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Books-a-Million in South Africa

Books-a-Million was founded in 1917 as a street corner newsstand in Florence, Alabama

by Clyde W. Anderson. Since then, Books-A-Million, Inc. has grown to become the premier

book retailing chain in the Southeastern United States and the second largest book retailer in the

nation. Based in Birmingham, Alabama, the company currently operates more than 250 stores in

31 states and the District of Columbia. The Anderson family is still very much involved in the

administration of the corporation with Clyde W. Anderson’s grandson, Clyde B. Anderson, as

Executive Chairman and Terry C. Anderson as a member of the Board of Directors.

Books-A-Million Superstores average over 20,000 square feet and provide a wide

selection of books, magazines, bargain books, collectible supplies, extensive card and gift

departments.

Bookland "traditional" stores represent less than one third of the company's retail outlets.

These traditional bookstores average 3,500 to 4,500 square feet and operate primarily in mall

environments. All Booklands carry a full selection of books and magazines, and many include

card and gift departments as well.

Joe Muggs® Newsstands represent the third concept. These stores average 3,000 square

feet and combine an expanded Joe Muggs® Café presentation with an exhaustive newsstand

selection of magazines, newspapers and best sellers.

American Wholesale Book Company is based in Florence, Alabama, and provides

complete book wholesale and distribution services for retailers across the Southeast.

Additionally, the company has developed to provide Internet fulfillment services for book

product sold by various e-commerce companies. The integration of complete wholesale and

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distribution services within the corporation provides significant economies and opportunities for

cost savings for both the retail and e-commerce divisions of Books-A-Million, Inc.

Book$mart, Inc., also located in Florence, Alabama, is a full service bargain book

distributor, servicing a large number of retail and wholesale clients throughout the country. Its

200,000 square foot distribution facility offers a tremendous assortment of value-priced books,

from specially published packages to publisher remainders of previous bestsellers.

I interviewed the former Vice President of Merchandising, Allison Harbin Lyberopoulos.

According to her, this is their main competitive advantage. In the book business, bookstores

generally do not buy directly from publishers. Instead, bookstores buy books from wholesalers.

American Wholesale Book Company allows Books-a-Million, Inc. to buy books from the

publishers, provide books for BAM’s retail locations, and sell books to other bookstores that use

the traditional method.

When books do not clear the shelves, bookstores cannot reduce them, but instead send

them back to the publisher. The publisher then reduces the price and sells them back on a

secondary market, called the remainder book market. Their secondary competitive advantage is

Book$mart, Inc. It acts as a wholesaler on the remainder book market, buying reduced price

books from the publisher and then profiting from sales to discount bookstores.

BOOKSAMILLION.COM, the company's e-commerce website, was successfully

launched in 1998. Through the American Internet Services division, they continue to develop a

suite of e-commerce solutions aimed to meet the needs of a variety of business clients.

In addition, in 2010, according to the Birmingham Business Journal, Books-a-Million

paid $3 million and committed a $1.5 million line of credit to gain a 40-percent equity interest in

Alabama-based Yogurt Mountain, a self-serve frozen yogurt franchise. It features 16 flavors and

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over 50 toppings. Books-a-Million has a Joe Muggs or a Yogurt Mountain, offering coffee or

frozen yogurt while you read.

According to their 2012 annual report, Books-a-Million emphasizes location in high-

traffic areas; wide selection of books, magazines, and general merchandise; and a staff

knowledgeable in the store’s merchandise. In 2009, Wratings.com analyzed Books-a-Million’s

competitive strength within their industry.

