The bookshop that lost the plot After 129 years, New Zealand's best-known bookseller is in jeopardy. What went wrong, asks Karyn Scherer.

In case you haven't noticed - and you could certainly be forgiven if that's the case - this is New Zealand Book Month.

If you happen to live in Christchurch, then getting hold of the latest bestseller is probably the last thing on your mind. But Book Month is a big deal for the publishing industry, and for the retail stores which stock its wares.

Around $20 million has already been committed to a campaign aimed at boosting sales, and booksellers hope many New Zealanders will still heed its message that "books change lives".

But some acknowledge the timing is rather unfortunate, given last week's quake. Not only are many Christchurch bookstores seriously damaged, but there was that other tremor, too - the fact that the entire future of the Whitcoulls and Borders chains, which account for around one-third of all book sales in New Zealand, is also up in the air.

It is probably crass to compare the shaky future of one of New Zealand's oldest companies and best-known brands to the shaky future of our second-largest city.

However, even the most optimistic observers admit to some doubts about whether both Whitcoulls and Borders can survive. They also claim that unlike the tragedy in Christchurch, the company's current problems were entirely predictable.

"We've all known for a very long time that they were in trouble," says one local publisher. 'It's been incredibly frustrating to watch."

In its current incarnation, the Whitcoulls and Borders group includes 76 Whitcoulls stores, 9 Bennetts stores, and five Borders stores throughout New Zealand.

The business, which can trace its roots to a bookstore founded in 1882 on Christchurch's Cashel St, has had a string of high-profile owners in recent decades, including Ron Brierley, Graeme Hart and Eric Watson.

It was Hart who added Australian book chain Angus & Robertson to the group in the mid-90s. In 2001 the company was bought by British retailer WH Smith, but was flicked on three years later to Australian private equity firm Pacific Equity Partners. PEP further expanded the group, adding 32 Borders stores in New Zealand, Australia and Singapore, as well as some other businesses.

PEP renamed the group REDgroup Retail. According to some in the book industry the name is apt, because when PEP surrendered the running of the business to the Australian branch of accounting firm Ferrier Hodgson last month, the group was bleeding red ink.

PEP declined to comment on its stewardship of the business, saying it would be "distasteful and unhelpful" for the 1200 or so staff who are still employed by both chains in New Zealand.

But behind the scenes, the company has made it clear it believes it has been a victim of international turmoil in the book industry, of a slump in consumer spending due to recessionary pressures, and of the record strength of the Australian dollar which has prompted Australians to embrace online shopping from American websites in unprecedented numbers.

The New Zealand book trade is a particularly small world, and its inhabitants are also unwilling to speak out, for fear of repercussions. But few buy PEP's line that it has been forced to address circumstances beyond its control.

Instead, they claim, the company's current predicament is an all-too-familiar tale of mismanagement: of shiny new executives rubbishing the opinions of experienced staff; of a bizarre attitude to discounting which saw popular books slashed in price and less popular ones quietly hiked; of cash being bled from the business in the form of management fees and interest payments on debt; of relentless cost-cutting that left many of its staff and suppliers utterly demoralised; and of short-term business decisions which proved a huge millstone around the owners' necks.

PEP's willingness to pay more than A$100 million for the struggling Borders stores at the height of the private equity boom in 2007 is a case in point, they believe.

"We couldn't believe it. But it was a typical private equity thing to do - just fatten the company up, regardless of whether it made sense, in the hope that you could flick it off as soon as possible," says one observer.

One former staff member says her heart sank when the sale to PEP was announced in 2004. Although Whitcoulls had been through some "interesting" owners, most of them actually listened to what managers had to say, she says. "With PEP, it was a case of: 'We know better'."

Like many local writers, Gordon McLauchlan has been saddened by what he sees as the decline of Whitcoulls over the past few years.

"If they ran the shop properly, they could kill every independent bookshop in New Zealand," he says. "But the problem seems to have been that the people running it seem to think that books are just like bread and butter, and treat them accordingly. It got to the stage where I used to go and make speeches there, if I couldn't avoid it, and I'd get a Whitcoulls token from them. But because there was nothing in the shop that really interested me, I used to take it around the corner and spend it at Unity."

