HERI Committee Meeting

STANDING COMMITTEE ON CANADIAN HERITAGE

COMITÉ PERMANENT DU PATRIMOINE CANADIEN

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, March 13, 2001

• 0903

[English]

The Vice-Chair (Mr. Dennis Mills (Toronto—Danforth, Lib.)): I see we have a quorum. Now that Mr. Wilfert is here, we can begin.

I want to move through this, because after we do the departmental business this morning, we also have the new president of Chapters-Indigo. So I'm sure members will want—

[Translation]

Ms. Christiane Gagnon (Québec, BQ): Is the chairman here?

The Vice-Chair (Mr. Dennis Mills): He is at the Environment Committee.

Ms. Christiane Gagnon: Very well.

[English]

The Vice-Chair (Mr. Dennis Mills): Before we do the officials, would you like to deal with Christiane's notice of motion? Does everybody have a copy of it?

Mr. John Harvard (Charleswood St. James—Assiniboia, Lib.): No, I don't.

• 0905

The Vice-Chair (Mr. Dennis Mills): Would you like to speak to the motion, Christiane?

[Translation]

Ms. Christiane Gagnon: Yes. Considering the impact that the Free Trade Area of the Americas may have on the government's ability to protect and promote culture, I move that the Standing Committee on Canadian Heritage invite the Minister of Canadian Heritage, the officials of the Department and the officials responsible for negotiating the FTAA, and all witnesses who one interested in this issue.

The Summit of the Americas will take place in April and it would be important that we at least be able to discuss it. Some say that parliamentarians do not have access to certain information and we could at least examine the impact of the FTAA on culture. I ask that this be made a priority of the committee over the next few months.

[English]

The Vice-Chair (Mr. Dennis Mills): Comments?

Mr. John Harvard: I gather the member is suggesting one meeting with the minister and the officials together—just one meeting.

[Translation]

Ms. Christiane Gagnon: You want to do it in one hearing?

[English]

Mr. John Harvard: I take it you're suggesting one meeting with the minister and her officials together.

Ms. Christiane Gagnon: Yes, but maybe more if we need to have more witnesses.

Mr. John Harvard: I have no trouble with it, Mr. Chairman, if it's one meeting with the minister and the officials. I wouldn't want to see it strung out into two or three meetings. I don't think that's necessary.

Ms. Christiane Gagnon: Some people from the culture want to be invited to make a point about the ZLEA from the patrimoine in Quebec. Some people want to ask questions of the parliamentarians, and that's why we propose that motion.

The Vice-Chair (Mr. Dennis Mills): Are there comments from other members? This is a notice right now.

Do we have quorum yet? What is our number for quorum?

The Clerk of the Committee: Nine.

The Vice-Chair (Mr. Dennis Mills): So we're one short of quorum. If there are any other views or concerns on this, we can come back when we have quorum, but I think it's a good idea. Is there anybody who feels edgy about this?

Mr. John Harvard: Mr. Chairman, I'm not edgy, but time is something we shouldn't be wasting. If the member is simply asking for the government position on various questions arising from the summit, that's fine. There may be some people out there, some special interest groups, who have questions. That's what members are for. They can ask the questions on their behalf. I don't think we have to go through a full-blown session, where we have witnesses and so on.

The Vice-Chair (Mr. Dennis Mills): We're just talking about the minister here.

Mr. John Harvard: That's why I'm trying to get clarification from the member and an understanding that this can be one meeting with the minister and her officials to establish where the government is coming from.

The Vice-Chair (Mr. Dennis Mills): Well, that's what it says here.

Mr. John Harvard: No, she mentioned, or at least implied, witnesses over and above the minister and the officials. That's why I wanted the clarification.

[Translation]

Ms. Christiane Gagnon: Some stakeholders from the cultural sector are worried about the impact of the FTAA on culture and they would like to speak to the committee and be given an opportunity to express their concerns and share their thoughts as to the impact of the FTAA on cultural protection.

I think that that also is one of the purposes of a committee. The members have to be open to the concerns of the people they represent at the Canadian Heritage Committee.

[English]

The Vice-Chair (Mr. Dennis Mills): Christiane, your motion reads “the minister and the officials”, and now you're going beyond your motion. I have no problem with “ the minister and her officials”, which is what the motion says. It's notice, anyway. We'll take it up at the next meeting, when we'll have a vote. But I think it's a good idea that the minister and the officials... But if there are other witnesses or other interested parties who have views or concerns or questions, they can come to us, as individual members, and we can pose them to the minister.

• 0910

So that's notice of that. We'll take it up on Thursday, and now we'll—

[Translation]

Ms. Christiane Gagnon: Just a moment. I don't know if you have the same version of my motion as I have, the one that was carried yesterday, but this motion indicates that the committee will hear the witnesses that are concerned by this matter.

[English]

That's the last sentence.

[Translation]

That is the last sentence of the motion. So it involves the Minister of Canadian Heritage, the officials, those who are involved in the negotiations, as well as witnesses who are concerned by this matter.

[English]

The Vice-Chair (Mr. Dennis Mills): I see that. Pardon me. You've given notice, and we'll take it up on Thursday.

We now have a quorum.

Mr. Wilfert.

Mr. Bryon Wilfert (Oak Ridges, Lib.): Mr. Chairman, I was going to point out that last part.

I think the idea of calling the minister and officials is fine. After that, we should see what comes out of that meeting. If there are going to be witnesses and if it's the will of the committee, then I want to know who are we proposing to see and to make sure they're a broadly based group of witnesses. However, I think it's good that we meet with the minister as soon as possible because the implications of this are extremely important. So we'll deal with this at the next meeting?

The Vice-Chair (Mr. Dennis Mills): Yes.

Mr. Bryon Wilfert: Thank you.

The Vice-Chair (Mr. Dennis Mills): That was good notice.

Colleagues, we now go back to the review from Mr. Wernick and Mr. Clarke of the Department of Canadian Heritage.

I would also alert you to the fact that when the departmental officials have finished, we have this morning as a witness—for those of you who didn't get the notice until late—Heather Reisman, chief executive officer of Chapters, who will be appearing in relation to the second issue this morning. I'm alerting you to that in case some of you haven't had the time to reflect and think about possible concerns or questions you may wish to bring up during the second portion of the meeting.

Mr. Wernick, welcome. Allons-y.

Mr. Michael Wernick (Assistant Deputy Minister, Cultural Development, Department of Canadian Heritage): Thank you, Mr. Chair.

What we would propose to you is to make a very brief presentation, a sort of summary of work in the area, and then to take questions from the members, if that's agreeable.

The Vice-Chair (Mr. Dennis Mills): That's terrific.

Mr. Michael Wernick: I'll just make a couple of opening remarks and then turn it over to my colleague, Mr. Clarke.

I notice, looking around the table, that most of the members of the committee are new and didn't participate in the study on books last year. I'll just recap quickly how important that study was to the debate and to discussion about issues in the Canadian book industry.

Your committee heard testimony from over 50 witnesses across the country over a three- or four-month period and looked at every aspect of the book trade—publishers, writers, wholesalers, distributors, retailers, e-commerce, and so on—and at how the pieces fit together. The study and the report you gave the government last summer focused on three real trends or shifts in the book industry and the way it's operating that have been emerging for a number of years, that are still underway, and that have an impact on the various players.

The first of these broad trends is innovation and technology, particularly information technology, digitization, and so on. The second is the impact of the arrival in Canada of the retail superstore and what that's doing to the industry. The third is behaviours and trends in wholesaling practices, as well as some of the ownership issues related to the links between publishing, wholesaling, and retailing.

We've been asked by the committee to get you caught up on some of the work we've undertaken since the committee gave the government its report almost ten months ago. Rather than go through this recommendation by recommendation—although we'll be happy to take questions on those—I propose that Allan take you through those three main issues and summarize some of the work we have underway.

Briefly stated, my perception is that the committee's report last year was a very accurate diagnosis, a very accurate reflection of the issues in and the state of the book trade at the time. Its take on the issues is still very accurate and very relevant. The most important contribution the committee made was to identify how the system works as a system instead of focusing just on the issues of writers, publishers, small retailers, or big retailers.

It did take a very thorough look at the way the pieces fit together into an overall book trade. We think the recommendations the committee made that deal with the industry as a system are very constructive and constitute a useful platform on which we and others can work.

• 0915

With that, I would ask Allan perhaps to take you through some of these clusters of issues very briefly, and then perhaps we can take questions from you.

Mr. Allan Clarke (Director General, Publishing Policy and Programs, Department of Canadian Heritage): We identified about four themes that emerged from the committee report—and I'm on page 2 in “Meeting the Challenges”: innovation and technology can help to build a more efficient supply chain; improvements can be made to the collection and dissemination of industry data; more can be done to promote Canadian books and authors; and there is a role for government as a facilitator of change.

The impact of returns on the industry was a major preoccupation of witnesses during the committee's hearings, and the high rate of returns in Canada could be reduced—although perhaps never entirely eliminated—with better supply chain management. Current technologies allow for more streamlined inventory control and communications, access to sales information, and more economical approaches to production; and they could allow the industry to develop better market intelligence, more informed printing and ordering practices, and better inventory management.

Such results have been achieved in other markets, and the United Kingdom has developed a range of integrated services that has significantly improved the efficiency of publishers, distributors, wholesalers, and retailers. The U.K. standard for electronic data interchange provides an expansive and immediate ordering of books throughout the supply chain, and it allows invoices to be paid electronically.

