HERI Committee Meeting

STANDING COMMITTEE ON CANADIAN HERITAGE

COMITÉ PERMANENT DU PATRIMOINE CANADIEN

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, February 24, 2000

• 1140

[Translation]

The Chair (Mr. Clifford Lincoln (Lac-Saint-Louis, Lib.)): I would now like to call to order this meeting of the Standing Committee on Canadian Heritage which is gathering for its first roundtable on the book publishing industry,

[English]

to consider the Canadian book-publishing industry.

[Translation]

Today, we are pleased to welcome,

[English]

from Chapters Incorporated, Mr. Larry Stevenson, the president and chief executive officer;

[Translation]

the Groupe Renaud-Bray, which was to have been represented by its President, Mr. Pierre Renaud, but which will now be represented by Ms. Carole Morency.

[English]

We have Pegasus Wholesale, Mr. Denis Zook, the president and CEO, and Mr. Nigel Berrisfford, the senior vice-president of purchasing.

[Translation]

Also here today representing the Association des distributeurs exclusifs de livres en langue française is Mr. Georges Laberge, the Association's Director General. I'm told that Indigo Books, Music and Café will not be appearing.

Mr. Pierre de Savoye (Portneuf, BQ): Mr. Chairman, for the benefit of committee members, could you tell us how you plan to proceed when the vote is called? When will we suspend our proceedings and when will we reconvene?

The Chair: I believe the vote is scheduled for around 12:05 p.m. Perhaps we could wrap up just before noon because we don't have far to go to get to the House. I will have someone notify the House that we will be on hand for the vote. Let's agree to adjourn at 11:57 a.m. That's will give us enough time to make our way to the House for the vote.

[English]

So the floor is yours. Who wants to start?

Mr. Stevenson, do you want to start off?

Mr. Larry Stevenson (President and Chief Executive Officer, Chapters Inc.): Thank you, Mr. Chairman.

First of all, if I could, let me apologize that we don't have our submission in both languages. We will send it. I won't be leaving a written copy, but we will get both languages back to you as soon as we are back in Toronto. So I will read, and then get that to you as soon as we possibly can. I apologize in advance.

[Translation]

Mr. Chairman, ladies and gentlemen, I want to thank you for inviting Chapters to share with you its views on the book retailing industry. We have submitted a much more detailed brief to the committee, but so as not to take up too much of your time, I will briefly focus on three key points.

First, the Canadian book retail industry enjoys vigorous and effective competition today. Second, Chapters has been good for authors, publishers and consumers. Third, Chapters has helped ensure a strong future for the Canadian book industry by investing to set up a national book wholesaler, Pegasus.

[English]

Let me first turn to the status of competition today in Canadian bookselling. Representatives of the Canadian Booksellers Association claimed, without any supporting evidence, at the December 7 meeting that Chapters had 55% of the Canadian market. This is categorically false.

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.

Some observers believe that the market should be more narrowly defined, should not include people like Price Costco, Loblaws, or any other retailer whose main business is not just the selling of books. I would contend, however, that surely anyone who sells the same books to the same end user is in fact a competitor of ours and should be included in the definition of the market.

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We also, of course, compete with our suppliers in the marketplace through their websites, through their book clubs, and through direct sales to companies and individuals.

[Translation]

Since Chapters opened its first book superstore, eight other Canadian companies have invested to compete with Chapters in operating large format book emporiums. Simultaneously, there has been an explosion of outlets offering books to consumers, many at deep discounted prices. Finally, the Internet has changed the world of retailing. Literally thousands of sites will sell books to Canadians. The largest Internet book retailer in Canada in 1999 was not Chapters, but Amazon, a company without a single employee in Canada.

[English]

My second point is that Chapters has been great for Canada. I would respectfully submit that Chapters has revolutionized the way books are sold in this country. The many changes we have made have been applauded by Canadians, but have constantly been attacked by our competitors.

In our opinion, the changes we have made have helped three different groups: publishers and authors; consumers; and the communities we live in.

Let me start with authors and publishers. We have grown the book market size dramatically in the past five years, and this has helped publishers and authors, especially Canadian authors and publishers. Our overall purchases are up 63% over the past three years.

More importantly, given our focus on Canada, our purchases from Canadian publishers are up 104% over this same three-year period, which means that we are doing a lot to promote Canadian publishers, and Canadian authors in particular.

Heritage Canada showed in its submission to the committee that 46% of all books sold in Canada were authored by Canadians. This is up dramatically from the early 1990s, when most studies showed that Canadian-authored titles represented somewhere between 30% and 35% of sales. This is a tribute to all Canadian authors, publishers, the Canadian government, and all Canadian booksellers.

Often our competitors claim that we determine what gets published in this country. I have asked publishers to name one single title in the past five years that was not published because Chapters did not purchase it. I have never heard of one such title. I would ask again in this committee, what title is it that did not get published in this country because Chapters did not buy it?

In addition to being positive for publishers and authors, I think we've been great for consumers as well, who often don't have a seat at these tables. Consumers love the enormous selection of books we and other superstores offer in this country. Before the superstores, a great book store might carry 20,000 titles, whereas a Chapters, an Indigo, a McNally Robinson, or a Bolen store might carry in excess of 125,000 titles.

Some of our detractors would claim that superstores lead to a homogenization of books, but that is patently absurd. How is it possible to claim that exposing consumers to 125,000 titles limits their choices more than exposing them to a store with 20,000 titles?

[Translation]

Consumers have also obtained great value as a result of Chapters. When Coles and SmithBooks merged, our competitors claimed at the time that consumers would suffer higher prices because of Chapter's creation, but in reality, retail gross margins in the retail book industry have fallen 3 per cent since the merger in 1995.

[English]

Canadian consumers enjoy the lowest prices for books in the world, according to Heritage Canada. We have been a significant contributor to Canadian communities. In the last five years Chapters has collected more than $160 million in GST, paid over $190 million in taxes to various levels of government in Canada, and created more than 2,000 jobs.