Wratings.com found that consumers felt Books-a-Million locations and their online site were

simple to shop, their stores were widely available, customer support was timely, and the

locations felt safe. In most of their supercenter locations,

Roughly 80% of BAM locations are Southeastern. The company benefits from greater

brand recognition and greater customer loyalty by placing emphasis on one region. Due to the

high level of variety in book content and topic, they can more easily adapt to their audience if

they are familiar with their audience’s demand. According to Publisher’s Weekly, “With its

largest market the southeast, BAM's product mix is much more heavily geared toward religious

books than Borders was, with PubTrack finding that 17% of BAM's sales in the first quarter

came from religious books compared to about 7% for Borders and 10% at Barnes & Noble.” Due

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to the large reliance on religious books sales, Books-a-Million has included Faithpoint, a section

containing Bibles and Christian-themed books, in most of its stores.

BAM’s primary brick-and-mortar competitor is Barnes and Noble, the number one book

retailer in the world. It has 689 retail sites and 667 college bookstores around the country. Barnes

and Noble is a true nationwide store and has been since it acquired B. Dalton Bookseller in 1987.

The other major competitor was Borders, but in mid-2011, it closed its doors and liquidated its

stores. BAM competes with the book business of big-box stores as well, namely Wal-mart and

Costco.

Online, Books-a-Million has multiple competitors: Barnes and Noble, Wal-mart, and

Amazon. Amazon and Barnes and Noble both have innovated the industry by introducing e-

readers to the marketplace. Amazon released the Kindle in late 2007 and in 5.5 hours, it was sold

out. Barnes and Noble’s Nook had similar reception when it was released in late 2009. Both of

these devices have opened these two corporations to a market that is quickly taking over the

brick-and-mortar business. Unfortunately, BAM has not released an e-reader and as of the 3rd

quarter ending on October 27, 2012, e-commerce was operating at a loss due to low sales and an

increase in shipping costs.

In general, when looking at the brick-and-mortar bookstores, Books-a-Million’s

customers tend to be less affluent and less educated than the customers at Barnes and Noble or

the now defunct Borders bookstores. Publishers Weekly reports that customers who frequent

BAM locations make a median household income of $60,000 while the household income for

Barnes and Noble is more than $71,000. 36% of BAM’s customers are college graduates

compared to 47% at Barnes and Nobles. Barnes and Noble, unlikely BAM, is not regionalized.

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While they enjoy a larger market, their business strategy does not allow them to adjust their

product offering as easily as BAM does, allowing BAM to carve out a fair market share.

In the third quarter, BAM reported that, in the 13-week period ended October 27, 2012,

sales increased 11% from $94.4 million to $104.7 million and in the 39-week period ended

October 27, 2012, increased 12.2% from $301.6 million to $338.2 million. While they have net

losses, they narrowed 29.9% from $3.9 million to $2.8 million. Their bottom-line losses have

improved greatly for the entire three quarters, from $10.4 million in the same period last year to

$5.6 million.

BAM has recognized and improved certain factors of their business that has proven

especially profitable. They have expanded their children’s department, a department that has

consistently done well with consumers. They have begun to concentrate more on toys and tech

items which have helped them remain stable in the turbulent book market.

Ycharts.com analyzed BAM’s EPS growth, revenue growth, 5 year average ROE, current

ratio, D/E ratio, long-term average cash flow, 10-year minimum gross margin, long-term average

debt multiplied by average net income, book value per share growth, and their frequency of

paying dividends. From these scores, Ycharts.com assessed that they had passed 8 out of the 10

test, with failures in the book value per share growth and their inconsistently paid dividends.

Those companies that score a 7 or above tend to match or outperform the S&P 500 index and

have done well over the past 20 years.

On October 31, 2012, their profit margins were down -2.65%. The annual report states

sales are seasonal, with the end of December being the most profitable due to the holidays. Their

past performance seems to show this.

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In searching for a foreign market for Books-a-Million, South Africa appears promising.

According to Global Finance, South Africa has a GDP of $419.925 billion as of 2010. In 2012,

the estimated GDP growth was 2.7%. From 1993 to 2008, South Africa had 62 quarters of

economic growth. Although the recession has hit South Africa hard, it is frequently included in

the group of rising economic powers: Brazil, Russia, India, and China. While its culture is

influenced by tribal and indigenous cultures, a large portion of economic power lies with Anglo-

Africans and Afrikaners, both groups heavily influenced by British and Dutch culture, cultures

that are more similar to our own.