The tracking of actual book sales to consumers has been one of the most recent developments in the U.K. A commercial system collects daily point-of-sale data from British retailers and provides various aggregations of the data to publishers for the purposes of marketing and promotion, trends analysis for printing decisions, and inventory management. These data can answer questions such as what is selling and at what price, what should be in stock, what needs to be ordered, what categories can be improved, when they sell, in what quantities, and at what price.

In the four years since the introduction of book tracking in the U.K., returns to publishers have decreased from 17% to 13% of sales. This recovery of lost sales would be a significant gain in the book industry like the one in Canada, where profit margins are historically well below 10% and returns are somewhere in the order of 30% to 35%.

We have already begun work in this area, and we will be completing a number of studies in the coming months to determine the readiness of the Canadian industry to adopt similar technology. Specifically, we will be examining the state of bibliographic resources and EDI standards in Canada; we will commission a study on the impact and cause of the current rate of returns; and we will look into the degree to which the industry is equipped and prepared to introduce a system for the collection and dissemination of point-of-sale data.

The committee report also suggested that significant improvements could be made to the collection and dissemination of timely, accurate, and comparable data. Existing data provided by Canadian Heritage, the Association for the Export of Canadian Books, the Canada Council, Statistics Canada, and the National Library represent a wealth of information on the book industry. Canadian Heritage has created a consultative committee on book industry data in order to bring together these bodies, as well as industry representatives, to address data collection issues, to streamline existing data, and to simplify the dissemination and collection of that data. Once better data becomes available, new tools can be developed to help the industry and government identify and understand industry trends, better understand the market, and measure performance. For example, we're looking at the possibility of developing a web-based electronic benchmarking tool to allow—

The Vice-Chair (Mr. Dennis Mills): Mr. Clarke, I apologize for interrupting, but the translator is having a very difficult time, so I would ask you to try to speak more slowly. If you would prefer to just speak about it rather than read it, we'd have no problem with that. You know this subject cold. Just relax, there is no big stress here this morning.

Mr. Allan Clarke: All right, but I tend to speak quickly by any stretch of measurement.

Anyway, we have created a consultative committee on book industry data. It brings together the bodies I just mentioned to address data collection issues, to streamline existing data and to simplify collection. Once we have been able to collect this data, we're looking at developing new tools to help industry. I mentioned a web-based benchmarking tool. This would be developed to allow publishing firms to evaluate their performance against industry norms and identify their strengths and weaknesses, and to help them take and measure action to improve results.

The Vice-Chair (Mr. Dennis Mills): Mr. Merrifield, do you have a question?

Mr. Allan Clarke: I'm not quite through yet.

The Vice-Chair (Mr. Dennis Mills): Oh, okay.

• 0920

Mr. Allan Clarke: Turning to “Promoting Canadian Books”, we currently provide support to publishers for the marketing and promotion of Canadian books and authors through the book publishing industry development program. Funding is also available for events or campaigns to support Canadian books—Salon du livre, the Word on the Street Book Fair, Journée mondiale du livre et du droit d'auteur, and Canada Book Day—and we are trying to maximize our funding to support larger-scale promotional events, national sales campaigns, media tie-ins, etc.

Last September, we also created the Book Industry Forum, which was a key recommendation of the report. This forum has representation from all sectors of the industry: publishers, distributors, wholesalers, and writers. It was created as a means of providing the venue to discuss important industry issues and, where appropriate, to initiate research and action on issues of common concern to members.

Over the past six months, we've met about six times. As an example of the tangible work that the committee is doing, we invited the managing director of BookTrack U.K. to come to Canada to meet with the forum to discuss how BookTrack U.K. operates in the United Kingdom and what benefits it has had for the industry there.

So we're using this forum as a means of moving forward on a number of different initiatives, such as the planned studies on returns and other supply chain issues. In fact, the forum has been asked to review a number of terms of reference for some studies we will be undertaking in the coming months.

The actions I have tried to describe in maybe a rather quick fashion are geared towards achieving a number of results. We're trying to achieve lower costs across the supply chain and to ultimately reduce returns. We're trying to develop a more strategic and inclusive approach to addressing issues that are of interest to the entire industry. Better collection and the use of industry data are key initiatives we're trying to achieve. And of course there is the building of a greater awareness of Canadian authors and books.

So that was a little bit of a quick and brief summary of some of the work we're undertaking at the Department of Canadian Heritage that follows up on the work the standing committee did last year in examining the book industry.

We are pleased to take your questions.

The Vice-Chair (Mr. Dennis Mills): Mr. Merrifield.

Mr. Rob Merrifield (Yellowhead, Canadian Alliance): I'm just trying to get briefed on exactly where we're going with this. At the present time, I don't have any significant questions.

The Vice-Chair (Mr. Dennis Mills): Okay, no problem.

Ms. Libby Davies.

Ms. Libby Davies (Vancouver East, NDP): I do have a question. First of all, though, my colleague Wendy Lill couldn't be here today, but I know she has been very involved in this issue.

In terms of the committee's report from ten months ago, one of the key recommendations was to establish a permanent interdepartmental committee that would in effect be a mechanism to work with the industry really to comment in a timely way on any negative trends taking place in terms of the creation, production, and distribution of sales of Canadian-authored books. This was a very key recommendation of the report: to make sure there's a mechanism in place so that before another crisis hits there is some way of dealing with it. So I guess the question I have is, ten months later, first of all, what has the department done to monitor recent events that have taken place, such as the takeover of Chapters? Has this interdepartmental committee been set up? If so, what has the committee done to respond in a timely way to some of the events that are now before us?

Mr. Michael Wernick: Let me take a stab at it.

We are in very close working relationships now with the other partners that have something to do with book and literary issues, such as the Canada Council in terms of their artist support. We're harmonizing our programs much more closely in terms of eligibility criteria on the timing of when we do assistance, and we're sharing information on the state of the companies and houses that are coming to us.

We have a very close relationship now with the Competition Bureau, which is dealing with the issues that deal with anti-competitive behaviours in the industry. We've worked with them to provide them with as much of our understanding and data and knowledge of the book industry as possible, being respectful of the fact that the Competition Act is ultimately their call. They'll make the determination under the Competition Act about whether there's something going on or whether actions should be taken, but we do have a very good professional relationship with our colleagues at the bureau.

• 0925

Those are the main partners that have anything to do with the book trade. The National Library would be another on some issues, and we have working groups on particular issues in which the National Library has a role. It's not so much having a committee as having those relationships on a day-to-day basis, and I can assure you we do.

The real change since last year has been the industry forum and having a group that comes together every month or every six weeks, people in the industry—writers, publishers, retailers, or wholesalers. It gives us an immediate feedback loop, where people will tell us what's going on, what their sense of anxiety or comfort is, and I think we have very good fingers on the pulse of what's going on in the industry compared to where we were a couple of years ago.

Ms. Libby Davies: Do I have time to follow up?

The Vice-Chair (Mr. Dennis Mills): Yes.

Ms. Libby Davies: Coming back to the report itself, it seems to me the committee and the report were trying to take that one step further. It's fine that the department has its ongoing liaison with key players in the industry, but the idea is to have some sort of mechanism where there is also a report back to this committee, because this is obviously a key concern for Canadians.

Again I'd ask you to respond as to where that particular recommendation is at and whether the Department of Canadian Heritage is actually going to consider establishing such a permanent interdepartmental committee so that, for example, on the issue of the implications of the Chapters takeover and what that means for foreign ownership restrictions, there's a place where that will be discussed and reported back to this committee. That's an issue before us today, and I'd appreciate your comments on that as well.

Mr. Michael Wernick: On the foreign ownership issue, we don't need a committee, because I do foreign ownership review and the recommendations to the minister, so it's the same place, the same part of the department.

We'll be happy to set up any kind of formal structures that are necessary, and we'd be pleased to give the committee a report once a year on the state of the book industry. That was one of the recommendations, and that would be relatively easy to do.

One of the issues, of course, was having current indicators as to what's going on in the market and not Statistics Canada surveys that are three years old. One of the fruits of the investment we hope to make in point-of-sale technologies, new information systems, is that you would have those kinds of very current, up-to-date snapshots of what's going on in the various parts of the industry. We'd be very pleased. We're trying to figure out how to turn that into something we could put on the website every quarter, every six months, or every year, whatever seems to work and be useful, not just to public policy-makers but to the industry itself.

Mr. Allan Clarke: We've really been able to build on some of the recommendations from the standing committee last year to increase, both on a multilateral and a bilateral basis, our relationships with people in the industry, as well as other government departments and agencies that are responsible. So although we don't have a formal mechanism to deal with every single issue, we have a number of different groups we've formed to deal with these, whether it's statistics or whether it's with some of the broader issues. We do have a lot of interesting plans for how to move some of these issues forward through these groups, and these groups have been very helpful to us in doing so already.

Ms. Libby Davies: To follow up, even though it's not, as the committee recommended, a permanent mechanism, if you're saying it exists within the department in a more informal way, is there information now available on the status and the state of Canada's book industry?

You've talked about the information. Is it available for us today so we have some handle on where the department thinks this is at, particularly in light of recent developments?

We're sitting here in a vacuum. Is that information now available in terms of the assessment of the department?