The fastest-growing book retailer in Canada in 1999, however, was not Chapters, but Amazon. 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. The bottom line is that Chapters has been good for the Canadian book community.

My third and final point is that Chapters has helped the book industry by creating an efficient national book wholesaler. Given that Pegasus will be making its own case, and in the interest of time, let me highlight two points about Pegasus.

First, contrary to the CBA's statement, independent bookstores cannot possibly be worse off after the establishment of Pegasus, since they can always buy their books as they have before. They can buy them either directly from the publisher or from other wholesalers. Bookstores do not have to use Pegasus, so they are certain to be no worse off than they were before its establishment.

Second—and this is important if Canada wants to compete on the Internet—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. I realize that people naturally fear change—

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[Translation]

Mr. Pierre de Savoye: I have a little problem. I see that some of my colleagues have a document in hand prepared by Chapters. I believe it was handed to them by the clerk. I would remind them of the rules we agreed upon, namely that the clerk can accept a document, but cannot distribute it until such time as it is available in both languages, French and English. Frankly, I'm not too pleased to see this.

The Chair: Your point is well taken. We did indeed pass a motion to this effect. If some members were handed copies of this document, then I apologize. However, there are a number of copies there on the table and if members wish to take one, then they are free to do so. I think we can all agree to being somewhat informal about this.

Mr. Stevenson apologized for not having his text in both languages. I know we agreed not to circulate documents under these circumstances. However, I believe the clerk didn't actually hand out these briefs. She left them on the table.

However, Mr. de Savoye, your point is well taken. We did indeed pass a motion to this effect. However, if you wouldn't mind this one time, I would appreciate you're letting interested members pick up an English copy of this document, since the French version is unfortunately not available at this time.

Mr. Pierre de Savoye: Just one final word on this. We are in the process of agreeing indirectly to something we formally said we wouldn't do. Furthermore, while I understand Mr. Stevenson's position, he is placing us in a very awkward situation. A company as large as his should have had more foresight than this.

There's nothing I can do about it, Mr. Chairman. What's done is done, and I can't snatch the copies back from members. Thank you.

The Chair: I understand your position, Mr. de Savoye. All I can say is that in future, we will ensure that the documents are in both languages before we distribute them. I apologize for the mix-up today.

[English]

Mr. Larry Stevenson: Let me conclude, if I can, Mr. Chairman.

People naturally fear change, given the tremendous uncertainty it creates. But we, and I think all our competitors, have no choice but to change.

The CBA submitted to the government six reasons this government should be concerned about Chapters. Many of the CBA's statements are false, but given the seriousness of their charges, we have rebutted each of their statements in what our written submission will show.

Once again, competitors are saying many of the same things they said in 1994 at the time of the merger. Thus they claim now, as they did then, that consumers will have less choice, that book prices will go up, and that Chapters will control what gets published.

I have to admit, it's hard to disprove prognostications about the future, given that none of us know exactly how the future will turn out, but I do think it's worth looking back historically to judge the accuracy of these same Cassandras in the past.

At the time of the merger, these same folks made seven claims about how the future would turn out, back in 1994. They were wrong on all seven, as has been shown in our written submission. Therefore I don't really think we should be believing what they are predicting for the future.

We are proudly pro-Canadian, and we would request this committee applaud the 6,000 Canadian booksellers who have done a lot, I think, for the Canadian book industry. The future is of course volatile, but I would also say that for the book industry it has never looked brighter. As Arnold Bennett, the English novelist, said, “Any change, even a change for the better, is always accompanied by drawbacks and discomforts”.

[Translation]

Mr. Chairman, ladies and gentlemen, thank you for inviting Chapters to participate in this roundtable. I will be happy to answer your questions. Thank you.

The Chair: Thank you very much, Mr. Stevenson.

We only have about five minutes left, Ms. Morency, before our presence in the House is required for a vote just before noon. Would you like to begin, or would you prefer to wait? The choice is yours.

Ms. Carole Morency (Communications Director, Groupe Renaud-Bray): I prefer to wait. Five minutes isn't really enough time....

The Chair: Of course. Again, we apologize for the inconvenience. It's something we really can't control.

We will reconvene immediately following the vote. That should be around 12:15 p.m, at which time will continue to hear from our witnesses.

Thank you very much.

[English]

We will resume after the vote. The meeting is adjourned for the time being.

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The Chair: Would the meeting come to order, please?

[Translation]

Thank you for your patience.

[English]

We'll now resume the meeting from where we left off. I'd like to mention that unfortunately I have to absent myself at 12:30. Mrs. Bulte will preside in my place.

[Translation]

I would now like to turn the floor over to Ms. Morency, who was the next person up when we were interrupted by the vote. Please proceed, Ms. Morency.

Ms. Carole Morency: Thank you, Mr. Chairman.

Mr. Renaud send his apologies for not being here this morning. I was a last-minute substitute.

Right of the top, let me just say that the French book market....

The Chair: Ms. Morency, could you tell us what your job is with the Groupe Renaud-Bray?

Ms. Carole Morency: Of course. I'm the Director of Communications for the Groupe Renaud-Bray.

The Chair: Fine.

Ms. Carole Morency: I have Mr. Renaud's full authorization to share with you the policies of our company.

First of all, I want to emphasize that the French and English retail book markets are two very different markets, for the following two reasons: market potential is much greater in the rest of Canada than it is in Quebec; and the discounts awarded to booksellers in Quebec are different.

In Quebec, Bill 51 states that our suppliers must give us a minimum discount of 40 per cent. For us, this often represents the maximum discount available to us.

It's important for us to mention this at this time because in the case of English book retailers, discounts are awarded on an escalating scale, depending on the quantity of books purchased. This isn't the case for us. Sometimes, we are awarded higher discounts on firms sales.