As Deloitte forecasted, there have been major infrastructure improvements due to the

World Cup in 2010. There is also a good trade relationship between South Africa and the United

States. While their legal system is based mainly on the Roman-Dutch system, the company laws

and the law of evidence is largely influenced by British law like ours, making the system easily

predictable and knowledge easily transferable.

On Hofstede’s cultural dimensions, there were key differences and similarities between

South African cultural and our own. On the power distance index, South Africa scored a 49,

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signifying that they expect a more rigid hierarchical structure and they expect to be told what to

do. The United States scores a 40, highlighting the fact that, in general, American hierarchical

business structure tends to be more flexible and seems to be set up more for convenience than for

cultural demand. On the individualism index, South Africa scored a 63, signifying a high amount

of individualistic feelings within the culture. This corresponds to the United States’ score of 91.

In terms of masculinity/femininity, South Africa and the United States are very similar, with

scores of 63 and 62 respectively. This equates to a more aggressive attitude in business and

business conflicts. On the uncertainty avoidance index, once again, the United States and South

Africa scored similarly: 49 and 46 respectively. These both equate to a reasonable amount of

uncertainty acceptance. They both appreciate innovation and novel ideas. However, in daily

business, a set of rules and codes tends to moderate behavior in both of these cultures. While

there was a score for the United States on the long-term orientation index of 29, South Africa

lacks a score.

Due to this similarity in scores in the cultural dimensions of South Africa and the United

States, there would not be major changes necessary in the administration of an American

corporation in South Africa. The one dimension that would probably need modifying is the

hierarchy of the corporation. As stated before, South Africans appreciate a little more rigidity in

their hierarchical structure and find it much more conducive to work if the administrators instruct

more than their American counterparts do. Books-a-Million would need to train the managers

they send over to South Africa in being more hands-on with their subordinates. However, as will

be explained later, this may not be wholly necessary.

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There are 11 languages in South Africa, but the language of business, administration, and

politics is English. According to the 2011 South African census, 9.6% of South Africans speak

English as their home language, but most South Africans speak English as a second language.

In 2008, the United States and the South Africa Customs union, of which South Africa is

a part, signed a Trade, Investment, and Development Cooperation Agreement, which aims at

fostering bilateral trade and foreign direct investment.  However, the United States, as of yet,

does not enjoy any financial break on imports into South Africa. However, according to Deloitte,

the government remains keen to attract foreign direct investment.

South Africa is a democracy. Voters elect parties to the Parliament. The party that has the

majority of seats in the National Assembly then elects the President. The South African elections

are scheduled for December. The incumbent President Jacob Zuma, is likely to win, which does

not bode well for his country’s economic growth. He has been ineffective at battling soaring

unemployment rates and a rigid labor market. Recently, there have been violent uprisings within

the mining sector that Zuma has been largely unsuccessful at fighting. These uprisings, the

downgrading of South Africa’s credit rating, and rampant corruption throughout the police force

and the administration as a whole, lead to further distrust of Jacob Zuma and his administration.

From 1948 to 1991, South Africa operated under a system of laws known collectively as

apartheid. It codified the segregationist actions of the white South Africans, the Afrikaners and

the Anglo-Africans, against the rest of the population. Under apartheid, there were four legally

recognized racial groups: Black, White, Coloured, and Indian. Through this period of racial

segregation, the White culture became separated from the cultures of the remaining groups. This

has resulted in a myriad of diverse cultures and in South Africa being dubbed the Rainbow

Nation.

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The diversity of experience influences the segmentation of the market. In apartheid-era

South Africa, according to Fresh Perspectives: Marketing by Peter Ismail, marketers tended to

focus on race and income, but Teddy Langschmidt and Richard Chipps developed a new system,

called the South African Living Standards Measurement system which provides a much more

comprehensive segmentation of the market.