Mr. Michael Wernick: Our best source of information is in fact the applications to the book publishing industry development program. Once a year, all the Canadian publishers apply to our program for a set of grants, and the applications for that tend to give you a lot of information on sales, profit margins, and that sort of thing. So once a year we have a snapshot.

We've just done the 2000 run, in January, and I think probably in about a month or so we'll be able to do a report on what that revealed to us.

• 0930

In terms of consumer data, I don't know that there's anything very fresh. That's one of the problems in Canada. I can't tell you with a lot of clarity which books moved at Christmas and whether there are more children's books or cookbooks; that may be a question you want to ask Ms. Reisman. But the lack of that kind of point-of-sale technology is one of the weaknesses of the Canadian industry.

The Chair (Mr. Clifford Lincoln (Lac-Saint-Louis, Lib.)): Mr. Wilfert, and then Mr. Harvard.

Mr. Bryon Wilfert: Thank you, Mr. Chairman.

First of all, the reason I support the notice of motion by Madame Gagnon is that clearly having the minister here to talk about the position of the department and the government with regard to the FTAA and the issue of culture is extremely important. It could be a very short meeting if the answer is that nothing is negotiable. Then that's fine, from my perspective. If in fact we know there are going to be pressures from certain quarters to put certain things on the table, then much of what we may be talking about may be irrelevant.

There are different perspectives as to just how far down the road to the FTAA we are, which is about 30% at the moment. So I'm anxious to see the minister here to talk about that issue and certainly give it some context.

We have 25 recommendations that went to the department in June. I presume these don't have to be reaffirmed because Parliament ended, but the fact is that a lot of time has transpired. One of the things I always find very difficult around this place is that I need to have everything in writing, and I like to see written responses to each recommendation and the rationale. If in fact the minister is prepared to accept all 25 recommendations, great. If in fact there are issues, then I think we need to take those out and examine them, and do that within the context of what may be happening on the wider stage. So I'd like a response to that.

Secondly, we talk about competition and foreign ownership. We're already the most foreign-owned country in the industrialized world, so I always chuckle when I hear about how we're going to see whether it's in the interests of Canadians, and in this case the book publishing industry, whether or not jobs will be protected, which I have very little faith in. I'm very concerned that the independents in the marketplace are being either driven out or eliminated because of either foreign competition or what may be the development of a monopoly.

In my view, the Competition Bureau is about as toothless as you can get. It hasn't been overhauled in about 75 years.

So I would suggest it's probably not an issue for you; it's probably for the Department of Industry. But clearly when we talk about guarantees, I'd be interested in knowing what kind of specific guarantees you refer to and how we make those stick in terms of job creation, the promotion of Canadian authors, and so on, in the case of the book industry.

Mr. Michael Wernick: I'm sorry, what's the question?

Mr. Bryon Wilfert: The first one is, when are you going to respond to the recommendations?

Mr. Michael Wernick: If the minister is agreeable, I'm sure we can put a written response together dealing with all of them. It's a government decision.

The Chair: Mr. Wernick, if I could interrupt, if it's the wish of the members of this committee, if the majority of the members of this committee decide accordingly, we have a procedure whereby we can request a response through Parliament. With Parliament dying last time, the response died with it, but we can request that now there be a response. So I would suggest that at the end of this meeting we find out if it's the wish of the members, and then we'll put a request to Parliament that there be a response.

Mr. Bryon Wilfert: Mr. Chairman, I asked somewhat rhetorically whether or not we had to vote again on these recommendations to make sure they in fact will be responded to.

The Chair: We don't have to vote on the recommendations themselves. The report is there, but what we can do is signify the wish of the committee that there be a response to the report's recommendations. Then it goes to the House, and then the ministry has to respond—which I understand, Mr. Wernick, you would be quite happy to do.

Mr. Michael Wernick: We would be pleased to do that. What we said when we were here last was that we'd be happy to give you a verbal report on what was going on and assurances that work was underway. That's why we're here to take questions. If there is a specific recommendation in the report about which you want to ask a question, we can either do it today or come back next week and do that. If you want to go through the formal “ask for a response and get it back from the government”, that will add some delays to this, but we'd be pleased to do that.

• 0935

Mr. Bryon Wilfert: I would suggest, Mr. Chairman, that since the report has been sitting on the desk since June, I don't know why you'd be having too many delays. Quite frankly, I think it should be just the norm that we would get a written response to each of the recommendations, period, and then go from there. A lot of water has gone under the bridge in the last number of months. If the best you can do is provide a short verbal response, it isn't satisfactory for me.

The Chair: I should explain, Mr. Wilfert, if I may interrupt, that if we ask for a response—the Standing Orders response—the government then must go to cabinet to get this response approved. That's what Mr. Wernick probably alluded to. So then it becomes a very formal procedure where we request the response through Parliament and the minister then has to prepare an official response, which goes to the cabinet for approval. So this is why the Standing Orders provide for 150 days. It usually takes that kind of time because by the time it takes its place in the line of the order of precedence in cabinet, it can be several weeks and even months.

Mr. Bryon Wilfert: Since 150 days have gone by, that's why I wanted to know whether we have to start again, or what is the procedure?

The Chair: We have to start again, yes. Unfortunately, what we have to do is express a wish in the committee here through a majority vote that we want a formal response to the report. Because the request for a formal response died with the last Parliament, we have to make that request. It goes to Parliament. Then the minister will start the procedure to write an official response, which then has to be approved by the government, the cabinet, and the Governor in Council and then be lodged officially with Parliament. It takes several weeks at best.

Mr. Bryon Wilfert: I'd be prepared to move that at the appropriate time.

The Chair: Yes, all right.

Mr. Dennis Mills: Mr. Chairman, I think there has to be some kind of a misunderstanding here. Are you telling me that if every one of these recommendations weren't... How many recommendations are there?

The Chair: Twenty-five.

Mr. Dennis Mills: Imagine there were 25 questions in the House of Commons in one day. Are you telling me that we don't, as a government, have a response in writing to every one of these recommendations?

Mr. John Harvard: He's already offered them.

The Chair: I think there are two things here. If Mr. Wernick proposes that he give a response, he can only give a departmental response. If it becomes a government response, according to the way things work, the minister will then have to go through the cabinet to get it approved. Maybe Mr. Wernick can tell us what kind of delay... it's up to 150 days, but possibly, given that the work has already been more than started by the ministry, you could indicate whether you expect this could happen much faster than we think.

Mr. Michael Wernick: Obviously the committee can decide what the committee wants to do. It's just a matter of parliamentary procedure that if you use the very formal procedure and ask for a written response, we have to go to cabinet, and with the Easter break and the delays in getting a cabinet document prepared and approved, I won't be able to give you a formal response until probably May or June.

What I would offer to you, with the parliamentary secretary's assistance, is we'll go back to the minister and see if she would agree that we just send you a letter with a written response to all of the recommendations. I can tell you that of the 25 recommendations, 23 of them are being acted on and accepted; we're working on them. Two of them are not, and we can elaborate on that.

Mr. John Harvard: Mr. Chairman, that's what I would be happy with.

The Chair: Okay.

Mr. John Harvard: I would hope there wouldn't be a great disparity between the departmental position and, ultimately, the cabinet's position.

I think we just want to get a great sense of what the department is doing in its response, and if Mr. Wernick—he's already suggested verbally that he can do this—can take these words and put them on paper in a report to us, I'd be satisfied with it. I would hope Mr. Wilfert would be too.

The Chair: We have the two alternatives now. I think Mr. Wilfert's point is well taken, that we should have a chance to discuss it briefly. Let's carry on with the questions now and at the end of the testimony here, we'll just decide whether we go for the formal request or whether we accept a written letter from the ministry giving us their input about the recommendations and what they're doing, which would be far simpler.

• 0940

Let's carry on with the questions for now and then we'll go back to this.

Mr. Wilfert, are you through?

Mr. Bryon Wilfert: We seem to get bogged down in these things. The fact is, Mr. Chairman, with all due respect, that it is inexcusable, in my view, given the time that has gone by, that the latter approach of saying there were 23 of the 25 that they are currently working on, of which there are two that they are not... We could have had that in writing. We could have clearly gone over that this morning. We don't have it. It's another delay.

In answer to my colleague, no, I'm not satisfied. I'm only satisfied when I get it in writing and I'm satisfied when... What are the two you're not working on? I guess the question would be why. I don't need the answer now because I don't want to take up the time of my colleagues. But I think if we're going to have a working committee, the department should come well armed and should provide that in advance to us so that we can look at these recommendations and see maybe what is the approach the department is taking that we have some questions on. But I would like to know that. I don't want to waste either the assistant deputy minister's time or mine.

Mr. Chair, I will turn the floor back to you.

The Chair: Is there any comment or question?

Mr. Harvard.

Mr. John Harvard: I think I have a couple of questions, I suppose for Mr. Wernick, related to the Chapters-Indigo merger.

When it comes to that matter, you and others, Mr. Wernick, enjoy a front-row seat, which I, naturally, appreciate. I would be interested to know from you, occupying that front-row seat, how you would describe the mood in the wake of that merger, and secondly, what questions has that merger raised, in your mind, or which questions have been settled? What questions remain outstanding in the wake of that merger? I would like to get a sense from you, on behalf of the department, where the department stands vis-à-vis that particular issue.

Mr. Michael Wernick: That is a very good question.