Marketing conditions are very different in Quebec than they are in the rest of Canada. That's an important fact to remember.

• 1225

I don't have a document to leave with you, but we could also send one along later.

Let me emphasize once again that the difference is the discount available. We are required to sell more related products just to survive as booksellers.

Our views on Internet-based retailing have naturally prompted my comments on discounts. We cannot compete with Amazon or Barnes & Noble which offer discounts of 30 or 40 per cent on their website. That's quite simply impossible for us to do. We constantly hear people say that they should be able to get a better price on the Internet. However, if we gave customers discounts like this, we would be out of business in short order. Therefore, discounts are a big problem for us.

However, we have no choice but to retail via the Internet. That's the trend in today's market. The volume of business we conduct over the Internet continues to increase every year by 50 to 75 per cent. That's a rather amazing rate of growth.

As I was saying, we are not in a position to compete against the giants. For us, discounts are clearly the contentious issue. The Groupe Renaud-Bray, which has 25 book retail outlets in Quebec, wants to remain on good terms with independent bookstores. We would also like to see the Association des libraires du Québec, of which we are a member, support our position. Yet, right now, the Association seems to be supporting the independents instead and they in turn are accusing the Groupe Renaud-Bray of engaging is 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. That's what we wish as well for the independents.

With respect to distributors, let me come back to the focal point of my presentation, namely discounts. We feel that because we buy books by the thousands, we should be entitled to slightly higher discounts which would enable us to improve our operations and management and eventually to pay our employees more. This is a problem that we are having with distributors.

Of course, we like to maintain close ties with publishers because we try to promote reading. In Renaud-Bray outlets, we offer readers our picks of the week. A reading committee makes their selections and suggests certain books to customers. The material is read by persons from different backgrounds, because we want to offer good value to our customers. That's important to us. Our picks aren't just new releases.

Therefore, it's truly important to us to promote reading. I work directly with publishers to organize workshops in bookstores in order to attract people to our outlets. To answer your question about the role that the Government of Canada should play, I would have to say that it should be promoting reading on a pan-Canadian scale, not just in English Canada.

In Quebec, for example, we are planning to celebrate World Book Day on April 20. This occasion is traditionally marked in Europe. Around the same time, on April 27, we will be celebrating Canadian Book Day. It's very difficult for us to promote both events given the major differences between Quebec and the rest of Canada.

Commissions have been struck and Quebec has staged a number of book summits. What more can I say?

The Chair: You've made a number of very important points and given us much to think about.

[English]

I would like to apologize. I have to leave for an appointment. Mrs. Bulte will carry on from here. Thank you.

Mr. Zook.

• 1230

The Acting Chair (Ms. Sarmite Bulte (Parkdale—High Park, Lib.)): Mr. Zook, welcome.

Mr. Denis Zook (President and Chief Executive Officer, Pegasus Wholesale): Hi. I'm CEO and president of Pegasus Wholesale.

It's widely acknowledged that there has been a long-unfilled need for an efficient national book wholesaler in Canada. Booksellers of all sizes, along with libraries, schools, government studies, and even publishers, have identified the benefits that such an operation could bring to the entire Canadian book industry.

Booksellers, retailers, and libraries across the country regularly wait weeks and sometimes even months for orders, unlike their counterparts in the United States and Europe, who have long relied upon the services of major wholesalers for all or part of their needs.

The implementation of Bill C-32 and the growth of the Internet makes this need even more critical. Our goal at Pegasus is to fill this need in Canada as well as being an efficient national wholesaler for other related products such as DVD, video, music, and software.

Pegasus has been accused of being nothing more than an attempt by Chapters to gain better discounts from publishers. With investment in Pegasus Wholesale's facilities, equipment, and systems at initial start-up costs of over $15 million and a total investment of over $50 million, there is no way that they could recoup this money on the small amount of extra discounts they would have received.

My third point is that nobody is forced to buy from Pegasus. Such would only be the case if Pegasus were an exclusive agency or distributor of a book or publisher. It is not. Pegasus has no exclusive contracts with publishers and does not seek them. We are entering into normal wholesale relationships in which we simply buy the books from the manufacturers and sell them to the retailers.

Pegasus is not in any way restricting competition. All of the former sources that were available to retailers and bookstores prior to our existence still exist today. The formation of Pegasus only creates a new source, rather than restricting what was there before.

The formation of Pegasus is therefore fundamentally different from the situation in the United States with Barnes & Noble, to which it has been compared. In the case in the United States, Barnes & Noble was offering to buy Ingram wholesalers. Ingram was the largest existing wholesaler in the United States. It had been a major supplier to independent bookstores and retailers for more than twenty years and for many independent bookstores was half or even all of their source of books. Therefore, the proposed buyout was removing from the marketplace a significant source for them to buy their books. That is not the case here, where we have started a new company and instead have offered one more option.

Some unnamed publishers have threatened that the creation of Pegasus will somehow lead to higher prices of books for the consumer. If a publisher chooses to raise the price of books, it is not because of the discount that they have given Pegasus. Pegasus has only sought the standard wholesale discounts that they give to every other wholesaler in Canada. If a publisher thoroughly analyses their costs of picking, packing, and shipping to hundreds or thousands of locations throughout Canada rather than shipping one shipment to Pegasus, they would be in a cost-neutral situation or, in fact, perhaps ahead of where they are today.

According to an Industry Canada study, fulfilment costs Canadian publishers between 4.8% and 20.3% of their sales, depending on their sales volume and their distribution capabilities. For many publishers, transportation alone represents 2% to 5% of their sales and would be even greater if they were matching the service levels that Pegasus provides. For the publishers that I do business with, I now bear all of the costs of the inventory, the picking, the packing, and all of the freight costs to ship those books to the retailers.

Publishers can sell books to Chapters without Pegasus. There has been an accusation that publishers have to go through Pegasus to sell books to Chapters. That's fundamentally untrue.