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As can be observed, the White population still controls the most wealth. As a result, The

South African government has been actively legislating to change the distribution of wealth.

In 2003, then President Mbeki signed the Broad-based Black Economic Empowerment Act, an

act that helps foster the economic strength of individuals that were disadvantaged under

apartheid. These individuals include those labeled in the apartheid-era racial groups of Black,

those whose ancestry is primarily or completely African; Coloured, those whose ancestry is of

primarily or completely European, African, and/or Asian origin; and Indians, those whose

ancestry is primarily of the Indian sub-continent. This act sets in place certain requirements

against which large businesses are graded. The criteria include whether or not black people own

and/or manage the enterprise, whether a certain number of opportunities go to black people,

whether the enterprise trains black people in a certain number of universal skills, and whether

local or rural communities are empowered through the employment of black people. The

government then evaluates and grades each company on a scorecard. While B-BBEE scorecards

are required for all public and government entities and those companies doing business with

either the government or a company that does business with the government, it is not required for

private companies like BAM. However, companies that may work with BAM can ask for their

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B-BBEE scorecard. If BAM does not have a scorecard, it could negatively impact their business.

If BAM goes abroad, they should request a scorecard.

Due to the need for a more rigid hierarchy in South Africa, made evident through an

analysis of Hofstede’s Cultural Dimensions, this may prove more a happy coincidence than an

obstacle. To score well on the B-BBEE, BAM has to prove that they have black people in a

number of managerial positions. I would advocate hiring South African black people and training

them in intermediate managerial roles. In this way, the intermediate managers, between the top

administrators and the lower employees, would be fluent in the cultural desire for a more rigid

structure and BAM would get a favorable score on the B-BBEE scorecard. All BAM would be

obligated to do would be to train these intermediate managers, something the B-BBEE looks

fondly on as well.

If Books-a-Million were to go to South Africa, there would be several options for them.

They could either enter into a joint venture. They could franchise. They could enter into a wholly

owned subsidiary. For the purposes of Books-a-Million, I would advocate a wholly owned

subsidiary for reasons that will become obvious.

According to a document entitled “Factors influencing the cost of books in South Africa”

released by the South African Book Development Council, the trade book market works slightly

differently in the South African market than the American market. When a bookseller needs

books, they send their order to a distributor, the distributor then sends the order to a publisher,

the publisher ships the order to the distributor, and the distributor then fulfills the order. These

multiple steps result in a much slower process than the American system.

In the American system, as was previously discussed, the wholesalers buy books from the

publisher and keep them warehoused until a bookseller places an order. The wholesaler then will

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fill the order. This entire process moves product faster than the South African traditional

distribution method. If Books-a-Million were to take their wholesaler, American Wholesale

Book Company abroad to speed up the process in South Africa, this would prove a competitive

advantage. Since wholesale is not a process that South Africans are accustomed to, BAM would

need to own a subsidiary of their American Wholesale Book Company located in South Africa to

maintain this competitive advantage. Unfortunately, this comes with a high amount of costs and

risk to the corporation.

First, BAM would have to acclimate itself to the international market it would be thrust

into. Imported books dominate the South African trade book market, the market that consists of

the non-fiction and fiction books that BAM primarily sells. 59.2% of books are imported from

foreign publishers. Due to the unique purchasing method that South African booksellers practice,

however, foreign publishers sell books to South African booksellers at such a discount that the

final price point given to consumers remains competitive with locally produced titles. They

would need to set up trade networks to ensure product arrived in a timely manner and thus ensure

their competitive advantage.

They would have to purchase large amounts of warehouse space for American Wholesale

Book Company and retail space for their product. They would have to do this while remaining

competitive with South African local booksellers.

BAM would have two major brick-and-mortar competitors: Exclusive Books and CNA.

based on publisher sales, they together have an extremely large market share.