Can I, first of all, Mr. Chairman, apologize to Mr. Wilfert if we have caused any misunderstanding. We were led to believe that a quick once-over of the committee's recommendations and taking questions was what was intended. If we had been asked for a written report I would have brought one this morning, I assure you.

The fact is we've been working very hard on all of the recommendations, and it's because we've been very active that it's been a moving target. If I had written a report in June it wouldn't have reflected the meetings and discussions we had in September. If I had written the report in December it wouldn't have reflected the work we were able to do in the intervening three months. We've learned a lot by having the industry forum. We've learned a lot from our working group on data. We've learned a lot by having the gentlemen from the United Kingdom here in January. We get a better response as every week goes by. I'd be happy to commit it to paper and give it to the committee.

In terms of Mr. Harvard's question, I think the merger is a prominent example, within the industry, between publishers, retailers, and wholesalers, of the issue of who bears risk and who has negotiating power. There has been a long evolution of this file. When this committee started its work the concern was about Chapters moving into the wholesaling business through the Pegasus arm and a close relationship between wholesaling and the retailing part of things. Chapters has changed its business strategy and is no longer going down that road. The publishers are obviously concerned about their negotiating power and their relationship with a large retailer that can be a very big part of their account, certainly in the English-language market,

[Translation]

and on the francophone market, the concerns are the same, Archambault being a very important client.

[English]

All of these issues about who bears risk and who has negotiating power to lever a few percentage points of discount from somebody else have their origins in this archaic supply chain, this practice of putting your thumb in the air and trying to figure out what the market will bear, shipping books to the wholesalers and retailers and then getting a lot of them back six months or a year or a year and a half later. There aren't a lot of retail industries that work that way, and the solutions are not going to be tinkering within the system as it works now but getting out of that system and putting an end to returns. That's why the committee's recommendations were so important. They pointed the way forward out of the quagmire of the past into a more modern supply chain where publishers' risk will be reduced and their margins will strengthen; small retailers will be able to compete more effectively with big box retailers; and ultimately the readers and consumers will have a healthy industry there for the next decade.

• 0945

The Chair: Mr. Harvard.

Mr. John Harvard: Just one more question. I suppose it's hypothetical, and it's always difficult to ask people to answer hypothetical questions.

Mr. Wernick, if you were to have a meeting today with Heather Reisman—and I'm sure you would be discussing a number of issues—what would you think would be at the very top of the agenda? Given what's happened in the last few months, and the state of the industry, and the concerns, and the matter of risk and so on, what do you think would be at the top of the agenda in that meeting with her?

Mr. Michael Wernick: We have a meeting after today's session. I would ask her the same question as I would the Canadian Booksellers Association, or the Association of Canadian Publishers, or the National Library: What are you going to do to move out of the practices of the past towards a more modern industry? What is the contribution you can make? Don't turn to government or somebody else, or blame your troubles on somebody else. Everybody in the industry tends to look at what the other players are doing. What contribution can you make to getting returns down to a much lower level, to reducing the level of risk, to reducing the fragility of the industry? I've asked that of the publishers as much I would of retailers.

Mr. John Harvard: You don't think the course she might take is clear yet? That's why you would ask the question, I assume.

Mr. Michael Wernick: I will find out some of this, I'm sure, from Ms. Reisman. I'm going to find out some of it from the Competition Bureau when they finish their deliberations on the transaction.

Mr. John Harvard: Thank you. That's all.

[Translation]

The Chair: Ms. Gagnon, did you ask for the floor?

Ms. Christiane Gagnon: I did, but what I had to say was along the same lines as Mr. Wilfert. I also wanted to ask what the priorities were in the recommendations and raise the fact that there are two recommendations that have no immediate follow-up measures. What are those two recommendations and when will we be given an overview of the department's positions, either by the minister or the officials? That is important. Are they all to be considered on an equal footing? What will your priorities be? We will not be able to put all 25 recommendations on the same level. Will we be given an agenda of the follow-up to be given by the department to the various recommendations of the sub-committee?

Mr. Michael Wernick: We tried to group our replies in Mr. Clarke's presentation. I think there are 23 recommendations that fall into two or three categories, and that is exactly what we tried to put forward. We would be very pleased to provide clarifications on each of these recommendations. Two of them are difficult for the government, the one involving the GST and the one that raises the issue of whether a special law is needed to settle the problem of competition in that industry. In the final analysis, the decision will be made by Cabinet.

In our opinion, removing the GST on books is not a very effective measure to help the industry. It is very indirect and very costly. It would cost the Consolidated Revenue Fund approximately $140 million in revenue and half of that amount would benefit foreign publishing houses. If we remove the tax on books, obviously, books published by foreign publishers will benefit from that measure. So if we really want to help Canadian industry, we should target the money from projects or programs to help solve the problems of Canadian publishers. Removing the GST is not in our opinion, a very effective measure.

The other is the matter of the special law. In our opinion, the Competition Act is sufficient. All the necessary regulatory tools are to be found in the Competition Act.

The Chair: Are you all right, Ms. Gagnon?

Ms. Christiane Gagnon: Yes.

[English]

The Chair: Any more questions?

Mr. Wilfert.

Mr. Bryon Wilfert: Mr. Chairman, I'm still a bit perplexed. I realize the department owns some computers, and I presume to say that what you would have written in June, or written in November, what you would have written in January would have changed. I presume that would be the case. I also presume that you could change that on the computer so you could give us the most up-to-date response.

• 0950

Recommendation 3.4 recommends the department get together with Finance and analyse the impact of removing the GST. That's what we requested. My understanding is the department isn't even going to provide the data for that, and I find it somewhat difficult, if not outrageous, to suggest that... As an all-party committee, we have said we would like to receive that information. Whether you think it's going to cost $140 million or it won't benefit just Canadian publishers but foreign publishers as well, I think that's an issue the committee should make the decision on. The committee is the one, I believe, that should have all of the information at its disposal, and that's why we've asked for that.

So I'm very concerned, Mr. Chairman, that the department has already said they're not going to even deal with it. If they're not, then that's one of the questions I'll be posing to the minister. In my view, you have 25 recommendations. We'd like to get all the evidence on the table in order for the members of Parliament to be able to do their job. I don't think it's up to the bureaucrats, with all due respect, to make the decision. If we as a committee want that information, then they darn well should get it, period.

The Chair: Mr. Wernick.

Mr. Michael Wernick: We just did. Our analysis is that it would cost the treasury about $125 million to $140 million—

Mr. Bryon Wilfert: Put it in writing and let me see it.

Mr. Michael Wernick: —and it would not directly benefit the Canadian publishing or retailing sector.

Mr. Bryon Wilfert: I'd like to see what evidence you used and how you gathered it. Those are the things I would like to see.

The Chair: That will be part of the report you will send to us.

Mr. Michael Wernick: Certainly. Being a tax measure, of course it's the Minister of Finance who would make the final determination on the design of the GST.

The Chair: Thank you.

Are there any more questions?

[Translation]

Mr. Harvey.

Mr. André Harvey (Chicoutimi—Le Fjord, Lib.): Thank you, Mr. Chairman.

Mr. Wernick, with regard to promotion, are you considering a strategy that would target the resource regions rather than only the large cities? What is your perspective on this book promotion strategy? Do you intend to go to the regions?

Mr. Michael Wernick: There are two important aspects to promotion: promoting Canadian books on Canadian markets and promoting them on foreign markets.

In the second category, that of foreign markets, we are working in close co-operation with the Association for the Export of Canadian Books. We have quite an elaborate work program, the purpose of which is identifying markets and possibilities.

Mr. André Harvey: Mr. Chairman, with your permission, I would like some further clarifications from Mr. Wernick concerning whether, in the initial strategy...

The Chair: Yes, I understand, but we are having a problem with translation from French to English. We are in the process of solving that, Mr. Harvey.

[English]

While we are waiting, I'd like to advise members that Mrs. Reisman has been detained in Toronto because planes have been delayed due to freezing rain at the airport. She has advised us she can arrive here just after 11 o'clock. At 11 o'clock we get room 253-D in the Centre Block. It seems to me extremely important. This is the third time we have tried to get Mrs. Reisman to come before the committee as a witness. The first two times she didn't turn up, she didn't come, and I think this is an occasion now, especially in view of the Indigo-Chapters merger or takeover by Indigo of Chapters.

• 0955

So what I would suggest is this. If members agree, one solution would be to suspend the meeting and reconvene after 11 o'clock, when we know Ms. Reisman is here, in 253-D where we could have the room between 11 a.m. and 12:30 p.m. We would suspend now at 10 o'clock after Mr. Wernick has finished with Mr. Harvey's question and reconvene.

Otherwise, the alternative is not to hear Ms. Reisman.

Madam Gagnon.

[Translation]

Ms. Christiane Gagnon: I agree with your proposal, but if we have time before we adjourn, I would like us to go back to the committee's work program.

The Chair: Very well.

[English]

Mr. Mills.

Mr. Dennis Mills: I have no problem with it.

The Chair: Mr. Merrifield.

Mr. Rob Merrifield: It does put me in a real dilemma. I'm vice-chair of the health committee, which is at 11 o'clock, so it's a real conflict for me.

The Chair: Is there somebody else from Alliance who could be there—

Ms. Sarmite Bulte (Parkdale—High Park, Lib.): Get somebody else from your party.

Mr. Rob Merrifield: I can maybe get somebody else to do the other one. I'd have to check on that.