Former staff have been quick to reminisce about the days when Whitcombe and Tombs, as Whitcoulls used to be known, was able to boast that it was the largest educational publisher in the southern hemisphere. As one former employee, John Bentley, noted in a recent letter to the Herald: "Bertie Whitcombe must be spinning in his grave."

But those familiar with PEP's strategy also note that grumbling about the lack of cerebral fiction in Whitcoulls these days is like lamenting the paucity of documentaries on prime-time TV.

"Whitcoulls is like reality TV," notes one industry stalwart. "It's all about the latest bestsellers, and cookbooks - it's not a specialist bookstore. And it's not really even a bookstore. It's a stationery store which happens to sell books. What they hope is that you'll pop in for some Sellotape and a greeting card, and pick up a paperback on your way out."

Nevertheless, many believe one of PEP's biggest mistakes was shifting the book-buying team to Melbourne.

What it didn't seem to appreciate, says another observer, is that Australians and New Zealanders are actually quite different. In many ways, Australians are more like Americans, whereas Kiwis are more English. "They like Oprah, and we like Jamie Oliver. And in England and America, it's the supermarkets who call the shots in the book trade. That isn't the case here." While many speak highly of former managing director Ian Draper, few seem to be fans of his successor, Dave Fenlon. Another former executive, Charlie Rimmer, remains infamous in the industry for a letter he sent to REDgroup's smaller suppliers in 2007, informing them that their services were no longer required unless they were prepared to pay a substantial fee.

According to one local publisher: "It was like a bomb went off."

Rimmer, who had previously worked for Borders in Britain, left shortly afterwards, but not before a withering reply to his original letter from Tower Books owner Michael Rakusin became an internet sensation.

Among other things, the letter accused REDgroup of not only failing to leave the door open to its smaller suppliers, but "slamming it and bolting it". It noted that Tower's sales had significantly increased to its other customers but had plummeted with REDgroup, which Rakusin blamed on "sub-economic ordering ... SAP installation, new management, and stock overhang". He accused the company of arrogance, and being "both immoral and unethical".

"It amazes me that the message has not become clear to your 'management': there are only so many costs you can cut, there is only so much destiny you can put in the hands of a computer system, there are only so many sweetheart deals you can do with large suppliers. After that, in order to prosper one actually has to know one's product and have an appropriately staffed buying department. Most importantly, one has to train sales people of competence ... And it would seem to me paramount to stop blaming suppliers for your misfortunes, trying ever harder to squeeze them to death, and actually focus on your core incompetencies in order to redress them."

According to locals, New Zealand suppliers chimed in with a hearty "hear, hear".

Many New Zealand staff also had misgivings about their new managers. Some were appalled when an employee who had been with the company for more than 40 years was made redundant. And one recalls an incident when a staff member was told she wasn't allowed to take a sample book home, because that would be tantamount to stealing.

One of the group's biggest problems, insiders say, was an astonishingly low turnover of stock, which it tried to address by reducing its selection of books and diversifying into even more products. But according to one observer, it was obvious REDgroup was starting to lose the plot when pallet loads of photocopying paper appeared in A&R stores. Unlike Whitcoulls, A&R is solely a bookstore.

"The same thing happened here," the person claims. "They were selling all sorts of stuff just because they got a good deal on it. I even heard there was a shipment of baby clothes on the way. What was next, bananas?"

Some were also baffled by Whitcoulls' decision to deeply discount Annabel Langbein's extraordinarily successful cookbook, The Free Range Cook, just before Christmas last year. The book was so popular that stock ran out, and customers were fighting over it. Yet Whitcoulls was apparently happy to reverse the law of supply and demand, and sell it at $20 below its recommended retail price.

Langbein, whose own company published the book, is still believed to be owed money from those sales. She declined to comment on the situation.

But publishers believe an otherwise lacklustre Christmas was probably the last straw for the company. In the retail trade, cashflow is crucial and it was clear by early December that REDgroup was running out of money, they say.

It had already begged publishers to extend their terms by several months, and had drastically reduced the amount of stock it was carrying.

"They would have hung on till Christmas, because December is the only profitable month in the book trade," says one industry veteran. "But December 2010 wasn't great."

Incredibly, there is no reliable historical data which charts official book sales in New Zealand.

Statistics New Zealand figures supposedly show the number of book, newspaper and stationery stores has dropped from over 1000 a decade ago to around 850 now. Employee numbers have apparently dropped from around 6500 to 5500 over the same period.