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In addition, we have been accused of squeezing extra discounts. As I said before, we've only asked for the standard discount. Many times the publishers publish this as a standard wholesale discount in their marketing materials. We have asked for no more than that. In fact, we know that same wholesale discount is given to many wholesalers that exist with only one retail store. So a retailer that has one store and also a wholesale business is receiving the same wholesale discount I'm seeking.

Pegasus operates independently from Chapters. Pegasus has independent outside investors whose investment is totally dependent on the performance of Pegasus as a stand-alone company. Pegasus has its own board of directors, who are charged with overseeing the operation of Pegasus and who are not connected with Chapters.

Finally, the management team of Pegasus is also an owner. Our full compensation is related to the performance of Pegasus and is no way related to the performance of Chapters.

We have already directly created 450 jobs, and we believe that given the growth in the Internet fulfilment, that will grow to over 1,000 jobs in the next two years.

In closing, we are committed to building the best wholesale operation in Canada, selling books and other products to as many retailers, libraries, schools, and businesses as we possibly can. While we hope that independent book stores and CBA members will become our customers, if they choose not to, they still have all of the other sources for buying books that they had before the creation of Pegasus. With time we will greatly improve the distribution of books in Canada and, we believe, improve sales and profitability for both retailers and publishers.

Thank you.

The Acting Chair (Ms. Sarmite Bulte): Thank you very much, Mr. Zook.

Mr. Berrisfford, are you going to add to that?

Mr. Nigel Berrisfford (Senior Vice-President of Purchasing, Pegasus Wholesale): No, I'm just here to answer questions.

The Acting Chair (Ms. Sarmite Bulte): Thank you.

Mr. Laberge.

Mr. Georges Laberge (Director General, Association des distributeurs exclusifs de livres en langue française): How befitting, Madam Chairperson, that you are sitting below the painting The Spirit of the Printed Word.

[Translation]

Le rayonnement de l'imprimé. How wonderful!

We have no written submission for you today, because we only found out around 11 o'clock yesterday morning that we were scheduled to participate in this roundtable. We would have appreciated knowing about this earlier and receiving a direct invitation, instead of getting the news from a third party.

However, I will try nevertheless to present to you the views of the Association des distributeurs and of its members. The Association wants to see a diverse range of books made available by book retailers to ensure access to diverse cultural offerings.

[English]

Even if you are a very large chain of bookstores, you may present 100,000 titles, but the other 300 and 400 in French will not be represented. A different owner may have different tastes and may want to influence differently his environment and the culture surrounding him, and he would offer his readership a different choice from that of other very large, important retailers.

[Translation]

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.

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If a sufficient number of retailers are diversified, the bankruptcy of one will not bankrupt the publishing and distribution industries, either in English or in French Canada.

If I can digress for a moment, I don't think English Canada understands very well how distribution and retailing works in Quebec.

The publisher publishes a book - his author -, but can choose either to publish the work himself or to bring it to the attention of a promotional team, or he can assign the task of distributing the work, that is taking orders, storing books, filling the orders, billing, delivery and keeping the books to someone else. In English Canada, these tasks all seem to be handled by one distributor. Therefore, the majority of Quebec publishing houses assign to a sole distributor the job of marketing their titles. The distributor therefore has two clients: the publisher and the retailer.

I cannot give you any statistics right now because we didn't have time to sound out our sources before coming here. However, we would be happy to pass along any data we collect to the committee at a later time.

Summing up, diverse ownership is needed to diversify the cultural offering and to ensure protection in the long run for publishing houses, distributors and retailers alike.

Thank you.

The Acting Chair (Ms. Sarmite Bulte): Thank you very much, Mr. Laberge.

[English]

Turning to questions, again we'll start with Mr. Mark, then Mr. de Savoye, followed by Liberal members. Mr. Mark.

Mr. Inky Mark (Dauphin—Swan River, Ref.): Thank you, Madam Chair.

I'd like to welcome the witnesses here today and apologize for missing the first portion because of the bells.

This past Tuesday we heard from small retailers, distributors, as well as grant agencies on their perspective on this topic of consolidation and concentration of the business of publishing and distributing books. I gather they fear what is going on basically on the premise that concentration will have negative impacts on the business side as well as on the Canadian cultural side. I wondered if you could indicate whether or not this fear is valid from your perspective on both points, business and culture.

Mr. Larry Stevenson: Thank you, Mr. Mark. On both of those, let me perhaps wear a broader hat.

Last year I was the chair of the Retail Council. I think it's fair to say that given the scale of the Canadian market, you will generally find a very large player in almost every sector of speciality retail. If you define it narrowly enough, you end up with a very large player, such as Toys R Us in toys, Loblaws in food, and Home Depot in home improvement. I do think there's always competition for each and every one of those. It is no longer the way we used to compete perhaps 15 years ago, in that it may not be a look-alike competitor. It may be in our case and in the case of Loblaws a Costco that doesn't carry all of the exact same skews you carry but has other products.

The second one, which I think is a very important one for this committee to consider, is will you still have cultural diversity? Will you still have alternatives in books as you get one, two, or three larger players? I think you will. I think the proof is in what has happened in the last five years. That exact same argument was made in 1994, which is if you allowed SmithBooks and Coles to get together, what would happen is that fewer Canadian books would be published. That was the entire argument at the time of the merger. The reality has been the exact opposite. At least ten, probably fifteen, points of market share have been Canadian authors who have gained. That is a tribute to the authors themselves, to the publishers, and a lot of other things that have happened.

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I think as you build the larger stores it's not that all of our stores have the same 125,000 titles. There are eight different competitors that are building large stores. You can go to the Internet and you can get access to millions of titles. Every book is now available. I think the diversity is going to get even greater as time goes on because of the impact of the Internet and giving consumers frankly a lot of the power that traditionally might have been held by publishers, distributors, or retailers.

[Translation]

The Acting Chair (Ms. Sarmite Bulte): You can answer if you like, Mr. Laberge.

