CASE 9

Barnes & Noble College

Bookstores
Power Struggle and Conflict in
the Textbook Channel
Amberly Knight, a senior marketing major, had been working as an intern in the
university’s Office of Business Affairs for only two weeks when she was presented with
quite a challenging assignment. She had just returned from a meeting with the vice
president for business affairs in which she learned of a potential conflict between the
B&N College bookstore and McGraw-Hill publishing. The vice president asked Amberly
to prepare an analysis of the conflict and propose a possible solution.
B&N College (a unit of Barnes & Noble, the world’s largest bookseller) operates the
only official bookstore for the university and is contractually obligated to stock all course
textbooks and materials. Consequently, professors are required to submit all textbook
requests to the bookstore. The conflict began last month when McGraw-Hill
implemented a new return policy. McGraw-Hill would now assess a fee for all new,
unsold textbooks returned by college bookstores. Referred to as a “restocking fee” in the
publishing industry, the 5 percent fee was to be assessed against only those bookstores
that failed to keep their returns below an established level of 15 percent. Prior to this time,
McGraw-Hill allowed retailers such as B&N College to return all new, unsold textbooks
without penalty.
The campus bookstore, troubled by the seemingly abrupt change in policy, promptly
sent a letter to each of the university’s professors. The letter, in effect, urged professors not
to select textbooks published by McGraw-Hill for use in their courses and attempted to
explain why McGraw-Hill’s new policy was not only unjustified, but ultimately burdened
the students. The bookstore suggested that McGraw-Hill already factors the cost of returns
into the prices of its textbooks. Thus the restocking fee would simply be an incremental
charge added to the already bloated prices of college textbooks. Citing circumstances
beyond its control, the bookstore also felt it could not possibly predict textbook demand
with any real accuracy. In addition, the bookstore’s policy is to place textbook orders
early enough to ensure having the textbooks on the shelf for the first day of class instead
of waiting just weeks before the first day of classes when enrollment figures are most
stable. Thus, according to the bookstore, substantial returns will always exist.
McGraw-Hill immediately rebutted by sending its own letter to professors explaining
why its new policy was, indeed, justified. The publisher claimed that B&N College failed to
manage inventories adequately. According to McGraw-Hill’s own statistics, the majority of
bookstores in its distribution channel have return levels below 20 percent. The B&N
College chain, on the other hand, has an average return rate of 34 percent, with the most
recent academic year return rate a whopping 51 percent at Amberly’s university. The
concept of the “restocking fee” was also apparently not a new revelation. McGraw-Hill
claims it allowed the bookstores several years to solve their inventory problems before
actually implementing the revised return policy.

561
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562 Part 5: Cases

McGraw-Hill was unsympathetic to the bookstore’s alleged difficulty of estimating

inventory needs. The publisher virtually guarantees delivery of textbooks to stores in just
five working days upon receipt of an order. Thus, in McGraw-Hill’s opinion, there is no
need to carry such large inventories at the retail level, especially since an estimated 5 to 10
percent of publishers’ operating costs arise directly from processing returned books. From
McGraw-Hill’s perspective, B&N College bookstores, in general, order large quantities of
new textbooks simply as “insurance” to have plenty on hand in case not enough used
books are available.
Amberly was determined to write a thorough analysis and to find an acceptable
solution to the conflict; however, she was not quite sure she fully understood the
situation. Amberly intuitively felt the issue was a distribution channel conflict and
decided she needed to examine the textbook industry to gain an understanding of the
industry’s typical channel structure. That evening, armed with her marketing channels
textbook, Amberly walked to the library to begin her research.

