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I don’t think it is any real secret that I’m a huge fan of the Direct Market system – I find it to be one of the most efficient and effective retail methods in which to deliver content.

The heart of the Direct Market, in my mind, is that we’ve traded discount for returnability. Now, contrary to what a lot of people seem to think “returnability” generally doesn’t strictly mean “order anything you want, return whatever doesn’t sell”, because your ability to return product is, generally, tied to your ability to sell things. For the most part, book distributors will allow you to return about 20% of the total dollars of your orders. In the simplest example, if you order $200 each of books A, B, C, D, and E ($1000 total), at the end of the sales period you may then return up to 20% of that $1000 – or $200. Potentially this could be 100% of book A, but then you can’t return any copies of books B-E, because you would have used up your returns allowance.

One of the essential problems I have with returnability is that the costs to the retailer are generally sub-rosa – but the costs are there, and can be significant. These are not insignificant costs, and, more importantly when you’re talking about material that didn’t sell, these are unrecoverable costs – after all, you didn’t sell that material, and generated no revenue for it, so all of your costs have to be paid for by other items.

I suspect that if you’re a Big Big store, economy of scale starts to make some of these expenses not so bad – you probably have an employee dedicated to nothing but packing and shipping; perhaps even one whose sole job is handling returns – but for your average small business, these costs, while largely “invisible”, can be a substantial hit against the bottom line.

You’ve paid shipping for it to get to you. You have to pay shipping to send it back (and you probably want to ship that with insurance and proof of delivery, so that costs more). You have to pay someone to order, unpack, rack, identify, unrack, pack, ship that item. If you were only returning a single item, that’s virtually certain to cost you $10 or more. Of course, hopefully you’re not processing returns as single pieces, that’s inefficient, but if you were, that’s a $10 cost on $0 of revenue.

Selling books in the traditional fashion is not a business with enormous profit margins at retail. Standard discounts are well under Keystone, books are generally heavy (and thus expensive) to ship, and they soak up a lot of square footage (which can get expensive in competitive real estate markets) – this is certainly one of the reasons so many book stores pair themselves with selling coffee (a very high margin business) or focus on used books (which can have a high margin)

The Direct Market on the other hand, generally does Keystone pricing or better. We’ve traded this for no returnability. The difference in profit potential can be fairly astounding – buying a random $10 Batman book from a book wholesaler might cost you $6. Buying that same book from Diamond is only going to cost you $4.50 – you’ve lowered your cost by twenty-five percent!

Essentially, when you know that you will sell something, buying an item as a retailer via the DM system is a much saner proposition.

But there’s a clear problem in the DM, and that is of the inherent fiscal conservatism of the DM retailer.

The system itself sets us up to be fiscally conservative,

Part of that is evolutionary – because the DM orders material monthly, and because our ordering processes have also been designed with a consumer component, as a market we’ve grown to rely on the concept of preorders. Not all stores do, of course – Jim Hanley’s Universe in New York and Comic Relief in Berkeley are two examples of very large DM stores that have eschewed the preorder model – but most do.

By and large, this is a sensible approach for most stores. Preorders represent “guaranteed” sales, and in virtually all cases one can apply a fairly standard multiplier against your preorders to have a pretty good gauge of what your “rack” (non-preorder) sales are going to be. Work with no preorders generally indicate work with little-to-no general interest. Certainly there are exceptions to this, but it is a good rule of thumb.

With one caveat.

The greater the percentage of your customers that preorder, the more “closed” your system becomes, and the less of a chance you have of reaching or appealing to someone who is not already your customer. I know stores that are 75% or better running to preorders; and, generally, these aren’t very good stores from my individual aesthetic viewpoint.

The best stores, in my opinion, use preorders as a tool, but not a rule. The worst stores, in my opinion, rely on preorders as a crutch.

The second part of the system that sets us up to be fiscally conservative is linked to discounts, and how Diamond calculates them. Generally speaking, for a mature store, Diamond caps discount for most publishers (not for most titles, but for most publishers) at 45% and only 42% for reorders. Unfortunately this makes a massive difference when compared against the largest publishers – a publisher like IDW is capped at 50%, while DC or Marvel might get you a percentage of 57% or higher.

Structurally, this puts anyone not already “big” at a huge disadvantage – when you put the cost differential up against the generally lower sales potential of “lesser known” work, it inherently makes that a bet less worth taking.