[English]

Ms. Carole Morency: Since in Quebec we are....

[Translation]

I will answer in the other language. Since we're on our way to becoming the largest chain of French bookstores, what with the acquisition of the financially troubled Champigny and Garneau chains, Renaud-Bray has been able to expand its inventory in these two chains and to offer customers a wider variety of titles. This is a positive development, in my view. Without the merger, neither the Garneau nor the Champigny bookstores would have been able to raise enough capital to stay in business. In this instance, the merger gave consumers a wider choice of products. Thank you.

The Acting Chair (Ms. Sarmite Bulte): Thank you.

Mr. Zook.

[English]

Mr. Denis Zook: I would add that as far as the diversity is concerned, I think with the Internet and the technologies there are today there will be a greater opportunity for diversity than there has ever been. Self-publishing is very easy in today's Internet world. I think we'll actually see many more small self-published or very small presses having their books out via the Internet. Also, because of print-on-demand technologies Canadian titles that were allowed to go out of print in the past because there wasn't enough demand for the publisher to keep them in print will actually be available on demand, where a book can be printed in one day if a customer wants it. I think rather than shrinking, the opportunity for Canadian authors and Canadian books will greatly expand.

Mr. Inky Mark: I was astounded to learn from the research done by our parliamentary research branch that in 1998 and 1999, 81% of the publishers in Canada were not profitable without a government grant. I know one of the biggest challenges, as you indicated, is technology change in this world. Do you think it is a healthy piece of data to hear that 81% of our publishers in this country aren't viable without a grant? Is it good for the industry?

Mr. Nigel Berrisfford: Perhaps I can address that.

No, I think that's very bad for the industry. If those figures were captured today I think they would show that a substantial number of Canadian publishers were now profitable, mainly because of the start of Chapters. We have grown the book business at such an incredible rate that publishers who were only marginally profitable or non-profitable without grants can now at the very least break even. But by the very nature of the Canadian market being so small, it's very tough for Canadian publishers to be profitable and publish a range of Canadian books. I would say that grants will still be necessary for the foreseeable future. But I do think publishers have made huge steps in coming at least to break even or even breaking even. Some are quite profitable, far more than was the case two years ago.

The Acting Chair (Ms. Sarmite Bulte): Thank you.

[Translation]

Mr. de Savoye.

Mr. Pierre de Savoye: Ladies and gentlemen, thank you for taking the time - and in Mr. Laberge's case, for coming on board almost at the last minute, if I understand correctly - to share with us your view on the book distribution, publishing and retailing industries in Quebec and in Canada.

We are concerned about a number of things. Some things, but not everything, can be accomplished by bringing in laws and regulations. Laws cannot stop the forward march of technology. Laws cannot interfere with commercial transactions as such, except when problems arise that threaten healthy competition. Mr. Laberge, you've expressed some concerns about maintaining a climate of healthy competition and a sufficiently diversified market.

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However, there are other, more immediate concerns. We had the pleasure of hearing from Mr. Zook from Pegasus, which is now offering consumers an opportunity to purchase books over the Internet. A few moments ago, Mr. Berrisford speculated that one day, consumers may be able to print up a copy of a book on request. It is unlikely that we will see a reversal of this trend.

I foresee two major problems in the near future and I would like your comments as to how soon we might expect to have to contend with them and how we might handle the situation.

The first problem is the penetration of the Canadian market by the Americans, mainly by way of information technologies. Once such example that you mentioned earlier is Amazon.

The second problem is the fact that some of the techniques in use since Gutenberg's time are in the process of disappearing. Before Gutenberg, monks copied and recopied material. This profession disappeared overnight.

More recently, we had adding machines, so called because they couldn't do multiplications, but merely add columns of figures, and very slowly at that.

With the advent of the electronic age, these machines also went the way of the dodo bird, along with the companies that manufactured them. And what of watches with Swiss time movements? These have been replaced by electronic timepieces.

Now for my two questions: first of all, could the American market take over, electronically speaking, the Canadian market? How long do you think it will be before this becomes a problem for you and what do you think can be done to counter the effects of this problem? Secondly, do you think that the methods in use today, that is the physical handling of books and paper and visits to bookstores to purchase books, will soon become a thing of the past?

Would you care to respond?

[English]

The Acting Chair (Ms. Sarmite Bulte): There's a vote in 25 minutes to adjourn the House. I apologize. I'm just letting you know that those are our time constraints.

[Translation]

Mr. Georges Laberge: While we shouldn't get into a panic over the current state of the book industry in Canada, nor should we disregard the fact that new technologies are taking over. A Sondagem survey conducted last fall for the Association nationale des éditeurs and for Le Devoir found that Internet purchases by Quebec readers accounted for just slightly over one per cent of all book retail purchases.

I was the head of the Presses de l'Université Laval in Quebec City back when the Sainte-Foy library opened its doors. McLuhan's influence was such at the time that the library didn't want to buy any books because the feeling was that books would soon become a thing of the past and that no one would use them.

• 1255

Of course, new technology allows us to consult information in a way that was not possible in the past. There is no longer any reason to have a printed copy of the Encyclopedia Britannica. One can readily imagine an end to print copies of works by Rimbaud and Nelligan, although I'm still not entirely convinced this will happen. Dreaming is one thing, reality quite another. We will have to monitor developments in this area closely.

Ms. Carole Morency: I agree with Mr. Laberge on this. In any case, eventually people will have the option of downloading books off the Internet. However, I don't think that's about to happen any time soon.

[English]

Mr. Larry Stevenson: I think probably I would be off the scale on this one, in that I'm a believer that it will happen very fast. But if you look at the Canadian market, it's absolutely correct, about 2% was sold over the Internet, and in the U.S. that's about 4.5%. But if you look at how fast the penetration has been, it's staggering. I think it's not so much what percentage will go, because I'm a firm believer, obviously, since we have a lot of those bookstores, that bookstores will exist. There's something emotional and tactile whereby people will still go in and still want to hold a physical book.