It was only two years ago that international research company Nielsen introduced its BookScan service here. But some believe the figures show the local industry is still a long way away from being diagnosed as terminally ill.

According to the Nielsen data, New Zealanders bought 9.6 million books last year, worth $244 million. The volume of sales was up 1.2 per cent on the previous year, although their total value was much the same.

In its heyday, Whitcoulls is believed to have dominated the local book market, accounting for more than half of all sales. It is now believed to account for around one-third of sales, with a similar share going to its main rival, PaperPlus, and most of the rest split among the independents.

PEP is believed to have bought the business because it was good, steady earner. However, an examination of Whitcoulls' group accounts filed with the Companies Office show its profitability has plummeted since 2004. In 2007, its pre-tax profit was almost $16 million. By 2009, this had fallen to just $300,000.

In 2009, PEP decided to consolidate its accounts to include Borders. But prior to that, the accounts show Borders lost nearly $1 million in 2008, and $1.8 million in 2009.

Right until the end of 2009, PEP is believed to have been keen to float the business on the New Zealand and Australian stock exchanges. It has maintained that the business suddenly deteriorated, particularly in Australia, in 2010.

If that is true then the deterioration must have been extremely swift, because in the middle of 2010 it announced it was likely to breach its banking covenants, and it ended up having to put its own money into the business when its bankers pulled out. It also decided to buy out local noteholders who invested in the business.

Following the announcement about its voluntary administration, many customers have been keen to vent their spleens about their less-than-satisfactory experiences in the chain's stores. Nevertheless, one former staff member feels desperately sorry for those who have been left to man the trenches in the face of not-so-friendly fire from customers. Not only did most staff find out about REDgroup's problems by reading the Herald, they also had to endure the fury of customers trying to redeem vouchers, the person notes.

Ferrier Hodgson revealed this week that unsecured creditors are owed more than $20 million in New Zealand. With PEP itself by far the largest secured creditor, local suppliers are pessimistic about their chances of recovering much, if any, of what they are owed.

There are concerns that some suppliers, such as local stationery companies, could go to the wall. And the owners of some of the group's largest stores, such as Australian mall owner Westfield, must be particularly anxious.

A "watershed" meeting is expected to be held in about a month's time to decide the company's future. But in the meantime, the administrators have noted the New Zealand business is in better shape than Australia, largely because both Whitcoulls and Borders sell many high-margin products as well as low-margin books.

While there is hope that Whitcoulls may survive in some form, few people hold out much hope that anyone would want to buy Borders, given that its British business has already collapsed and its American business has just filed for bankruptcy protection.

Briscoe Group owner Rod Duke, who is renowned for casting his eye over any retail business open to offers, is believed to have previously declined the opportunity to take on Whitcoulls.

Some would love to see an approach from the Norman family, given their track record with Farmers and jeweller Pascoes, while others wonder if the Warehouse Group, or Kathmandu founder Jan Cameron, might be tempted to make a cheeky bid.

Other potential buyers could include PaperPlus, or Whitcoulls' previous owner WH Smith, which may be keen to pick up its highly profitable airport stores. Dymocks might also be interested, although sceptics note its history so far in this country has already been pretty rocky.

Some doubt there will be a trade sale at all. It is more likely, they claim, that another private equity player will take it off PEP's hands, or that PEP will continue to run it itself with far fewer debts to worry about.

It has also been noted that PEP has reinstated a book-buying team in New Zealand. While some credit the company with realising it made a mistake by getting rid of its New Zealand staff - particularly its highly regarded buyer Joan Mackenzie, who joined rival PaperPlus - others are more cynical, and believe it probably realised it might have to split off its New Zealand business.

One industry figure believes small investors might well have been persuaded to invest in the company.

"It's just so lucky that public float didn't happen, because otherwise we might have ended up with another Feltex," she suggests.

While some people familiar with REDgroup's strategy insist it was flawed, no one is completely dismissing the importance of the huge challenges that undoubtedly still face the industry.

If what has happened to the music industry is any indication of what might yet happen to books, then it is possible that no one will want to buy Whitcoulls, they suggest.

In New Zealand, Macmillan is the latest local publisher to shift its distribution to Australia, following in the footsteps of Penguin, Hachette, and Allen & Unwin.