The Chair: —because I think it would be really important that we do.

Mr. Rob Merrifield: It's important that I be here.

The Chair: Do I understand there is consensus then that we reconvene after 11 o'clock? Rather than you going there at 11 a.m., Ms. Reisman will let us know. She might be just after 11 a.m.

Mr. Dennis Mills: At 11:15 a.m.

The Chair: We'll have 11:15 a.m. to 12:30 p.m. in room 253-D. Okay?

Mr. John Harvard: That's provided we can get done here in the next two or three minutes.

The Chair: It's 10 o'clock. We have to adjourn anyway. There's a brief. Ms. Gagnon wants to bring up some items of business quickly. Is the translation okay?

Would members agree that we finish with Mr. Harvey's question in French,

[Translation]

without translation? Otherwise, it will be 15 minutes.

Mr. Wernick.

Mr. Michael Wernick: As I was saying, there are two aspects to promotion: Canada and foreign markets. In foreign markets, matters are being well managed by the Association for the Export of Canadian Books. We do not export many books. We export publishing rights. There are partnerships between Canadian publishing houses and an Italian publisher, or a Brazilian one, to publish and sell books on the foreign market. It is an expanding market and things are going very, very well for Canadian publishers.

In Canada, there are two or three important instruments. There are book fairs and exhibitions. We provide assistance to a network, and not only in the large cities. In Quebec, we help at least six or seven book fairs. There are all kinds of book festivals to promote authors. In Toronto, the International Festival of Authors, within the context of the Harbourfront Reading Series, is well known. There are all kinds of promotion activities. The Canada Council also provides financial assistance to authors who go on book promotion tours.

Of course, there are two important partners in promoting books. First, there are the publishers. If a publishing house decides to finance a given book or a given author, its financial interest is riding on the book being well promoted. So, publishing houses are very involved in promoting books. Retailers also have an important role to play.

[English]

Chapters, Indigo, Archambault, and other bookstores are very involved in promotion of Canadian titles and Canadian authors. One of the things you might want to ask Ms. Reisman or anybody else in the selling part of the industry is, what are you doing to promote Canadian titles in your stores.

[Translation]

Mr. André Harvey: Thank you, Mr. Wernick.

[English]

The Chair: Sorry, Mr. Wernick.

[Translation]

Mr. Harvey, is that all?

[English]

Are there any other questions? If not, I would like to thank Mr. Wernick and Mr. Clarke very much for coming here and for giving us the benefit of their expertise and information. Thank you very much.

Mr. Michael Wernick: Thank you, Mr. Chair.

• 1000

[Translation]

The Chair: Ms. Gagnon, did you have a question?

Ms. Christiane Gagnon: Before your arrival, I moved a motion asking that we examine the impact of the FTAA on culture and invite certain witnesses, among these the minister and some officials involved in the negotiation process, as well as some witnesses who have expressed the wish to be heard by the Canadian Heritage Committee.

The Chair: Ms. Gagnon, you have to provide 24 hours' notice.

Ms. Christiane Gagnon: Yes.

The Chair: We will discuss the motion on Thursday.

Ms. Christiane Gagnon: Fine.

The Chair: If the motion is accepted...

[English]

A voice: Forty-eight.

The Chair: Forty-eight.

[Translation]

You have to provide 48 hours' notice. We will thus be discussing the motion on Thursday. At that time, the committee will decide whether it accepts the motion or not. We will not be discussing it now. You have given notice, and all the members of the committee have been apprised of the motion. We will discuss it Thursday.

Ms. Christiane Gagnon: I also made another request. You know that there is an internal crisis at the NFB and that the estimates will be tabled soon. I think it would be important that we hear the officials of the NFB as well as the group of young people who deplore this long-standing, recurrent situation. It would be interesting to inform the committee about the development of the situation and about the way in which money is invested at the NFB.

The Chair: Ms. Gagnon, as you know, we have to study the department's estimates, and the committee has the right to ask the organizations concerned to appear here on May 31. As you also know, Bill C-10 will be referred to the committee shortly. Since we must always grant priority to bills, we will have to finish studying that bill. Immediately afterward, within the context of our examination of the department's estimates, you can ask that we call one organization or another. You can submit the request to the committee at that time. We have until May 31 to hear organizations affected by the department's estimates.

Ms. Christiane Gagnon: Thank you.

The Chair: Thank you.

[English]

If there's no further business, we'll suspend the meeting until 11:15 a.m. in room 253-D to hear Ms. Reisman.

Thank you.

• 1005

• 1137

The Chair: I declare reopened the meeting we suspended earlier due to unfortunate circumstances. The weather is extremely bad everywhere, and we appreciate Ms. Reisman making that extra effort to be here.

We are very glad you're here. I'm sorry that all the members are not here. Our committee was supposed to adjourn at 11 a.m., but we decided to come back to hear you because we thought it was so important. Some members had conflicting schedules, of course. Anyway, we are quite a few here and we're very pleased to have you with us. I will give you the floor and we'll go from there.

Ms. Heather Reisman (Chief Executive Officer, Chapters Inc.): Sure. I take it I'm going to respond to questions people have?

The Chair: We can start with questions and answers or you can say a few words to start with and then we'll open the floor to questions—whichever way you prefer.

Ms. Heather Reisman: Okay.

Mr. Dennis Mills: Mr. Chairman, why doesn't Ms. Reisman give a short vision and preamble and then we could maybe go right into questions. Tell us about this—

Ms. Heather Reisman: I can give you a sense of what the state of the industry is. I could—

The Chair: Especially if you could let us know... As you know, we had this report on the book industry last year—

Ms. Heather Reisman: Right.

The Chair: —and much of it focused on the fact that a lot of the small publishers, and also the small bookstores, felt threatened by the heavy presence of Chapters, especially the connection of Chapters—

Ms. Heather Reisman: To Pegasus.

The Chair: —with Pegasus. So we started this report and now another very significant evolution has happened where Indigo has taken over Chapters. Perhaps you could address the present circumstances as you see them and how you see the future. We have this room until 12:30 p.m. so we have lots of room for questions.

Ms. Heather Reisman: Perfect. Maybe it would make sense, for the people who are here, for me to provide my perspective on how this industry has evolved over the last number of years, because a snapshot at any given point in time I think misses the larger patterns of what's going on.

From my point of view, the best way to look at this industry and to understand both the challenges it faces and the opportunities that could be defined is to start to look at the industry pre the emergence of Chapters and just prior to the merging of Smith's and Coles. I think that's an important jumping-off point. We're actually going back to roughly the 1994-95 period.

• 1140

At that time, the Canadian industry was made up of two national players, Smith's and Coles—with Coles being the larger—and a very balanced number of independents. I suspect that at the time—although I don't have the exact figures—Smith's and Coles together represented 20% to 25% of the industry. The balance of the industry was heavily made up of independents and university bookstores. We then saw the entry of mass marketers like Price Club, Wal-Mart, and Toys-R-Us who sold some number of trade books.

With the merger of Smith's and Coles, we did see the creation of a large national player. At the time, the thinking was that it was highly likely that either Borders or Barnes and Noble, the major superstore players in the U.S.A., would be coming to Canada. Therefore, it would make sense from a Canadian point of view to create a strong Canadian competitor.

If one wears the glasses of the time as opposed to backward-looking lenses, it was probably a thoughtful and intelligent decision at that time to allow that merger to take place.

I think no one can ever anticipate all of the circumstances that will emerge. What did emerge with the merger of Smith's and Coles and with the particular leadership of that company—the company that then was setting sail to create Chapters—was a particular orientation, one that they would develop, that was aggressive beyond the norms of what one would normally consider good business practice.

I don't think anyone—by that I mean any government officials who made the decision to allow the merger or any committee that looked at it—can ever foresee, when they're looking at something, that there are going to be practices that are essentially non-economic.

Nevertheless, what emerged after that merger and with the emergence and then huge development of Chapters was a confluence of conditions that have led us to where we are today.

First of all, at the same time the merger was approved, the government took a very strong stance against allowing either Borders or Barnes and Noble to come to Canada. This was an unprecedented strong stance in terms of the demands that were being made on what the balance would be between Canadian and American ownership.

Therefore, Borders did not come to Canada, and Chapters did not have a strong competitor. Furthermore, Barnes and Noble, quite put off by the way Borders was treated, decided that rather than come to Canada, they would participate by simply buying a piece of the newly merged company, which was then called Chapters.

So what we had was a merger of the only national players, a company leadership with an extraordinarily aggressive and—as it turned out—non-economic approach to growing the business, and the fact that they were backed up by the know-how of the largest player in the world. With that one player, we have the stage set for a very difficult and in fact abusive set of conditions to emerge.

As that player was growing and demonstrating very clearly the nature of its behaviour, there were lots of initiatives taken with the Competition Bureau and with Canadian Heritage to lay out clearly what the apparent trajectory was and the extent to which that dominant player would cause the industry to be bent out of shape.

Notwithstanding that, no action was taken, with the result that between 1997 and just prior to the present time, we had the emergence of Indigo and the increased, rapid pace at which Chapters chose to grow, having one intent in mind. This is a bona fide fact that can be backed up by all kinds of people, including publishers and real estate people. Chapters had one goal in mind, and that was to bury Indigo. It was the stated strategy of the then chief executive of Chapters that the way to win was essentially, in his words, “not to let anyone on the beaches”.