Having said that, if 15% to 20% of the industry goes Internet, which I think is what Forester, Jupiter, all of the consulting firms that follow the Internet believe will happen, and that as much as 22% will go as a direct download on electronic books—which means that you don't even have the opportunity to be the middleman, because it's going from perhaps the author directly to the consumer—I think that has implications for all Canadian retailers. Even though Wal-Mart or Home Depot or Toys R Us may be American companies and their head office might be south of the 49th, they still employ Canadian people in the stores, in the physical world. I think we're at great risk if we're not a player.

One of the things I would advocate for us as an industry is flexibility. At times of tremendous change, flexibility is better than rigidity. That's not a great piece of advice, but it's just that as governments try to jump ahead of this, I think it's very tough. If you ask me how exactly the world is going to turn out, I would say that I honestly do not know. I've been wrong every single year in the last five when I've tried to figure out what is going to happen on the Internet. All we are trying to do is be flexible enough that we can survive whatever the onslaught from the U.S. competitors will be.

The second thing is very important. For the book industry we will not be players on the Internet unless we have a very efficient pipeline from the publisher to the consumer. Most of the books, if you look at what we sell, are the ones that are available, shipped within 24 hours. That's really what people are coming to us for. And if we said we can get it to you but will you wait six weeks, they will go to so many other alternatives that we will lose those sales.

I also think it's important to have strong Canadian companies. So in terms of the question about where publishers are and how important grants are, I do think it's important to have Canadian books; therefore, it's important to have strong Canadian publishers, strong Canadian distributors, and strong Canadian retailers.

When we acquired SmithBooks, the year before we acquired them they lost $8 million. Publishers say that they like that competition between those two companies, but you don't have competition between two companies where one of them is losing $8 million for very long. They can't survive, and they definitely can't invest the $30 million we've invested to get on the Internet.

The Acting Chair (Ms. Sarmite Bulte): Mr. Shepherd and Mr. Bélanger.

Mr. Alex Shepherd (Durham, Lib.): I'd like to focus my comments to Pegasus and your discount policy.

As we're talking here, it seems to me that what we're doing is getting these great discounts from book publishers and indirectly the Government of Canada is subsidizing these people. It seems to me that the taxpayers of Canada indirectly are involved in some of your discount policies. Some of the comments you've made differ from those of some of the book publishers. You said that these publishers have a choice: they can sell directly or they can sell through you. However, I understand that as of this morning 49 of those 50 publishers are now actually signed to contract with your company.

They've also made statements that this hasn't been a gentlemen's protracted business arrangement, that some of this has been very difficult. We've had statements that you've denied payments to some of those publishers for a period of time so that they would fall in line. I would like you to comment on that.

• 1300

A bigger issue here is volume pricing. So presumably, if you're buying books on large volumes, you're getting big volume discounts. I assume that the same is also true on your retail side; that is, if Chapters is your biggest purchaser, those discounts are moved along in the chain, but if I'm a small bookstore in Port Perry, Ontario, I don't get the discount. Is that a fair statement?

Mr. Denis Zook: Would you like me to respond to all of them, or just the last?

Mr. Alex Shepherd: All of them.

Mr. Denis Zook: As far as the discount is concerned, as I said in my statement, we are not asking for an extra discount. The discount they are giving Pegasus is the exact same discount they're giving every other wholesaler in Canada.

There are other wholesalers that sell to bookstores, such as Book Express and North 49. They get exactly the same discount that I get, and that's all I've asked, that they give me the same discount. So I have not asked for anything extra, and therefore I'm not getting an extra discount that is indirectly costing the government more money. It's the same discount to any wholesaler.

Mr. Alex Shepherd: Do the discounts go up with the size of order?

Mr. Denis Zook: Right now I'm speaking to the comment about what I get as a discount from the publishers. Your first comment was that the discounts I was getting would be indirectly causing more subsidies from the government, and my comment back is that I'm getting exactly the same discount that every other wholesaler is getting. The other one on discounts was that I would be getting a greater discount based on volume, and that I would be giving a discount on volume to my customers.

On the first one, as I just said, I don't get a volume discount. A bookstore such as Children's Bookstore in Toronto, which had a wholesale division, received a 50% discount from publishers for their little wholesale division, with one store. I get that same 50% discount. So it's the same.

I do give a volume discount to my customers. I give a standard discount to all customers, and then a sliding scale based on volume. But I want to point out that this is not unique. Every publisher and every wholesaler in Canada also gives a sliding-scale discount based on volume, and the people who order more books do get a better discount. That's not just true of Pegasus; that's true of everybody in the book industry.

Ms. Carole Morency: English.

Mr. Alex Shepherd: But by definition, Chapters would have the biggest discount.

Mr. Denis Zook: There are other retailers in Canada that sell enough books that if I could get all their business, they would receive maximum discount as well.

Mr. Alex Shepherd: But currently Chapters gets the biggest discount of all.

Mr. Denis Zook: That's correct, and they currently buy the most books, and probably they would be getting, or they would like to think they were getting, the largest discount buying it directly from a publisher like HarperCollins or Penguin, because, as I said, all the publishers give a sliding-scale discount based on volume too. So your neighbourhood bookstore is not buying a book from Penguin at the same price at which Chapters or Indigo are buying it, because they also give a volume rebate.

The Acting Chair (Ms. Sarmite Bulte): Mr. Zook, on the other question, the publishers saying they had been forced to enter into this agreement, could you answer that?

Mr. Denis Zook: I was involved in many of those negotiations, and I would like to believe I always did so in a gentlemanly way.

Their choice was clear. If they were willing to recognize me as a wholesaler and give me the same discount that my competitors would be getting, I would be glad to do business with them. If they were offering to give me a lesser discount than the other wholesalers against whom I compete, then I really could not buy their books and go out and sell those books to retailers without losing money.

