IPG and Borders in Trouble?

An anonymous source has alerted me to an email indicating that Borders will not be paying book distributor Independent Publishers Group for two months “due to anticipated excessive returns.” IPG has stated that its return rate has been historically low. But this default will cause IPG to lose approximately $2 million in revenue. IPG has issued an email to publishers, asking them if the publishers wish to continue distributing books through Borders or accept a new provision that IPG can only guarantee payment (for Borders) “only for the publishers’ historical printing cost of books that are not paid for, rather than for the whole amount of any unpaid invoices.” Whether this will present a partial repeat of last year’s AMS bankruptcy, with many IPG publishers left in the lurch because of Borders’s decision, remains to be seen.

UPDATE: IPG President Mark Suchomel has left a comment claiming that IPG is “having a record sales year.” I have also been asked by IPG to “retract” this post. I do not intend to do so. I have merely presented information that was also reported by Galleycat this morning, asking the perfectly reasonable question of whether the $2 million shortfall will harm IPG and the publishers. If Mr. Suchomel wishes to be transparent, offering specific figures and data about how IPG is in “great shape financially,” rather than having his publicist email me and deeming me “irresponsible,” then the forum here is open to him. I have also informed the publicist that I would be happy to talk with Suchomel over the phone, and I have sent an email to Suchomel asking for specific evidence to prove his claims. It is also worth noting that IPG has kept its mouth shut when talking to The Bookseller‘s Catherine Neilan.

UPDATE 2: To understand why Suchomel should probably respond with additional details about IPG’s financial security, here is the memo that was sent to publishers from IPG.

Special Alert: Borders Policy

The financial health of Borders does not appear to be improving. They now tell us that they will not be paying us for two months due to anticipated excessive returns. IPG’s returns rate is historically low, so this is a somewhat questionable course of action. They were in a weak condition even before the current financial crisis, and of course no one knows how long or how severe that crisis will prove to be. The immediate reason for our concern is that the companies that insure receivables, who make a living knowing the risks of granting credit, have now refused to cover Borders.

IPG typically carries receivables of approximately two million dollars with Borders. A default of that amount would by no means put IPG out of business, but it would be painful, weaken the short-term health of the company, and would mean we would have to defer some of our plans for future growth.

Distributors need to be especially vigilant about the viability of their customers because, in case of a default, a distributor is out the full value of any unpaid invoice; a publisher, on the other hand, is really only out the printing cost of the lost inventory.

To put some numbers on this concept: a $14.95 paperback should cost about $1.50 a copy to print. But IPG bills Borders $7.48 for that copy (a 50 percent discount). That is a difference of $5.98 or almost four times the printing cost.

Given these considerations, IPG must now ask its client publishers to choose one of two options in regard to future Borders orders for their books. Publishers must either:

  • Instruct IPG not to ship their titles to Borders
  • Accept the provision that IPG, for Borders business only, will guarantee payment only for the publishers’ historical printing cost of books that are not paid for, rather than for the whole amount of any unpaid invoices

IPG’s competitors in the book distribution business either have always had a provision in their standard agreement that allows them to deduct customers’ defaults from the amounts owed their client publishers; or else they have recently adopted the policy that they will not take any of the credit risk for Borders payments. IPG, at no small cost, has covered the amounts lost when accounts stop paying and our client publishers have received the full amount owed for their titles. Over the years this has been a significant though somewhat low-profile benefit of working with IPG.

We think that the best course for IPG’s client publishers is to accept the option of still shipping to Borders. Borders has been paying IPG, they are reported to have cash on hand and access to credit in the future, and the last thing anyone wants is to have only one giant chain in the retail book market. Borders may prosper, and even in the worst case, given IPG’s uniquely flexible policy, the value of your inventory would be preserved.

On the other hand, booksellers and wholesalers in trouble sometimes resort to tactics that can damage publishers. Sometimes they return books that are selling well and then reorder the same titles. This allows them to start the payment meter over again, but of course it means more damaged copies. Sometimes they order far more copies than they need for the purpose of having more stock in their warehouse to comfort their secured creditors. Sometimes they have no reasonable expectation that they can stay in business, but order books just in case some miracle arrives to save them. We will not allow your titles to become pawns in any such games.

We do not see evidence of this sort of behavior to date at Borders, but we have, for some weeks now, scrutinized every one of their purchase orders, in some cases reducing them to reasonable amounts. Their performance has been erratic. We will continue this vigilance in regard to the titles of publishers who wish IPG to continue to ship them.

Please inform IPG in writing or by e-mailing Vice President of Operations Mark Noble, of your choice by Monday, November 10. Until we are informed of your decision, we will assume that you do not want us to ship your books to Borders. This policy will stay in affect only while there are serious concerns about Borders viability, and we will keep you apprised of any new developments.

If you would like to discuss these issues further, please contact Curt Matthews, x210.

UPDATE 3: Mark Suchomel has responded to my queries via email. He hasn’t provided me with any specific information about IPG’s financials and has asked me to take IPG’s current fiscal health based on a statement of good faith, but his answer does provide some insight into the Borders situation.

Thanks for giving me a chance to clarify. Our record sales year is a fact. We have shipped more and billed more than we ever have. I’m not sure how I can give you tangible evidence and I would hope that you would consider a statement by the president of the company as a reliable source. We are a private company and don’t release financials like a public company is required to do, but since we have very little debt, which should be eliminated by the end of the year, and strong sales in several markets, and compared to what we read and hear about other businesses in the industry, we consider this to be great shape. Estimated book sales may be dropping, but as our sales are increasing we are obviously gaining market share.

We are not out $2 million dollars as you seem to imply. That is the amount Borders typically owes us. IF something happens to Borders and IF we were to keep shipping them at that level, we could possibly be out that much if something were to suddenly happen. You can bet that every major supplier to Borders is looking at their exposure and trying to reduce it, or at least they are making sure it is something they can work through if the account fails. We don’t think they’re going to close their doors in the next few weeks but we are certainly going to make sure they don’t owe us such a large amount until we see signs that they have turned things around.

Everyone who relies on retail sales is anticipating a tough holiday season. In the shape we are in now and with a careful eye on Borders and other struggling accounts we will be one of the companies in the industry to come out of it in reasonable shape. You implied a comparison to the AMS debacle
at the end of 2006 which endangered the business of many of their PGW clients. This is not a responsible comparison. There is no issue as to the health of our company. The issue is the health of Borders. Among other things publishers rely on us to keep them safe from potential disaster. In
this way they are in better command of their risk and can decide if one course of action is better than another. Your speculation that we could be in trouble has no basis in fact. We’re not even close to being in trouble but we are also going to make sure we don’t get there.

Did you know that another large distributor also made this change a couple of weeks ago but won’t even cover the printing and binding costs of their publishers if something were to happen? I’m not sure why that wasn’t covered. Distributors have a unique role and responsibility in the industry
in that we collect revenue on behalf of our clients. Our clients need to know that we’re being very responsible. Rather than cut off an account or at the least reduce the amount of credit we are willing to extend them, we feel it is a reasonable move to let our publishers decide if they want to shoulder some of that risk in order to keep the sales moving through at the current rate. Most of them are willing to and are very appreciative of the way we have handled this.