In Depth

« Back to Features

New routes to retailers

25.04.08 Graeme Neill

Borders seemed to buck the trend when it announced earlier this year that it would close its central distribution centre.

The move will see the chain’s Cornwall-based warehouse shut in favour of direct supply to shops from publishers and wholesalers. This at a time when supply chain centralisation has been a hot topic. Waterstone’s has been carrying out an ongoing high-profile consultation regarding its distribution for the past year, ultimately concluding that centralisation was the way forward.

From the end of May, stock will be shipped to one central Waterstone’s warehouse in Burton upon Trent, rather than going direct to branches as it currently does.

In both Waterstone’s and Borders’ cases, the changes are likely to be the biggest made to their business models this year, but some experts believe an overhaul for the whole book industry supply chain is long overdue. As Paul Smiddy, retail analyst at HSBC, puts it: “The [book] retail supply chain is currently more akin to the 19th century than the 21st.” He believes the number of routes from publisher to each retail store are “far too numerous to make commercial sense”.

“Most publishers have their own sales forces and distribution networks,” he adds, with some smaller publishers using the services of larger ones such as Random House and HarperCollins. “Wholesalers, of which there are now only two main ones left, act as consolidators to a degree. Most retailers do not have their own centralised distribution system.”

Add to this already complicated system the sheer number of times a book can travel up and down the supply chain—a problem caused by sale or return. “It’s remarkable because in most other retail sectors the retailers take more of the stock risk, and product doesn’t go back down the supply chain with a consequential increase in handling costs,” Smiddy says.

In changing their operations, both Waterstone’s and Borders believe they will make their own supply chains more efficient.

Over in Burton upon Trent, the finishing touches are being made to Waterstone’s 150,000 sq ft distribution centre. The scale is impressive. It has space for 7,500 pallets, houses a dedicated 30,000 sq ft area for its internet order dispatches and pick and pack operation, as well as 34 dispatch and sortation bays (see diagram, right).

Slow start

The project has already taken a long time to come to fruition—it has been part of Gerry Johnson’s plans since he joined Waterstone’s as m.d. in October 2005. The small matter of taking over Ottakar’s and integrating it with Waterstone’s meant it had to be kept at the bottom of his in-tray. Originally due to open on 1st May, Johnson’s attitude is that “hitting a date is not important”.

The centre will start supplying the Burton upon Trent branch of Waterstone’s around the 31st May, then supply will be scaled up to the surrounding region, and then the entire store base. “The whole reason for a staggered roll-out is so we don’t commit ourselves in our entirety on day one,” says Johnson. “The operation can be brought in gradually and we aren’t putting our eggs in one basket. We have the systems and infrastructure in the background if we need to use them.”

Johnson’s previous experience includes handling the supply chain at DIY specialist Wickes and for food wholesaler Booker. He says it’s tricky to say whether the book supply chain lags behind other sectors because “every supply chain is different”.

“From our perspective, there’s a far better way to do it than how we are doing it now,” he adds. “The fact we can [make the change is] helped by the advances made in the supply chain systems that retailers use. It’s not groundbreaking for retail in general, but it is a big step we are taking towards modernising our supply chain.”

Johnson says he modelled Waterstone’s new supply chain system on other small electrical and entertainment retailers. “I benefited from being able to see modern supply chains that work more efficiently than the book supply chain,” he says. “That didn’t drive the decision. What did was that I wanted our booksellers to spend as much time [as possible] selling books. I want to take as much effort [as possible] out of getting books onto the shelves.”

Publishers are supportive of the move, but nearly all add the disclaimer “providing it works”. Johnson is aware of the concerns, so he set up an advisory group including representatives from Random House, Hachette Livre, Penguin and the Faber Independent Alliance. “The larger publishers have a strong relationship with the buying team, our commercial director and myself. It’s important to spend time with the smaller publishers and help them through the process.”