• 1145

Notwithstanding that, Indigo did start up. Of course, I have been the founder and chief executive of Indigo, and for almost four years now Indigo has been working quite hard to establish a position for itself in the market. From a consumer point of view and from a market point of view, Indigo has in fact established an excellent position.

Notwithstanding this, the actions of Chapters over the last 18 months have had a very serious effect on both Indigo and all of the independents. The playing out of the strategy of the former management of Chapters to, in quotes, “not let anyone on the beaches” has caused them to expand their superstore network at an extreme pace, way over the number of superstores this country required, even if there were no other players.

In other words, Chapters opened 77 superstores in just under five years. Now, 77 is probably too many superstores for this country, if that's all there were, but in fact Indigo had succeeded in opening 15 stores over a four-year period.

During the same period, two other factors emerged to have an impact on the industry. One is that the mass marketers—Price Costco, Toys-R-Us, Wal-Mart—vastly expanded their move into popular trade books, or best-seller trade books, hugely. They went from 5% of the market to approximately 16% or 17% of the market.

Price Costco, for example, will have a trade book business this year of somewhere in the area of $200 million, which means they are larger by far. They are double the size of Indigo. They are a major player. While they sell a narrow number of titles, over the course of the year they will sell so many titles, because every six weeks they change, that they must be viewed as a major player in the industry.

So we had a huge growth of mass marketers. We had a massive growth of Chapters. We had the introduction of Indigo. The combined impact of that was then further affected by the advent of the Internet and the presence of the Internet on the market as a very viable force for book-selling.

So when you look at it, you've now gone from 1995, with Smith's and Coles and a large number of independents, to early 2001, with 77 Chapters superstores, 15 Indigo superstores, the huge growth of the mass marketers, and the advent of the Internet, which is picking up. These are not just Canadian Internet players. You also have the major U.S. Internet players, Amazon and Barnes and Noble.

This huge growth in the number of vendors of books has had a very significant impact on the economics of the business. Chapters' overexpansion has hurt Chapters badly. In other words, in their desire to keep everybody off the beaches, they so overexpanded that they opened a huge number of stores that are not only not profitable but are also losing money on an operating basis.

Indigo is struggling to stay with its head above water, not only because of the enormous number of stores Chapters put up right beside us but also because for the last 12 months, in their attempt to increase their sales, they have been on an aggressive discounting program, selling books at 40% and 50% off.

All of this has skewed the entire downstream market, as it's called. There is huge capacity, and far too many players, frankly, are struggling for a market that in and of itself is growing at a very modest 4% a year.

• 1150

Some of the growth, or a good part of the growth, has taken the opportunity away from—and this is your question, sir—little players. They can't compete on a price basis, they can't compete on an overall experience basis in certain circumstances, and so what we've seen is a huge diminution in independents.

Some of that would, no doubt, have happened anyway. The market is evolving, and in the book industry, as in many other industries, consumers are responding to larger format and more choice, but in our country, unlike the United States and unlike many other countries, the pendulum has swung far too much to the right. It's my own view that we have a paucity of independents, and we have essentially created a situation, both by intervention and by non-intervention, by factors that have just emerged, that has in fact, I believe, hurt the ability to have a viable and thriving independent community.

So that's what's happened from a downstream point of view. There is far too much capacity and there is the wrong kind of capacity.

In my opinion, a good number of superstores in this country would be approximately 65, not 95, because between Chapters and ours—and there are one or two independents with superstores—we should have 65, not more. Sixty-five would be a very satisfactory number. There are a number of studies that have been done that prove this point. That's the case on the downstream or consumer market.

On the upstream market, in the way in which it affects publishers, and I think this is of great concern to you, the behaviour of Chapters, first, in terms of its aggressive growth—to a great extent unintelligently planned growth—was a short-term huge boon to publishers when all of these stores were built and books were ordered.

However, in this industry, where books that are not sold can be returned, what there was, was far too great purchasing, and purchasing that was in many cases not done thoughtfully at all, with the result that there are huge, massive, unprecedented returns coming back to the publishers at a level that cannot be sustained. The level of returns reached as much as 50% and 60% prior to our taking over Chapters—and I took over this company to discover that there was excessive, poor quality, dead inventory, both in our warehouses and in our stores, which I have no idea what we and the industry are going to do with.

Further exacerbating the problem, while Chapters was opening all of these stores at a far too rapid pace and while the orders were being placed without the right kind of thinking, the former management of Chapters decided that to further put a hammerhold on the industry they would open their own wholesaling business and therefore be able to extract from publishers additional discounts.

The way in which the wholesaler, which you know is called Pegasus, was created... it was set up as a totally separate business with a totally separate infrastructure and totally separate marketing so it could say it was a separate business that was going to go out and get business from third-party independents.

Having said that, it was run by somebody who knew almost nothing about logistics and distribution. Their ability to get accounts was absolutely abysmal, not surprisingly because, one, they could not deliver on a timely basis, and two, very few people wanted to deal with them.

So what Chapters created was a $50-million distribution warehousing facility that does not work. It is broken. I can tell you, I have been in there for a month. I am very familiar with logistics. I have spent many years looking at logistics. This facility is plain, ordinary broken. It does not work.

There is today $40 million at cost of inventory in that facility. We can neither get it out nor do we know what to do with it. This, I tell you, ladies and gentlemen, is no exaggeration. I welcome having anybody who is a professional assess that facility, and I think the answers you will get will 100% confirm what I am telling you.

• 1155

Therefore, we have an upstream problem, exacerbated by this facility, which has the publishers reeling from the returns, in very dire straits financially. The vast majority of Canadian publishers are on the verge of bankruptcy at this point. That is the reality.

At this point, I am the owner of both Chapters and Indigo. When we acquired Chapters, we discounted to some extent the good condition Mr. Stevenson said the company was in. But I can tell you—and I would say this publicly—that there was no way that we had any idea of the extent to which that company is in trouble today on the online side and on the distribution side.

The core physical business has many strengths, but because there are far too many stores, there is a basic streamlining that has to take place. Over the last several months, starting in December, I have been meeting with the Competition Bureau in order to come up with a solution that would both satisfy the Competition Bureau and satisfy the industry, both the retailers and the publishers, that there is a solution that will address both our now strong position and the economic realities. I would say, as of today, that on the one hand we are probably close to a solution, but I will say here, as I am saying there, that it is a solution cobbled to address what I believe are theoretical concerns on behalf of the Competition Bureau. They are theoretical concerns because they demand a large divestiture of stores, which would see the current capacity in the industry essentially continued.

Notwithstanding this, my hands are pretty much tied. I have recently invested over $120 million to acquire Chapters. I have today $40 million in Indigo. That is, $160 million of equity, and loans that are equal to almost that amount. I am committed to trying to right this industry, financially, business-wise, and, frankly, morally. Having said that, this is a very difficult situation. I think I can see a path out. I am still in the process of trying to convince the bureau that some of what they're asking for is in fact not constructive; nevertheless, I must finish this process with the Competition Bureau so that I can get on to do as much as I can.

Before opening it to questions, let me say one word about the independents, which I think is a very critical issue in this country and is important for writers, for publishers, and, frankly, for Indigo and Chapters. The single most valuable thing that could happen to increase the opportunity for independents is that the number of superstores in this country would be taken down; the number of mall stores that we own would be decreased to some extent; we ourselves would put a moratorium on future growth for a number of years; and we would allow the independent community to pick up the white space, the market space, that would be created by our vacating. Having said that, if we are forced to go the route currently being discussed with the bureau, that process will take longer.

Basically, that's my position. I respect all of the work that the different areas of government have done. I totally understand the way the Competition Bureau is looking at this. From a competition and, to some extent, conceptually theoretical point of view, all of what they are examining and looking for has great legitimacy. From a business point of view, which I think absolutely is important, and from a health-of-the-industry point of view, I would say to you, in front of this committee, as I have said to them, that I seriously question the route we are being encouraged to go down.

• 1200

So, ladies and gentlemen, that is a brief overview of the industry, and I'd be happy to answer any questions you may have.

The Chair: Thank you very much, Ms. Reisman. I think you've touched on all of the aspects that are of great interest to us. We have half an hour for questions and answers.

[Translation]

Ms. Gagnon, you will begin, and then it will be Mr. Hearn's turn. We will then go to the Liberal side, with Ms. Bulte and Mr. Harvard.

Ms. Gagnon.

Ms. Christiane Gagnon: I have no questions for the moment.

The Chair: You have no questions.

[English]

Mr. Hearn, do you have a question?

Mr. Loyola Hearn (St. John's West, PC): Just a very brief one. The picture you paint certainly isn't a very pretty one. Is it a battle you can win on your own or do you require a lot of government—I won't say “assistance”—cooperation in order to be able to do what you think will be beneficial not only to the existence of your company but to the industry generally?

Ms. Heather Reisman: If I speak from my point of view as president of Indigo and Chapters, the only assistance I need relates to the Competition Bureau's understanding and perspective of the industry and our somehow coming to a satisfactory arrangement.

I believe, though, that Canadian publishers—and let's not even try to analyse why and how they got into this situation—may very well need some government assistance, and I would say that may even be in the form of some financial help over the period.

I think it would be a terrible situation if our indigenous Canadian publishing community were not to survive. In the normal course of business the odd one goes under, but the current situation is really dreadful. So to the extent that I can share a perspective with them—I can't speak for them—I think there are a number of publishers that would benefit from some assistance, and by that I mean some financial assistance. It's very important that Canadian stories get written and published.