In fact, that situation existed. Large publishers who were not willing to give me the same discount as every other wholesaler in Canada put me in a situation where I actually lost retail business because I couldn't supply the retailer with the books from that publisher. They were in no way forced. I have no way to force them to do business with me. They either do business with me or not, and they were able to sell directly to Chapters stores without going through Pegasus.

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Mr. Alex Shepherd: The statement by many is that 60% of their sales went to Chapters, so they really didn't have much choice as to whether in fact they continued with this business arrangement. It was either do that or go out of business.

Mr. Denis Zook: Well, no, as I just said, they were not refused to do business with Chapters. Pegasus didn't exist until we established it. They had been selling to Chapters directly before Pegasus existed, and if they chose not to do business with Pegasus, they could continue to sell directly to Chapters.

Mr. Alex Shepherd: Chapters set up Pegasus for a reason.

Mr. Denis Zook: Pegasus invested in the setting up of Pegasus for two reasons. One is that there is a huge need for a national wholesaler in Canada that can be a very profitable business and they can be an investor in a very profitable business. Secondly, as Mr. Stevenson pointed out, it really is impossible to compete on the scale of an AMAZON.com or a barnesandnoble.com without there being a back-end wholesaler that can supply the books in a 24-hour period.

I carry 450,000 books in stock, meaning if you order any of those books over the Internet, I ship them the same day. If there were not a wholesale, you would have to order those books from the publisher and wait four to eight weeks before they could be delivered to the consumer.

Mr. Nigel Berrisfford: If I could add one small point to Mr. Zook's position, the largest publisher in the world, Random House, has not reached terms with us, Pegasus—

Mr. Alex Shepherd: That's the one that's missing.

Mr. Nigel Berrisfford: —and their books are represented in all Chapters stores. So the argument that they can't get into Chapters if they haven't signed with Pegasus is utterly false.

Mr. Alex Shepherd: But you only started in October, and you have 49 out of 50 publishers.

Mr. Denis Zook: They actually started in May, and I started negotiating in May. So there have actually been quite a few months.

Again, we shouldn't even use the word “negotiating”, because I started a new company, which is a book wholesaler, and I wasn't negotiating; I was simply asking them to give me the same discount as the other wholesalers that exist in the marketplace today.

I actually would not have imagined that it would take that long and that much negotiation to get what legally I should be able to get, which is fair treatment with every other wholesaler in Canada.

[Translation]

The Acting Chair (Ms. Sarmite Bulte): Mr. Bélanger.

Mr. Mauril Bélanger (Ottawa—Vanier, Lib.): Mr. Stevenson, I just wanted you to know that I read the document you forwarded to my office. My initial reaction is that you are being somewhat too defensive when it comes to your retail operations.

I'm a Chapters customer, although I patronize the independent booksellers as well, and I admit that you have been very good for consumers. There's no arguing that fact. I concur in part with your findings and with your contention that you have helped the market to grow. I agree that you have made a contribution, but perhaps not as substantial a contribution as you would have us believe.

However, that's not the issue here. My question has to do with vertical integration. I'm wondering about something. I'm prepared to acknowledge that Pegasus is a separate operation, even though ultimately, you're responsible for Pegasus. You are the principal shareholder in Chapters and Chapters is a majority shareholder in Pegasus.

In a letter sent by Mr. Richard Taylor,

[English]

assistant deputy commissioner of competition, civil matters Division B,

[Translation]

to Ms. Sheryl McKean of the Canadian Booksellers Association in November, two sentences caught my attention and I'd like to read them to you now:

[English]

The preliminary examination has not uncovered evidence to support the initiation of proceedings under the Competition Act on this matter.

—“this matter” being the Pegasus vertical integration situation—

But sufficient cause for concern has been identified to continue our investigation and monitoring of developments in the market.

Would you care to comment on that?

• 1310

Mr. Larry Stevenson: Sure.

First of all, I think the Competition Bureau is completely within its jurisdiction to monitor competition. That is the job they do, and having been monitored since the time of the merger, I have to say it has done so unbelievably well. There has not been one complaint. One of our competitors complained a year ago that we were monopolizing all the real estate in Canada, and we had to pay hundreds of thousands of dollars of legal fees to provide them with every single piece of paper on real estate. I think it is the right of the Competition Bureau to ensure there is competition.

On this issue of vertical integration, I agree that there is a concern. The Competition Bureau communication to us was that it will continue to monitor, and that if there is any kind of abuse it will have to see what it will do. From our perspective, there is no potential for abuse. We have set this up as a separate company, and you're absolutely right that we do own 82% of this company. Therefore, we do have some influence in this company.

The issue is this: Since the time of the merger, I've met with several of the publishers, both of the Canadian wholesalers and some of the U.S. wholesalers, trying to get them to make the investment to build a Canadian national wholesaler. My belief was that Chapters would fail as a company if we didn't start turning our inventory more than 1.8 times. We just cannot survive by telling our customers to wait six to eight weeks in an age when you can get electronic downloading and when you can actually buy it from Amazon.com. If we are going to compete in the future, we have to run our stores differently. We also have to be able to compete on the Internet.

To be quite honest, we would have preferred to have been a minority investor. When it's our $54 million that has been put in, though, I think it is relatively fair to say we should get some economic return for building a company that is going to create in excess of a thousand jobs and that is going to serve everybody equally.

Mr. Mauril Bélanger: Madam Chair, out of respect for my colleague, I have a number of questions to ask, and we could go with this for quite a long time. I'll put forward two or three questions and leave them hanging for now without seeking answers, so that Wendy can have....

I'd be curious to explore at some point soon the impact of legislation called Bill C-32. You referred to that, essentially. You say “Publishers, not retailers, have all the power in this industry”, and that if the Government of Canada is going to look into the Canadian book publishing industry, we “should focus not solely on the retail domain”—I totally agree with you—“but also re-evaluate the impact of publisher dominance and monopoly rights.” I presume you're referring to Bill C-32, the exclusion. At some point we have to come to grips with that.