Both publishers and Waterstone’s are expected to make savings in terms of reducing distribution costs and cutting returns as books are redistributed across the chain rather than returning to source. As a result, Waterstone’s has asked publishers for up to 5% extra discount, depending on their size and performance. This will partly offset the “huge” investment being made in Burton upon Trent.

“Over the next calendar year, we will not save directly from the distribution centre,” Johnson admits. “Looking at the longer term, it will cover costs and then we will work with publishers and distributors to improve the way things work.”

An opposing strategy

While Waterstone’s centralises, Borders is going in the other direction. Its Cornwall distribution centre will close in August with the loss of 91 jobs. No final decision has been made by Borders head of supply chain Geoff O’Neil about how books will then make their way from printers to stores, but he says it will be a mixture of delivery via wholesalers and direct from publishers.

“We have anything from 1,500 to 2,000 publishers on our records,” he says. “We couldn’t have all of them sending stock into our stores each week. Some of the big publishers and distributors will go direct, but some of the small but equally important publishers will go through a wholesaler.”

Both location and size of the chain have driven the changes. Many in the industry have previously questioned the logic of having a distribution hub hidden in the far south-west corner of England. This slowed book delivery; once an order had made it to the distribution centre, it could take a further two days to send it on to a store. Borders’ original American owners had also built the centre with a view to service at least three times as many stores than the chain’s current portfolio of 42 branches.

“It was built by the American management when it was seeing Borders as having a 100–150-store-strong business in the UK,” O’Neil explains. “A distribution centre would have been therefore appropriate. Now our strategy going forward is different from what the Americans had. [The centre] will never be as efficient as it needs to be to justify the costs.”

When O’Neil joined Borders in August 2006, the immediate future of the business was unclear. Then parent company Borders Group put it up for sale in early 2007. He said that he started examining the supply chain in earnest several months before Risk Capital Partners bought the retailer in September last year. “We considered the various options, which were: continue operating out of the distribution centre; move to a new distribution centre in a central location; go through a third party like a logistics company; go entirely direct; or a hybrid of the latter two.”

O’Neil says that the new supply system will improve availability and speed of response, with delivery time cut to two or three days. Publishers will reap the benefit of gaining a closer insight into how individual stores are selling their books.

“Publishers will have a visibility of each individual store’s performance,” he says. “By supplying direct to stores, they will know which stores are performing well in each category. If one store was underperforming in academic titles in a university town, a publisher could spot that and work with us to maximise opportunities.”

It is planned that the new supply system will be in place six weeks before the distribution centre closes in August.

Publishing possibilities

While retail is at the forefront of supply chain changes, it is possible that the steps being taken by Waterstone’s and Borders may lead to wider changes within publishing.
Stuart Hearn, business development manager of DHL’s publishing industry group, claims that the changes could have wider implications for the entire industry.

“Whatever the strategic reasons for change, one thing is clear—the adoption of such different supply chain models will create a serious headache for publishers who will need to create increasingly flexible and dynamic supply chains to suit specific routes to reader,” he says. “Clearly, the future winners in the publishing sector are likely to be those with the most efficient and responsive supply chains.”

He says that a historic culture of “over-production and over-complication” has to change. “The recent moves by Waterstone’s and Borders to restructure their logistics strategies show that supply chain change is no longer a paper exercise; it’s actually happening and will force publishers to change the way they engage with retailers on an individual basis.”

He floats the possibility that publishers should collaborate and share inbound supply, transport, staff, warehousing, delivery locations and IT systems; in effect, consolidate their warehouses. “This is the crux of the matter—do publishers embark now on a strategy of developing bespoke supply chains for every route to reader, or combine and collaborate to reduce costs, improve margins and improve supply chain efficiencies?”

Next year, then, it could be the turn of publishers to bring their supply chains further into the 21st century.

Retail Flagship Feature waterstone's gerry johnson Borders Flagship Graeme Neill Home supply chain

See Also