Independent bookseller Hamish Wright says he understands the reasons for such moves, but laments that it sometimes means retailers are not able to respond to customer demand as quickly as they would like. Some New Zealand orders are now being given lower priority than those from Australia, he says, and some now take many days to arrive. In December in particular, delays can mean lost sales, he says. Or they may prompt customers to go online instead.

Independents insist their superior service and greater knowledge will continue to give them an edge over the chain stores. But with sales of e-readers slowly gathering momentum in New Zealand, and overseas sites such as Amazon and The Book Depository continuing to siphon off an unknown number of online sales, some believe that many bricks and mortar booksellers will struggle to remain viable.

Even Whitcoulls has been unable to match its competitors in online sales, despite the fact that it was one of the first to tackle what used to be called e-tailing with its aptly-titled FlyingPig website. More than a decade later, local websites such as Fishpond and MightyApe are believed to be well ahead of Whitcoulls in online sales.

With global giants such as Google and Apple announcing new initiatives almost daily, and a lot of chatter about the merits or otherwise of self-publishing, local publishers are understandably defensive about the impact digital technology is likely to have on local sales.

While customers may gripe about the price of hardbacks, some tend to forget that the only reason Amazon is able to make a buck is because it is selling huge volumes to a global customer base with extremely low margins and minimal overheads, they argue. And even then, they note, Amazon absorbed many years of losses.

Some are convinced publishing will need to undergo a fundamental transformation if it is to thrive in the digital age.

"For the moment, ebooks and overseas online retailers have only just started to gnaw away at local distribution," Australian business consultant Josh Dowse recently wrote on the Business Spectator website. "Their convenience and price advantages make sense, so the trend will continue. But to fly books in small parcels around the world is surely crazy, not least for their carbon footprint. There must be a way for books to be bought online and sent from local warehouses, through the same distributor who has spent money to secure the local rights for the book, and invested more in its local marketing and publicity."

Random House managing director Karen Ferns disagrees that the industry will have to rethink some of its basic tenets.

"I think that publishers and retailers are all under pressure of change, and the recession has had an impact, but we just have to be fleet of foot and ready to adapt," she says.

According to Ferns, last year was a record year for New Zealand publishers in terms of local turnover. "I prescribe to the view that it's not an industry in crisis."

Ferns admits the industry has already become more selective about the number of titles it publishes each year, but notes that new technology now allows smaller print runs of less popular books, like New Zealand fiction, making them more viable.

The industry is also getting its head around the fact that its marketing needs to change, as reviews in the mainstream media, which have been its main marketing tool until now, have gradually shrunk, she says.

It's an issue that companies such as Amazon have not yet even begun to grapple with, she notes.

Macmillan boss David Joel also claims to be somewhat more sanguine than some of his colleagues about what he agrees is a fascinating period in publishing. But Joel is far less optimistic about the local implications, and doubts that any local publishers are ultimately making money from local books. The New Zealand market is simply too small and too fragmented, he believes.

"With the REDgroup situation, I just cannot believe that local publishing will survive. University presses will, I guess - or maybe they won't."

Even with modern printing techniques, it is almost impossible for a publisher to cover its costs with print runs of less than 3000 copies, he says. Most local titles are lucky to sell anything like that.

It could be that in 10 years' time, Creative New Zealand will be subsidising local cookbooks, as well as fiction and poetry, says Joel.

But he also notes that contrary to many predictions, books in general have so far managed to survive many rivals for the public's attention. "Ebooks are certainly going to reduce the number of books that will be sold in traditional outlets, but by how much? If it got to 25 per cent I'd be absolutely staggered."

Gordon McLauchlan begs to differ. "I have absolutely no doubt that ebooks are a major part of the future," he suggests.

While McLauchlan believes that specialist bookshops will probably survive, he is also wary of what he perceives as an "intellectual and cultural snobbery" about the future of books.

"If you read all the overseas magazines, as I do, you find that nobody is all that much more informed than we are. People are making very educated guesses about what's going to happen, but nobody quite knows."

His own view is that the paper book will continue to survive "as an artefact" but it will be a "very diminished" industry.

"People over 50 think books are hallowed objects, but if you're realistic about it, and realistic about the books you read, then you have to admit that ebooks are the way of the future."

The real question may be whether that future includes Whitcoulls.