Ultimately, retail is gambling – be it returnable or non-returnable – you’re betting that you can figure out the “right” number of copies to bring in to sell them in a reasonable time frame to the maximum number of people. In a perfect world, you’ll never run out of any book until the demand for it has shrunk to zero, and that you’ll always have the perfect amount of Just-in-Time inventory on hand.

In other words, if you sell, on average, a copy a day of a title, and your resupply is 2 days away, and you order each and every day, then you don’t need to have more than 3 copies of that book on hand to “never run out” and to sell 365 copies of that book over the course of a year: you’re getting your replacement stock “just in time” to replace the copies you’ve just sold.

(In reality, most books actually sell rather slowly, outside of their initial release window, so “just in time” can certainly be “in the next two weeks”)

But, in the end that raw dollars-and-cents discount-based calculation is more likely to cut something off at the knees than anything else – if you can make a $5.50 profit versus a $4.20 profit for selling the “same” $10 book, which decision are you going to make?

Tied in with the pricing issues is the notion that all of the major publishers are fairly dramatically overproducing material right now – whether that means sometimes three different “Hulk” comics a month from Marvel, or three different “Transformers” comics a month from IDW, there’s a significant number of items that are out there to soak up the money from consumer’s pocketbooks, rather than being material of merit in and of themselves. It is my belief that there’s at least 25% more material being produced in 2009 than there’s a real and legitimate market for. The net impact of over-production is to drag down sales of “core” material, and to make fringe books fairly insignificant movers. For Comix Experience, at least, there’s now a wide swath of material from major publishers that I’m not even bothering to bring in any rack copies of whatsoever. For example, on the most recent order form, I count 42 different TP/HCs from Marvel comics (not counting “variant cover” editions [!]) – I ordered zero rack copies of thirteen of those; or nearly 31%! Further, of those 42 books, there’s only six that I ordered more than a single rack copy of – and only eight that I think will have “legs”, where I’ve set an automatic “minimum point” for my Point-of-Sales system to reorder the book automatically without any action on my part.

The other 81% of Marvel’s “backlist” for the month, I’m effectively treating like a periodical comic – get it in, get it out and forget about it after that.

Now, at Comix Experience, it is a point of pride that we carry a wide variety of publishers and genres (and so Marvel’s over-production of marginally long-term salable material doesn’t have that much of an impact on my thinking), but I suspect that you can see from this how the “average” retailer might be thinking “Well, man, if I can’t sell material from the #1 publisher in the business, then why should I be ordering [whatever from a smaller press]?”

Here’s the thing, though: even having full returns and no change of discount, I still wouldn’t be racking most of those Marvel trades – I don’t see an audience for them, and returns wouldn’t change my thinking in any significant fashion.

We’re in this really weird place in comics right now where amazingly aesthetic and commercially successful graphic novels are falling out of the sky faster than they can be counted, and yet the sheer volume of releases is dragging the average velocity down considerably. And that’s more likely to lead to even greater fiscal conservatism from retailers as more time passes – it isn’t possible for all but the physically largest stores to carry “everything”, even if they wanted to.

But the important thing to remember here is that markets, generally, behave in the way they are programmed to – when you make sales-to-consumers the major part of your catalog strategy, when catalogs get divided into “haves” and “have nots”, and wholesale pricing (and stock availability!) follow those divides, then, of course, the market will micro-focus towards those “haves” and become less efficient overall towards the “nots”.

Here’s the thing, though: because of the centralized nature of the majority of distribution into the Direct Market, it actually makes it easier to change behavior in the DM than harder. Not that I think it is likely to happen anytime soon, because of lack of political will, but I believe that the general direction of the DM could “easily” be changed over a 3-5 period with something as simple as a redesign of Previews.

Essentially, there have to be reasons given for retailers to take anything other than “the easiest path” if that’s what you want them to do – that can be done with pricing, with placement and “editorial voice”, with promotion, and so on. There’s an inherent fiscal conservatism to any kind of small business (or, generally, they don’t stay in business all that long) – and the system that the Direct Market has been built/evolved into really does nothing but reinforce that conservatism in ordering.

Brian Hibbs has owned and operated Comix Experience in San Francisco since 1989, and is a founding member of the Board of Directors of ComicsPRO, the Comics Professional Retailer Organization. Feel free to e-mail him with any comments. You can purchase a collection of the first one hundred Tilting at Windmills (originally serialized in Comics Retailer magazine) from IDW Publishing. An Index of v2 of Tilting at Windmills may be found here. (but you have to insert “classic.” before all of the resulting links) You may discuss this column here (but you have to insert “classic.” before all of the resulting links).