Follow-Ups: The Book War and ‘Project Impact’

There has been a lot of action and commentary on the Amazon/Wal-Mart battle that we commented on last week.

Other stores, of course, have waded into the fight. Target matched the Wal-Mart and Amazon cuts, but Sears took a different approach:

Buy any one of those deep-discounted books at Target, Wal-Mart, or Amazon, and send Sears the receipt … and they'll give you a credit of $9 towards anything you buy from Sears online.

So now your book is free (you could even have made a two cent profit if you bought it at Wal-Mart). And you end up with an incentive to shop at Sears.com. I haven’t seen much clever marketing from Sears in recent years, but this strikes me as an excellent job of piggybacking on what other stores are doing, without it being a me-too effort.

Meanwhile, though, the independent booksellers (who will be most hurt by this, according to respondents to our poll) have asked the Justice Department to intervene:

The American Booksellers Association has asked the U.S. Department of Justice to investigate the book price war under way between Wal-Mart Stores Inc., Amazon.com Inc. and Target Corp. to determine if it constitutes "illegal predatory pricing."

In a letter dated Oct. 22, the ABA said it believes that the discount pricing—which has led to 10 of the most anticipated hardcover titles being priced as low as $8.98 on walmart.com—amounts to such an act and that it is "damaging to the book industry and harmful to consumers."

The letter said while it may appear that the prices will generate "more reading and a greater sharing of ideas in the culture," many of the independent stores that belong to the ABA won't be able to compete.

"The net result will be the closing of many independent bookstores and a concentration of power in the book industry in a very few hands," the letter said.

The Justice Department, Amazon and Target declined to comment.

The commentary on this that I’ve seen indicates that people knowledgeable in antitrust law don’t think the booksellers will get far with this.

As for the publishers, who look to be hurt almost as badly, they’re stuck between immediate gains and long-term damage to their margins. This blog notes something I had not thought of, that publishers might be able to use the Leegin decision to invoke minimum pricing rules:

What's interesting is that book publishers have the power to end this massive discounting. In 2007, the U.S. Supreme Court ruled in the Leegin case that it is legal for manufacturers to set a minimum retail price for their products. Thus, book publishers can legally tell Amazon and Wal-Mart that their books can be sold at a minimum price (say, 50% of retail price) or higher. So with the plethora of "devaluation" complaints, why aren't publishers doing this? They are stuck in a prisoner's dilemma.

The prisoner's dilemma is a classic game-theory case that shows when people behave in a manner that maximizes their welfare (profits/happiness), they can actually end up being worse off.

Consider how the prisoner's dilemma applies to the Wal-Mart/Amazon price war. Publishers have sunk millions of dollars in non-refundable advances to big-time authors. Especially in this economy, is a publisher really going to walk away from potentially an extra million units of sales by saying, "Don't sell our book for $9?"

Actually, saying flatly that the Leegin decision makes it “legal for manufacturers to set a minimum retail price for their products” is misleading, since the Court put a number of restrictions around the rule. But whether it might apply in this case is probably moot, since the publishers are unlikely to be brave enough to forego the immediate profits from the sales the price-cutting will generate regardless of what it does to their margins. The profits are today and the margin damage is tomorrow.

Advertising Age had an article on Wal-Mart’s Project Impact, reporting that the 32% of stores that have rolled out the new design are out-performing the rest of the chain, despite the elimination of millions of feet of merchandising space:

In fact, results to date indicate overall same-store sales are 1.25 to 1.5 percentage points higher in the remodeled Impact stores, which have 8% to 9% less inventory than similar un-remodeled stores, Chief Merchandising Officer John Fleming said in a presentation to analysts today. "One of the most important elements from a customer perspective is this idea of giving space back to customers," he said. "This has been highly controversial. There's been a lot of debate."

He said Wal-Mart has rolled out the elimination of in-aisle displays to an additional 300 stores beyond those fully remodeled, and that those stores have seen 0.4 percentage points faster same-store growth than control stores with a 3% decline in inventory. "It's working well," he said. "And we're rolling it to the [entire] chain next year."

Of course, there are options for suppliers losing out on those displays that are being eliminated:

Realistically, suppliers increasingly shut out of "action alley" will also be more motivated to pony up for Wal-Mart's growing number of pay-to-play in-store marketing options, including event marketing for $200 to $250 per store and end-cap displays linked to the Wal-Mart Smart Network in-store TV program, which will also bolster Wal-Mart's bottom line.