The College Textbook Industry

Total publishers’ net sales of college textbooks were over $4.5 billion in 2010, represent-
ing approximately 19 percent of all book sales.1 According to the Association of Ameri-
can Publishers and the National Association of College Stores, 66 percent of every dollar
spent by a college student on a textbook is received by the publisher. The university pro-
fessor who authors the textbook normally receives 10 percent of sales as royalty, while
the freight and shipping companies who move the books to the campus bookstores com-
mand an average of 3 percent of every sales dollar. For an on-campus bookstore, an ad-
ditional 6 percent is given to the college or university for use in either academic
programs or student activities. The remaining 15 percent belongs to the bookstore with
the majority going for employee salaries and benefits. A typical allocation of the retail
price of a new college textbook is illustrated in Exhibit 1.
Unlike the fragmented U.S. trade and mass market publishing sectors, college educa-
tional publishing has remained concentrated in the hands of a few large publishers as a
result of several factors unique to educational publishing. The volume of college textbooks
produced is substantially smaller than trade and mass-market books. While the per-unit
cost of a book decreases with increased print run size, only the largest and best established
publishers are able to shoulder the burden of small volume per-unit costs associated with
most textbook runs.
Cost of production, however, is not the only barrier to entry in the college textbook
market. According to the Association of American Publishers, the college sector experi-
ences one of the highest return rates in the publishing industry—bookstores typically re-
turn to the publishers approximately 23 percent of all new textbooks for full refund.2
Once again, only the largest publishers are able to sustain the subsequent price reduc-
tions necessary to sell the returned textbooks in the secondary marketplace.
Textbook returns are primarily caused by inaccuracies in predicting college enroll-
ment levels, a task made more difficult over the past decade by two demographic-
related factors. Enrollments at many U.S. colleges and universities have been declining
in recent years, with the college-age population falling about 2 percent per year.3
Although enrollments are predicted to grow again in the near future, accurately predict-
ing the number of students needing textbooks from year to year and semester to

1
Association of American Publishers.
2
Ibid.
3
Ibid.

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 Case 9: Barnes & Noble College Bookstores 563

EX HIBIT 1 Breakdown
of the Price of a New $180.00 Textbook Dollars Percent
New $180 Textbook*
1. Publisher 118.80 66
2. Author 18.00 10
3. Freight company 5.40 3
4. Revenue given to college or university for academic 10.80 6
programs, student activities, and/or reduction of
school operating expenses
5. Bookstore
a. Employee salaries and benefits 18.00 10
b. Earning and other direct expenses including taxes, 9.00 5
equipment, maintenance repairs, supplies, etc.
Total $180.00 100%

*Note: Based on statistics provided by the Association of American Publishers and the National Association of
College Stores.

semester still remains open to substantial error. For example, the recent trend of greater
numbers of nontraditional students in college is compounding the problem. The enroll-
ment of nontraditional students is highly dependent upon economic conditions, as either
the unemployed return to school to acquire new skills, or individuals with extra money
return part-time to complete their old degree or begin a new one.
The traditionally high prices of college textbooks, combined with changing economic
conditions, have engendered a strong market for the sale and purchase of used textbooks.
Bookstores typically repurchase used textbooks from students at the close of each semes-
ter for prices substantially lower than those at which the textbooks were originally sold.
The bookstore then resells the textbooks at an average discount of 25 percent off the re-
tail prices of identical new textbooks. Even with the discount, bookstores make a sub-
stantial profit, typically much higher than the profit earned on the sale of a new
textbook. Not only are bookstores repurchasing used textbooks, but independent used-
book wholesalers buy used textbooks directly from students, then resell them to college
bookstores. Currently, sales of used textbooks account for 20 to 40 percent of total col-
lege textbook sales and can virtually eliminate the demand for a textbook edition within
two to three years of its first publication.4 Used-book wholesalers, however, do not ac-
cept any returns of unsold books from bookstores.

The Textbook Channel

With the knowledge she gained from her research, Amberly was able to sketch the rele-
vant channel of distribution for textbooks for the university. McGraw-Hill and other
publishers sit at the top of channel and sell new textbooks directly to the university’s
B&N College bookstore, as well as to other independent college bookstores that have re-
cently opened near the campus. Professors play a somewhat facilitating role in the chan-
nel’s operation by determining which textbooks will be selected for a course. In addition,
since one of the retail outlets is a campus bookstore, the university’s Office of Business
Affairs has some input into the management of the channel. At the retail level, the book-
stores then sell the books directly to students. For used books, the used-book wholesalers,

4
Ibid.

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
564 Part 5: Cases

along with the bookstores and student-to-student sales, comprise the secondary channel
structure for textbooks.
Amberly felt satisfied with her depiction of the channel structure until she remem-
bered that B&N College operates its own used-book wholesaling division. In addition,
she recalled a recent trend at many colleges and universities to outsource the bookstore
function to retailers such as B&N College instead of running the bookstore in-house.

Discussion Questions
1. What environmental factors are contributing to 3. What causes of channel conflict can you identify
the conflict between B&N College and McGraw- within the channel?
Hill? 4. What solution might you recommend to
2. Discuss the balance of power in the channel. Amberly as a potential avenue for consideration?
Who has the advantage?

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.