The other matter is the question of ownership and this industry remaining in Canada. At some point some of us might wish to suggest that there be legislation prohibiting foreign ownership. I would like to know how that would sit with the people who own either the retail chains or the vertically integrated systems. I think there's enough said there.

Finally, as a question for Mr. Zook, you say, sir—and I accept it—that you have never engaged in any practice that is dishonourable. Are you prepared to make that statement as well for present or past employees of Pegasus or Chapters, in that none of them have engaged in threatening behaviour vis-à-vis retaining payments and so forth?

Mr. Denis Zook: I can really only respond to what I know. I can respond that I know I didn't. To the best of my knowledge, none of the people who work for me did that either, but really I can't answer beyond that.

The Acting Chair (Ms. Sarmite Bulte): Thank you, Monsieur Bélanger.

Perhaps you could take the questions that Mr. Bélanger has posed and provide to us your responses in writing.

Ms. Lill.

Ms. Wendy Lill (Dartmouth, NDP): I guess my first question is whether or not Chapters is wholly Canadian owned.

Mr. Larry Stevenson: Ms. Lill, and I'm not sure of the full ownership. I know for a fact that 7% is owned by Barnes & Noble, which is a U.S. company, and 93% of it is wholly owned by.... I'm a shareholder with 5% of Chapters. Ontario Hydro and Ontario hospitals own 17%, but they're a series of pension funds. Because of the way a public company operates, I might know who the holder is but not who the ultimate holder of some of those stocks is.

Ms. Wendy Lill: I guess I'm interested in how active a role Barnes & Noble plays in the governance of Chapters, and whether you're talking to Barnes & Noble right now about a merger.

Mr. Larry Stevenson: 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. They are an investor in Chapters.

• 1315

Ms. Wendy Lill: I would like to ask you a question, Mr. Zook. You referred to the Barnes & Noble-Ingram International situation in the United States and to the fact that you're quite different from them. The fact is, however, that the Bureau of Competition took a look at that. After extensive investigation, the companies decided they would in fact not go ahead because an injunction probably would have prevented it. The reasoning around it had to do with the issue of the theory of raising rivals' costs. I guess that's a theory in the book publishing industry that you may be aware of.

I'll read a brief paragraph here about the concerns, and I want to know if you can address them for me.

The concerns were that the combined Barnes & Noble-Ingram conglomerate could choose to raise the costs of their downstream retailers and rivals, such as independent bookstores and other national or regional chains or Internet retailers, in a number of ways, including strategies short of an outright refusal to the non-Barnes & Noble bookstores. For example, Barnes & Noble could choose to (1) sell to non-Barnes & Noble bookstores at higher prices; (2) slow down book shipments to rivals; (3) restrict access to hot titles; (4) restrict access to Ingram's extended inventory or back-list; and, (5) price services higher to discontinuing or reducing these services.

I really have heard many of these kinds of fears from all the booksellers who have been before us, so I guess it is not quite out of the realm of possibility that they are seeing these as threats to their business. So I'd like answers to those questions, as well.

Mr. Denis Zook: I'll try to answer, but I'm not sure what kind of a response you're looking for. I mean, I can categorically say we're not doing any of these things.

On our prices to retailers or libraries, we make those public when we're talking to our potential customers. They're the same whether I'm talking to a retailer with one store or to one with twenty stores. They're perfectly in the open, so there's not a case that I'm somehow raising the price for someone who is smaller. They may not be earning a volume rebate, as I pointed out, but the basic terms that they get are the same.

As for restricting product or slowing it down, really all I can do is tell you that those are not practices we engage in or have any intention of engaging in. Our goal is to create as many sales as we can for Pegasus and to have as many happy customers as we possibly can with Pegasus. For that reason, we'll give them the best service we possibly can.

We've built the systems in a way that things are first come, first serve. Whatever order things come into the system, they are handled in exactly that order in which they came into the system. There's no priority given to who the customer is. It's done exactly when the order was received.

Again, really, all I can do is tell you that those are not our practices and never will be.

Ms. Wendy Lill: Do I have another minute?

The Acting Chair (Ms. Sarmite Bulte): You may have thirty seconds, so perhaps you can go quickly. While the six of us are here we're okay, but if anybody leaves we're going to have to quit.

Ms. Wendy Lill: I am a writer by profession, and nobody has talked too much about writers today. You have talked about the fact that there has been an increase in Canadian titles. I'm glad to hear that, but I want to know exactly what that means to the writer. I know writers used to get 10% on a book sale, but I understand that they are in fact getting less now through discounting. Do you have any idea what kind of decrease in salaries writers in this country are experiencing because of the conglomeration of booksellers and the new ecology of the industry, so to speak?

Mr. Nigel Berrisfford: Yes, I'd like to answer that.

There would be no diminution of writers' royalties because of discounting. In some cases, the standard author's contract would say that if a discount was over 50% by a retailer, then the royalty would be reduced. In most cases, the discount that we give is not over 50%, so the royalty would not be reduced.

• 1320

I can't speak about whether or not royalties have gone up. I was a publisher for a year five years ago, and royalties were averaging from 12% to 15%. If you're John Grisham, you get 25%. If you're Alice Munro, you get 25%. If you're a first-time author, you most probably get 9%. I think those things are exactly unchanged. So our being around has had no effect on royalties to authors except in that we have sold more books, and therefore authors' royalties have risen substantially because of volume.

The Acting Chair (Ms. Sarmite Bulte): Thank you very much.

I'm very sorry, but we're out of time. Thank you again for all of your patience this morning and this afternoon, and thank you for coming. Again, for some of the questions that you may not have had a chance to answer here, if you would be so kind as to put those answers in writing and send them to our clerk, we would appreciate it.

Thank you very much, colleagues. The meeting is adjourned.