeover of a Canadian firm in the book industry by a foreign entity. One official began by noting that in 1999 the authority to review foreign investments in Canadian cultural industries was transferred from the Minister of Industry to the Minister of Canadian Heritage.
Under the Act, the Minister may review all investments by non-Canadians in the cultural sector, and the review includes a consideration of the net benefits to Canadians that would flow from the proposed investment. The official from the Department of Canadian Heritage provided a lengthy list, from section 20 of the Act, of factors that would be considered in determining net benefit.
... the effect of the investment on the level and nature of economic activity in Canada; the degree and significance of participation by Canadians in the Canadian business; the effect of the investment on productivity, industrial efficiency, and technological development; the effect of the investment on competition; the compatibility of the investment with national industrial, economic, and cultural policies, taking into consideration provincial, territorial, industrial, economic, and cultural policy objectives; and the contribution of the investment to Canada's ability to compete in world markets.84
The official also noted that, in addition to the Act itself, there were specific guidelines pertaining to book publishing and distribution.85 Under the guidelines, a Canadian-owned business in the book industry cannot be acquired by non-Canadians except under exceptional circumstances. The business would have to be in financial distress and Canadians must have had a "full and fair opportunity to purchase the business." Even if these conditions are met, the purchase will still be reviewed for net benefit to Canadians. Under the guidelines, the factors to be considered in determining the net benefits to Canadians include:
[A] commitment to the development of Canadian authors, such as undertaking joint ventures [with] Canadian-controlled publishers which would introduce the partner's Canadian authors to new markets both domestically and abroad.86
Of most concern to the immediate subject of this report was the affirmation by the department official that
... we want to ensure in investment cases that Canadian-authored books continue to be made available to Canadians. Through the net benefit process, we will endeavour to ensure that continues to happen for Canadian-owned businesses.87
The Committee strongly supports this position. The factor in determining the net benefit of possible foreign investment as it relates to the promotion of Canadian-authored books is of paramount importance.
The Committee recommends that the Department of Canadian Heritage, in reviewing proposed foreign investment under the Investment Canada Act, ensure that no foreign investor is allowed to take over a Canadian firm in the book industry unless credible assurances are made that the investment will increase the availability of Canadian-authored books.
The 1997 amendments to the Copyright Act (by Bill C-32) included what has come to be called the parallel importation provisions. These provisions strengthened the position of Canada as a distinct market for books. Those with the Canadian rights to a book, for example, had additional protection from the practice of "buying around." This practice involved going to another market to bring the book into Canada and selling it in competition with the entity that had the Canadian rights.
As Ms Wanda Noel, a legal expert on copyright, explained to the Committee:
copyright owners and assignees such as publishers have always had the legal right to control the flow of books between markets. It's been there since 1923. But book distributors, who have and still do negotiate exclusive distribution rights for the Canadian market, did not have these rights. Bill C-32 gave this importation protection for the Canadian market to exclusive book distributors. That was the change. Before, only copyright owners had the rights. Bill
C-32 gave the same rights to exclusive book distributors.88
There are some qualifications on the exclusive distribution rights -- the Canadian price cannot be too far out of line with prices in other markets, and the Canadian distributor must be able to provide the book in a timely manner -- but the ban on buying around does increase the value to a distributor of having the Canadian rights to a book.
Of concern to some who appeared before the Committee was the possibility that Pegasus could obtain exclusive rights to some books, so that all bookstores in Canada would have to deal with it to obtain these books. It was felt that this would give Chapters, which owns 82% of Pegasus, a strategic weapon to use against retail competitors.
Mr. Dennis Zook, The President and CEO of Pegasus, however, told the Committee that Pegasus has not obtained the exclusive rights to any books nor does it intend to.
The Committee recognizes the importance of having copyright legislation that can keep pace with, and be sensitive to, book industry dynamics and changes. Chapter Four will revisit this issue in a discussion of new technologies and creators. At that point, Recommendations 4.5 and 4.6 will address this pressing matter.