The Chair: Ms. Bulte.

Ms. Sarmite Bulte: Thank you, Mr. Chairman.

Thank you, Ms. Reisman, for coming to address us today.

Let's talk a little bit about the publishers. A concern this committee heard expressed many times was the problem with the supply chain. It had to do with, as you mentioned, an excessive amount of returns that happened last March. But the thing that was also part and parcel of the returns was the payment. The payment was within six months or 90 days, but it was also subject to returns so that at the end of March publishers would find they actually owed money to Chapters. You said that perhaps the government could provide some assistance to those publishers. You're talking about the dead inventory or the $40 million inventory that's still there. How do you propose to deal with the issues these publishers have? I understand they are still owed incredible sums of money.

Ms. Heather Reisman: As I say, one of the things I could not anticipate when I took over was the extent to which they were owed money. I don't know if anybody here followed our bid. Let me tell you one thing I am very sure of now. Had we not bid, had we decided to just take a pass, one of two things would have happened. Future Shop would have bought the company, with zero knowledge of how to run the business. The president who was running the company, Glenn Murphy—and I have no problem going on the record with this and would open this up to examination—would not have been able for Future Shop or for Chapters to work his way out of the problems he had. Having now been in there, let me just say that had we not bought the company, it would have been bankrupt in 12 months, without any shadow of a doubt.

With regard to your return issue, not only were they returning and taking credit, but we learned that they took credits last March 31 in order to doctor their financials for books that are still sitting in the warehouse.

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So now you say, so what about it? What are we going to do with this? This is a question I cannot answer, except to say that I am committed to sitting down with the publishers and saying, collectively, we have to work our way out of this problem. Certainly, I don't intend to let $150 million go down the drain. I am the one person in this country with that much cash in this industry—the only one. Larry Stevenson never had any cash in the business. I can't tell you exactly, but what I can say in front of you is that I am committed to working with the industry to find some solution.

Ms. Sarmite Bulte: I believe you stated that in this plan you're talking to the Competition Bureau about there is an avenue to allow the independents to take over some of the market, which is great. If you should decide to set the standard and continue with the same policy in returns and payments—

Ms. Heather Reisman: Let me address that. The publishers and I have worked out a code of conduct that requires that after a certain short transition period where we're trying to get our handle on the issues, we commit that over the course of 36 months we will bring returns down to between 25% and 30% and payment terms down to 90 days. There is an entire code of conduct, and I think the committee may have a draft of it. If not, I'd be happy to ensure it gets to you.

The Chair: Yes, I think that would be very useful.

Ms. Heather Reisman: There is a several-page code of conduct, which I am committing to put into place and to work to. But there will be a six-month transition period where all of the problems have to come out, and we're putting them out now. We're finding out what the problems are. Some we're trying to work out through the retail end. There are all kinds of things we can do to try to sell off some of this merchandise. But, frankly, I am just now getting a full and rich handle on the situation. I can't tell you exactly but following that period we will put this code of conduct into place, and we will live by it. So if I can make it through the next six months, then I believe I could come back to this committee and say there is a game plan and this industry is going to get righted.

Ms. Sarmite Bulte: Thank you very much.

Perhaps if there's more time afterwards, I'll come back.

The Chair: Sure.

Mr. Harvard.

Mr. John Harvard: Thank you, Mr. Chairman.

First of all, thank you very much, Ms. Reisman, for your excellent presentation.

Ms. Heather Reisman: Thank you.

Mr. John Harvard: I want to ask you a couple of questions about the process before the Competition Bureau.

But just before I get to that I would be curious to know from you if you had known then what you know now about Chapters, would you have gone through this rather protracted struggle of acquiring it?

Ms. Heather Reisman: If I look at this 100% economically, which is the right business way to look at it, there is no doubt in my mind that we overpaid considerably, that our first bid was a high-level bid. So I would have to say no, because I believe in my heart of hearts that company would have been bankrupt, and I would chapter and verse be able to explain why I believe that to be the case.

The other side of it is that it's a living, breathing organism. There are 7,000 people who work in that company. The vast majority of them, particularly out in the retail system, are so committed to this business it's incredible. Since joining I have already met with 75 of the 77 general managers and a very good number of the Coles store managers. It has been a very busy five weeks, I can tell you.

There's no way to put the value of what they could create under the right kind of direction onto a balance sheet. I think the year it would have gone down would have harmed it in a way that there would have been no route. Right now, I can see a route out. I think it's going to be a longer return than I think, but I'm in here for the long term.

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So it's six of one and half a dozen of the other. I would like to give you a definitive answer. I think if you ask my partner, Mr. Schwartz, he would say he would not have done it.

Mr. John Harvard: Thank you for that.

Now, I want to ask you about the process you're going through before the Competition Bureau. I think you used the word “theoretical” in describing the bureau's demands. I inferred from that perhaps the bureau is not being realistic, that it really doesn't understand the business—the book business—and that it doesn't really have its feet on the ground. Can you just fill that picture out for me? What is so unrealistic about their demands? What are they trying to impose on you that doesn't make sense?

Ms. Heather Reisman: I say “theoretical” not necessarily in a pejorative sense. I want to put that into context.

I also think this has to be put in a certain timeline context. We do have now, through ownership... But if we're allowed to merge, we will have by far the largest position in the industry; we will be the largest player.

They have a concern that a large player could behave irrationally.

Mr. John Harvard: “They”, the bureau?

Ms. Heather Reisman: “They”, the bureau. They have a concern that a large player could behave irrationally, and therefore they are required to set conditions, I understand—I'm not an expert—that would avoid irrational or non-competitive behaviour. This would be fine if there wasn't so much change going on in the industry from the emergence of these new players who they do not want to call part of the industry, the Internet or the mass marketers, but those players are there and they're big.

It would also be a perfectly legitimate and understandable position if essentially these were money-making businesses—if Chapters was making money, if Indigo was making money, if the publishers were making money. But we don't have an option for the best of all worlds. In the best of all worlds, Smith's and Coles would not have merged. They would not have merged under that ownership. In the next best of all worlds, when the Competition Bureau was being informed that there was likely going to be abusive behaviour, they would have taken action then and put a moratorium on that growth and allowed other players to grow. That would have been the best of all worlds. But that's history.

Today, we are in a situation where everybody—everybody—is hanging in the balance. So I would say they have a choice between allowing a benign big player with a demonstrated huge financial commitment to the business to right itself or forcing a divestiture and having some third party come in and add to the uncertainty in the industry. And of course, while all that divestiture has to go on, the people working in those stores, what are they feeling? They're going to be sold; they're not going to be sold. Who's going to own them? That has a huge impact on the morale in the company—huge.

Mr. John Harvard: Are you suggesting—

Ms. Heather Reisman: They don't have a choice between a great decision and a poor decision. They have two poor decisions, perhaps, from their point of view. Take the smarter of the two, but that does not seem to be. The route we're going down is not that route.

Mr. John Harvard: Are you suggesting then, Ms. Reisman, that if a premature divestiture—if I can call it that—was imposed, it would further imperil the industry? That it could have catastrophic results?

Ms. Heather Reisman: It's like your question, would it be better to wait or not? I can tell you as a business person that, number one, the uncertainty that will be put on the employees in those stores will ripple through my entire system. It will be very hard to manage. We have a fragile situation already, a very fragile situation.

I think it imperils it. It is going to sound like a self-serving answer, but as I've said to them, I invite anybody to be with me on these cross-country trips and understand the extent of the worry out there in our staff.

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Mr. John Harvard: I have a final question. I think I heard you say that the government might be able to offer some assistance, not necessarily financial. Given the fact that the Competition Bureau is at arm's length, what could the government do?

Ms. Heather Reisman: Yes, it is at arm's length. Whether or not to act is their independent decision, and they have to make a decision that from their view seems like... And I believe they are doing, in the best sense of the word, an extremely caring job. I am not in any way being negative from that point of view.

But what can the government do? I can't answer that. The Competition Bureau is indeed an arm's-length entity. I don't know whether or not there are still discussions and communication going on. If there's nothing they can do, then nothing will happen. You're quite right. Forced to make a settlement, we will make one.

Mr. John Harvard: Thank you.

The Chair: Madam Gagnon.

[Translation]

Ms. Christiane Gagnon: Ms. Reisman, you said earlier that the best thing that could happen to independent bookstores would be that the number of superstores be reduced, such as Chapters and Indigo. I consider that they are superstores and should be reduced.

This can be interpreted in two ways. It leaves you in control of the book industry. Could it also be to keep at a distance any potential buyer who has nothing to do with the book industry? In any case, it is in your interest to express such a wish, but I suppose you also have other objectives aside from that of keeping control. One of your objectives may be to see the book industry remain in the hands of competent people who know the industry well.

You referred earlier to Future Shop. You said that the fact that Future Shop does not know this industry well would have provoked a fragility in the book industry. I would like you to explain why you absolutely want to see the number of superstores reduced. According to me, you want to become the only actor in this decision.

[English]

Ms. Heather Reisman: Okay. Let me say this: superstores are just a format—a large format. Some people want to shop in book superstores. Some people want to shop in large discount stores. Some people want to shop in small stores. Some people... Actually, we've just done some research that shows that about 60% of book purchasers shop in stores of all those formats, so sometimes they shop in one, sometimes they shop in another.

