The Bookseller.com

3rd December 2008

Chen Gang is a journalist at China Publishing Today.

Why Bertelsmann's China trip turned sour

10.07.08

When Bertelsmann announced last month that it was to close the 36 stores of its 21st Century bookstore chain in China, industry insiders projected that this was the beginning of the group's scaling back of its book operations in the country. Its most recent decision to close it book club indicates that they were right, even if Bertelsmann still prefers to call the withdrawal a refocus.

Regardless of the semantics, it is clear that the group has put a lot into the Chinese book market and got less out in return. According to Cui Juan, from Bertelsmann's corporate communications team in China, its "financial affairs [are] not satisfactory, and there is a lack in scale efficiency".

Few would have expected this outcome when Bertelsmann first entered the Chinese market in 1995, with a  joint book club venture with China Science & Technology Book Company.

But the reality did not live up to expectations. Book retail in China is a low-profit market, which may be the case all over but is especially so in China. The low price of books, the rising cost of operations, fickle readers, and the rise of online booksellers' discounts all made Bertelsmann's task considerably difficult.

China complex

As Yunnan Xinhua Bookstore general manager Li Weiwei says Bertelsmann did not fully understand the Chinese market before it entered, and its initial research had "omissions". The market was much more complex than it had imagined, according to Li.

That market was also totally different to what it was used to in Europe,  and the US. Direct sales and mail ordering, for instance, were relatively new marketing methods in China and did not receive a warm welcome from the country's readers.

In addition, the most important aspect of Bertelsmann's operations in China—its nationwide book club —needed a logistical system for precise, high-speed deliveries. However, logistics companies in China could not match this need.

Lastly, as one experienced industry insider explains China's book market did not develop in the same way as other book markets. For example, while other countries' produce multiple editions-—hardcover, paperback and book club or special edition—in China books only come in one type. As a result, all booksellers compete on a level playing field with unending price wars in an increasingly ferocious market environment, with no natural advantage for a book club.

Bertelsmann's problems were also structural. Its operations in China could be likened to a "three-horse cart": the mail-order book club, Bertelsmann Online (BOL) website, and the 21st Century bookstore chain. Industry insiders believe this structure has serious problems.

Bertelsmann's book club initially targeted young adults, a group that did not have extensive or stable purchasing power and frequently changed addresses. This kept sales revenue from rising. Combined with the fact that readers had to pay for shipping, this meant that despite discounts, readers were paying more than they would be in bookshops.

Zhou Liwei, chairman of the board for Zhejiang Xinhua Distribution Group, says building a loyal customer base in China is difficult in an era of fickle readers, with websites stealing a substantial amount of time from readers. Therefore, the cost of recruiting and maintaining membership is high. So after more than 10 years, Bertelsmann's book club is estimated to have just 1.5 million readers.

At the same time, Bertelsmann's book club's low-price strategy led to accusations that it was destabilising prices in the book industry. The vast majority of suppliers did not support the idea of putting downward pressure on prices and relying on extensive discounts to encourage purchases, so the range of such books was not wide.

In February 2003, Bertelsmann merged its online book clubs with its e-commerce site, creating Bertelsmann's only remaining online bookstore worldwide (Bol.com.cn). But Bertelsmann did not adjust its online operations to provide a full product selection. Instead, it tied its online operations to the book club, limiting the books it could offer.

Hence, when China opened its book retail market to competition, Bertelsmann lost ground to online rivals such as dangdang.com, Joyo and Amazon.

Turning point

Industry insiders believe Bertelsmann's biggest strategic mistake in China was its purchase of Beijing 21st Century Jinxiu Bookstore franchise. Beijing All Sages Books general manager Liu Suli believes this was the turning point that set Bertelsmann on the course to failure: "[Traditional walk-in] bookstores expend staff, money, and management."

According to industry observers, the stores concentrated on the wrong type of products, and lacked the scope to expand their ranges. One further problem it faced was a fragile "inter-regional" supply chain.

Bertelsmann's three sales channels (mail-ordering via the book club, the online bookstore and the chain of walk-in bookstores) were all set up independently, each with its own management system. This led to inefficient overlaps, wasted resources and, more detrimentally, conflicts  among the independently-operating sales channels.

One further problem, and one not only faced by Bertelsmann, was its use of local knowledge. As Zhou Liwei says, when foreign enterprises set up businesses in China the cost of "localisation" is quite high. "As far as I see," Zhou relates, "Bertelsmann's employees were not very loyal, and the foreigners in upper management were often changed. Those who arrived often overturned some of the strategic decisions of those before them, implementing new plans and creating higher management costs."

In China, Bertelsmann seemed less like a precisely-tuned international business but rather like a bureaucratically cumbersome state-owned enterprise. But while its failure—so far—will be disappointing for the German group, others are more positive. As Zhou says: "Bertelsmann's example makes those within China's book industry realise that foreign enterprises are not something to fear."

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