Any discussion of books in Canada generally includes at least an indirect reference to the Excise Tax Act, which is the legislative basis for the Goods and Services Tax. The Committee hearings on the book industry in Canada were no exception, as witness after witness called for the removal of the GST on books and other reading material.
Mr. Michael Wernick, Assistant Deputy Minister, Cultural Development, Department of Heritage, appeared before the Committee and argued that removal of the GST was really too blunt an instrument to address the cultural concerns in the book industry.
If you remove the GST there would be about $140 million cost to the treasury of doing that in revenue forgone. That would be a very blunt and indirect way of addressing any of the issues that you've heard. About half of that would be a windfall to the foreign publishing houses because their sales would be then a little bit cheaper.
Furthermore:
There is no way, under trade law, to discriminate and provide the break only to Canadian book publishers and not to foreign publishers. It wouldn't in any direct way flow money to creators or to publishers or to retailers. So while the whole system might be a little better off because book consumption might go up a little bit because books were 7% cheaper, our view is for $140 million you can probably do a lot more good in more targeted applications.89
The Committee understands the desire expressed by book industry witnesses to have the GST removed from books. It worries, however, that this could be an extremely costly and ineffective measure in that it might not address most of the important issues raised by industry stakeholders.
The Committee notes that some books purchased over the Internet from outside Canada may escape payment of GST. This is a concern to Canadian booksellers who must charge the GST on all their sales and could find themselves at a competitive disadvantage with non-Canadian booksellers. An analysis of any effects of the GST on the sale of books should include the possibility of an uneven application of the GST to books purchased from non-Canadian booksellers.
The Committee did not undertake a full study of the GST and its application to books. A fuller analysis is needed:
The Committee recommends that the Department of Canadian Heritage and the Department of Finance get together and analyze the impact of the tax on books on publishing, the sales of books and reading in Canada, with a view to gauging the implications of removing the GST on books.
43 For example, in 1999, Encyclopedia Britannica announced that it would no longer print its encyclopedia but would sell it online for an annual subscription fee.
44 George Anders, "Amazon soars on upbeat outlook despite widest ever quarterly loss," Wall Street Journal, 3 February 2000.
45 Ibid.
46 The rapid growth of Amazon has forced traditional book retailers in Canada and the United States to change their business in fundamental ways. In the United States, Barnes & Noble attempted to buy Ingram, a large privately held book distributor. Press reports indicated, however, that the United States Department of Justice would disallow this acquisition, so the parties did not pursue the merger. Barnes & Noble has since set up its own distribution system to compete with Amazon.
47 Ira Wegman, "A Profile of the Canadian Wholesaling Industry," Department of Canadian Heritage: Publishing Policy and Programs, 12 November 1999: 3.
48 Statistics Canada's response to letter from the Chair of the Standing Committee on Canadian Heritage, 17 January 2000: 7.
49 Wegman. Op.Cit. 9.
50 Ibid, 4.
51 Ibid.
52 See Chapter Six for further details on Canada's position in the electronic commerce market.
53 Telephone interview with researchers, 7 February 2000.
54 "Chronology:
Publishing and the book trade in Canada", National Library of Canada Fact-Sheet,
<www.nlc-bnc.ca/services/quickref/echrbook.htm>.
55 Data from book market study by Bain & Company for Smith Books, 30 August 1994: 10.
56 Home Depot has sales of approximately $30 billion and is extremely profitable. It is currently opening a new store every 53 hours. It negotiates tough deals with suppliers and keeps prices down with an extremely efficient distribution system. Products from suppliers go directly from their factory to the store.
57 Forbes, 24 January 2000: 122.
58 At least five major building supply centres have gone out of business in the United States in the last four years. These include: Ernst Home Center (Seattle); Handy Andy (Schaumburg Illinois); Grossman's of Stoughton, Massachusetts; Hechinger Co. of Largo, Maryland and, Rickel Home Centers of South Plainfield, New Jersey. These companies had combined sales of approximately $7.9 billion U.S. Ibid: 126.