First of all, I would put forward the idea that it's wise to look at the industry not from a format point of view but according to the number of players. For me to have a good, strong, viable business, I would like to reduce the company. If we had 60 to 70 superstores, which would be much fewer than now, we'd have a great business. I'd be extremely happy with it. We'd have a good position in the industry, but in terms of the percentage of overall book sales, we'd have somewhere around 25% or maybe 30% maximum of the whole industry. It would be very viable, we would have a good position in the industry, but we would be far from eliminating competition in the industry.

There would probably not be room for another strong superstore player, but who cares? We don't need to have two superstore players. Let's have lots more independents. Let's have somebody opening stores that have maybe 8,000 square feet, a chain of 8,000-square-foot stores, or a combination of little stores and 8,000-square-foot stores. There's no written rule that says bookstores must be in the super format.

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What I'm saying is that I'm looking to create a strong, meaningful business in this industry, one of importance because I would like to play a role in the industry, but that we don't need to have it all. That's basically what's motivating me. I would like a good, profitable business that is financially sound and that I can also be proud of running. That's basically what's motivating me.

Ms. Christiane Gagnon: Merci.

The Chair: Okay.

Mr. Mills.

Mr. Dennis Mills: Ms. Reisman, over the last year and a half this committee put together a report on the book publishing industry, a report in which everyone takes great pride. One of the organizations we had testify before our committee was the Competition Bureau, and we made sure they were sensitized as to what our concerns were and made it clear that we felt they should play a constructive role.

Now, as John stated earlier, we cannot dictate to them what they must do, but at the same time I'd like to think that the work of this committee had some influence on the way they think and proceed. When you made the statement that in your view the Competition Bureau was asking for... the expression was “not constructive requests”. Could you be a little more specific about what you mean by that? If in your commitment to this industry you feel there's another agency of government that is doing something that is not constructive for the industry, then I think it's important for us on this committee to know specifically what you mean by that.

Ms. Heather Reisman: I'm happy to answer that. I've been very forthright with them during all the discussions, so I have nothing here to keep from this group either.

I completely respect the fact that from their perspective and given the mandate they work under, the issues they're raising and the demands they're making have legitimacy. I understand that—from their point of view. What is very difficult for them to understand is the reality of running a business in an industry of this level of fragility. My view on the very best thing that could happen to this industry is consistent with the answer I just gave to Madam Gagnon. It is that there needs to be some contraction of the big players in order to allow some smaller-sized players to grow and take root in different ways. That would be the ideal scenario.

Mr. Dennis Mills: You've made your point. That's one position. Give us an example of another non-constructive request.

Ms. Heather Reisman: I think that's the biggest issue, this issue of forced divestitures on the premise that there is a need to create in the industry what Indigo was. Their position is that Indigo was here and Indigo was a competitor, so we need to have someone else the size of Indigo.

The reason I was interested in putting the two companies together and streamlining them is essentially that Indigo was not going to be viable in the long term. There was no doubt about it. In fact, at this moment it is being kept viable by cash infusions that would not be appropriate in the normal course of business. That tells you what would actually have happened to Indigo.

Mr. Dennis Mills: Thank you. I have another short question, just as a point of curiosity. You mentioned that—

Ms. Heather Reisman: However, I just want to answer something first. The code of conduct that I have been negotiating and that the bureau has been instrumental in working with is a 100% constructive effort on all parts, and I have tremendous comfort with making those commitments, which will be formal legal commitments.

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Mr. Dennis Mills: The other thing is just a point of curiosity. You mentioned how, once you rolled up your sleeves and got into the books, the warehouses, the returns and everything else, it was like “doctored financials”. You actually used those words. When you're doing a deal like that and you discover something, can you have some kind of a retroactive claim based on—

Ms. Heather Reisman: No, we can't.

Mr. Dennis Mills: You're just stuck with it.

Ms. Heather Reisman: I'm saying that in the context in which it has been brought to my attention. Books for which credit was taken last March were actually only returned to the publishers in the last five weeks. That's very unusual.

This is probably a longer story, but, no, we cannot take any action. But thanks for asking. Would I like to? Ask me if I would like to.

Mr. Dennis Mills: Thank you.

Thanks, Mr. Chairman.

The Chair: Ms. Reisman, could I ask you just a couple of brief questions? If the Competition Bureau was to decree divestiture and we have to replace the Indigo-Chapters scenario, do I understand you to then be saying that if that were the case, we'd be back to the future, so to speak, and we would be in dire straits, so the whole process would have to start again? Are we in a bad way?

Ms. Heather Reisman: It is my belief that it is going to—because I'm pretty sure this is going to happen; we are trying to do this—add additional stress to the situation. Will it, in and of itself, bring us all the way back? I can't say, because I'm going to be working my damnedest not to lose the investment I have. But it is going to add a big level, an additional level, of stress, and it also takes away from me. It will take longer for me to start doing some things with publishers that I would like to do, and therefore it will cause the publishers to require additional help from government.

And yes, I think it is worth noting here that, at least from my understanding in discussions with many publishers—and the Canadian publishers in particular—they would have been very pleased to just get the legally binding code of conduct and would have allowed for the managed streamlining of the industry.

The Chair: Now that Pegasus has been folded into Chapters and is now just a distribution division, so to speak, do you see that all the problems the publishers had in regard to Pegasus are now over with this new reorganization?

Ms. Heather Reisman: No, not yet, because, one, the facility itself does not work.

There are issues. The publishers have two ways in which they can ship: to a central distribution or to stores. It's harder to ship to stores. It's harder for them, and more costly for them and more costly for us.

We now cannot use the facility. It's quite astounding, sir.

The Chair: Do you mean the physical layout?

Ms. Heather Reisman: Yes, the physical layout. It is so over-mechanized—and this is a fact—that sometimes an order can start at the beginning on Tuesday and not get to the end of the line until Thursday, because there are miles and miles of conveyer belts. That is a fact.

I've been in business for 26 years, and I can tell you I have never seen a situation like this—never.

So the issue is, the longer it takes us to work through all of this inventory... Now, at some level the publishers are just going to say, no, we can't take it back, and that would be fair. But then we have to get rid of that inventory. There's a bit of a cost to us that affects our financial ability to start writing all of the payables. So it's a bit of a conundrum, and I can only say to you today that, together with the publishing industry, we are trying to work together to work this out.

The Chair: I have one last question before I pass it over to Mr. Harvard.

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I just want to make sure I understood you right. With the new code, where you would try to get returns down to 25% to 30% and the payment terms to 90 days, did you say within 36 months, or that you would put something in place within 6 months, which would be effective within 36 months?

Ms. Heather Reisman: No. We're putting something in place as soon as we come to terms with the Competition Bureau. There's a first period of time when we still have to get our hands around things and the actual terms of the code will not be implemented 100%. But essentially from the time we come to terms, the clock starts running and every year we will make improvements toward the end goal, which gets reached in 36 months. So we will immediately be bringing returns down and payables down. But there will be some transition period where we will still be out of whack somewhat.

The Chair: Are the publishers in accord with this? Are they on the same wavelength as you?

Ms. Heather Reisman: Yes, they know there is some sort of working through of former inventory.

The Chair: Mr. Harvard.

Mr. John Harvard: Just one question.

Ms. Reisman, do you know of anything that would stand in the way of the bureau meeting your business requirements without the bureau violating the terms of its own mandate?

Ms. Heather Reisman: I don't. I couldn't answer that, sir. I'm not familiar enough with competition law.

Mr. John Harvard: Okay.

The Chair: Are there any more questions? If not...

Sorry, Monsieur Harvey.

[Translation]

Mr. André Harvey: Thank you very much, Mr. Chairman.

I had the opportunity of seeing the report of the Competition Bureau on another industrial sector. The Bureau went quite far in its recommendations. This was at the time of the merger between Abitibi-Consolidated and Donohue. The Bureau went quite far in its recommendations that its mandate be maintained. Are you expecting specific recommendations that might even have a bearing on your management process?

Secondly, all industrial sectors are evolving rapidly. This is as true of the space industry as it is of culture. Can you quickly summarize the trends, in terms of statistics, in the development of the book industry?

Thank you.

[English]

Ms. Heather Reisman: The biggest evolution is the increased role the mass marketers are playing in retailing books, the impact of the Internet, which is approaching about 10% of the market—that will continue to grow notwithstanding all of the volatility in Internet stocks. Book purchasing over the Internet is a very well-established industry so there's huge opportunity for consumers to buy it there. At some point—and I don't think this is in the next couple of years—there's no question that electronic publishing will have an impact on the industry. So those are, as you say, the normal evolutionary conditions. But I would say the biggest evolution in the industry has to do with the increased number of channels participating in the retailing.

The other part, of course, is the consolidation of the publishing industry worldwide and the tremendous difficulty of small publishers to thrive. Here is a place where I'm hopeful that the heritage department will make a strong move, because we need—we need—a strong Canadian publishing industry. That's my opinion.

Thank you, sir.

The Chair: Ms. Reisman, I'm speaking not only for myself—this has been extremely useful to us in furthering our knowledge of what's going on now. I think you've been extremely forthright with us, which we really appreciate. I thank you very much for coming.

Ms. Heather Reisman: Thank you for being here and for waiting for my plane.

The Chair: This meeting is adjourned.