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Both of these booksellers are primarily located in major urban centers, such as Pretoria,

Johannesburg, and Durban. More, because of consumer demand, they are located in shopping

malls and other commercial centers, which have high costs associated with rent and the naturally

seasonal business of bookselling. There is a lack of bookstores in rural areas and a lack of books

provided in languages other than English or Afrikaans. Moreover, the marketing efforts are

exerted on the middle-class and upper-class white people. This ignores middle- and upper-class

black women or, in South African marketing terms, Black Diamonds. The Black Diamonds are a

growing economic power in South Africa and they continue to get wealthier. This provides a

clear way for Books-a-Million to differentiate itself.

For example, Adex 2008 found that marketers do not utilize SABC1, the main mass

media channel that reaches Black Diamonds, to its fullest potential. BAM should begin to market

on SABC1 to try to capture this highly lucrative segment. South African marketers are

dismissing the effectiveness of word-of-mouth advertising. In 2007, a global study launch by

Millward Brown found that 80% of South Africans are inclined to praise a brand to others, as

opposed to a 69% global average. More, the University of Stellenbosch Business School

conducted research that found that Black Diamonds, because of their rich oral history and

tradition, are much more likely to both talk about brands to others and to trust the opinions of

others. Black Diamonds, being the rising segment they are and owing to their sharp cultural

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differences from white people, strive to be accepted by their peer group rather than mimic white

styles and trends. Thus, they are even more likely to buy brands recommended by friends and

other peers. They also have a higher level of brand loyalty to brands they trust. If BAM can

connect to black women emotionally or use their brand to connect people to each other, a tactic

that has been shown to appeal greatly to women, they can build that brand loyalty and thus

penetrate this relatively unexplored market segment. Furthermore, the Black Diamonds are

becoming proficient internet users. To capture the market segment, BAM should rely largely on

social networking to help emphasize and bolster word-of-mouth marketing. All of these

marketing tactics would help set Books-a-Million apart from South African brands like

Exclusive Books and CNA, but it would mean the incurring of greater costs to the corporation.

Apart from buying physical space in South Africa, they would need to work on

positioning themselves within the market so that they can insure the capture of the Black

Diamond market segment. Unfortunately, Books-a-Million, as has been previously discussed, is

operating at a loss. It is trying desperately to find the niche market it once enjoyed, but so far, it

is being outcompeted domestically by Barnes and Noble, Wal-mart, Amazon, and Costco.

While I think South Africa could prove to be extremely lucrative, I do not believe that

Books-a-Million is in a position to absorb the exorbitant overhead costs it would take to be

successful in this new market.

In the retail sphere of the business, a joint venture appears at first possible. However, as

previously mentioned, the South African companies of Exclusive Books and CNA control a large

portion of the bookseller market and a joint venture with a South African bookselling company

would not prove satisfactory in capturing the highly lucrative Black Diamond segment of the

population. South African companies, as of yet, have not realized and do not fully understand

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this untouched market segment. While BAM would be entering a joint venture, it would be out

of BAM’s purview to try to exert control over the marketing of the retail sphere because BAM

would have no connection.

I think what Books-a-Million should work on doing is strengthening its brand and its

position within the domestic market first. It is losing traction to bigger brands, namely because of

their e-readers and prevalence within the e-commerce market. If it can successfully secure a

profitable portion of the domestic market, then it can begin looking abroad. Before it goes

abroad, it needs to do more research on what market segment they are trying to capture. As I

have previously said, the Black Diamond market segment appears lucrative and unlike the

current market segment booksellers are targeting, it is not saturated. The South African trade

book market is a small market, chiefly because there is such a small market segment that the

current booksellers are capturing. If BAM did more research and successfully captured the Black

Diamond segment, it could translate into big profits for a South African subsidiary. If they can

begin to make a profit domestically, it will free up capital to invest more heavily internally,

which then can further research the appropriate market strategy for the South African market.