59 The issue of market share will be discussed in more detail below.
60 George L. Parker, The Beginnings of the Book Trade in Canada, Toronto: University of Toronto Press, 1985: 230-231.
61 Data provided by Department of Canadian Heritage in a presentation to the Standing Committee on Canadian Heritage, 7 December 1999. SmithBooks and Coles data provided during the development of Chapters (from "The Book Trade in Canada"), however, indicate that there were only 2,044 independent bookstores in 1993. Furthermore, Larry Stevenson of Chapters, in a 25 April 2000 letter to the Committee, notes that: "by our count, the number of independent bookstores in 1990 was 1,290 and in 2000 it is 1,285."
62 Zena Olijnyk, "Indigo shelves IPO due to 'cool market'," The National Post, 11 February 2000.
63 Marina Strauss, "Chapter Online loss jumps 12-fold, adding to parent's woes," Globe and Mail, 9 February 2000.
64 Bain & Company, 1994: 9.
65 Anita E. Hennessey, "Online Bookselling 1999," M.A. thesis prepared for the Centre for Publishing, New York University, <www.bisg.org/99thesis.html>.
66 Ibid, 23.
67 "Chapters
Inc. announces Q3 results," Canadian Corporate News, 8 February 2000,
<www2.cdn-news.com/scripts/ccn-release>.
68 Mr. André Lafond, Deputy Commissioner of Competition, Competition Bureau, 30 March 2000.
69 Mr. André Lafond, Deputy Commissioner of Competition, Competition Bureau, 30 March 2000.
70 "Sample Letter to MP from Employers," from CBA Internet site: www.cbabook.org.
71 Ms. Sheryl M. McKean, Executive Director, Canadian Booksellers Association, 7 December 1999.
72 See Chapter Six for a more detailed discussion of returns.
73 Leah Eichler, "Indigo owner optimistic on stores, worried about industry," PublishersWeekly.com, 20 March 2000.
74 Mr. Larry Stevenson, President and Chief Executive Officer, Chapters Inc., 24 February 2000.
75 Ibid., 13 April 2000.
76 Mr. Chris Busuttil, Acting Assistant Deputy Commissioner of Competition, Competition Bureau, 30 March 2000.
77 Mr. Larry Stevenson, President and Chief Executive Officer, Chapters Inc., 24 February 2000.
78 Ibid.
79 Mr. André Lafond, Deputy Commissioner of Competition, Competition Bureau, 30 March 2000.
80 See the Canadian Booksellers Association 1999 Source Book for information on Canadian publishers', distributors' and wholesalers' discounts.
81 Susan Heinrich, "Chapters may sell its Pegasus Wholesale unit," National Post, 2 June 2000, C1.
82 Mr. André Lafond, Assistant Deputy Minister of Competition, Competition Bureau, 30 March 2000.
83 Mr. Larry Stevenson, President and Chief Executive Officer, Chapters Inc., 24 February 2000.
84 Ms. Carla Curran, Chief, Publishing Policy (English), Cultural Development Sector, Department of Canadian Heritage, 28 March 2000.
85 These are available on the Internet at: investcan.ic.gc.ca.
86 "Revised foreign investment policy in book publishing and distribution," Text of "Fact Sheet" issued by Communications Canada FS-92-3808E, Industry Canada, investcan.ic.gc.ca.
87 Ms. Carla Curran, Chief, Publishing Policy (English), Cultural Development Sector, Department of Canadian Heritage, 28 March 2000.
88 Ms. Wanda Noel, Barrister and Solicitor, 28 March 2000.
89 Mr. Michael Wernick, Assistant Deputy Minister, Cultural Development, Department of Heritage, 9 May 2000. Unedited copy.