Storybook Success Slowing : Competition Hits Advanced Marketing Services
Until recently, Advanced Marketing Services was riding high, occupying a very profitable market niche as the leading distributor of books and tapes to discount warehouse chains such as Price Club, Costco and Sam’s.
Advanced Marketing Services’ sales in 1990 were $207.2 million, or nearly triple the $70.3 million in 1987, a growth rate that was fed by the rapid expansion of the discount warehouse industry. As Price Clubs and its clones proliferated throughout the nation, there was a direct, beneficial effect on Advanced Marketing Services’ sales.
The company had other things going for it as well, including its unrivaled service. Not only does Advanced Marketing Services select, package, inventory and deliver books and tapes to the warehouses, it also takes all the risk: the company takes back whatever books and tapes its client warehouse stores do not sell, no questions asked.
Today, Advanced Marketing Services faces a different, more difficult environment. There is stiff competition, not just from other distributors but from the warehouse chains themselves, who increasingly are buying books directly from publishers.
And the 9-year-old company has been hurt by its practice of accepting returns of unsold merchandise, particularly in videocassette distribution, a low-margin, high-risk business that the company all but shut down this year after writing off $1.3 million in returned tapes.
The changing dynamics of the market have significantly dimmed Advanced Marketing Services’ sales and profit picture. Sales are down to $144.3 million so far this fiscal year, against $171.5 million over the same nine-month period the last year.
Although the company rightly attributes much of the drop to the reduction of its video-tape sales, there are other factors to blame. At warehouse stores open at least a year, Advanced Marketing Services is now selling 9% fewer books per location than it was a year ago because of what chief financial officer Jonathan Fish describes as “an erosion of market share.”
“The real situation is that (discount warehouse chains) are going direct. It’s a no-brainer to know that a Jackie Collins book is going to sell well or that Danielle Steele or Stephen King books are going to do well,” said a securities analyst who asked not to be named.
Just when Advanced Marketing Services needed a strong quarter to turn things around, it stumbled badly during the busiest shopping season of the year, again because of its practice of shouldering all inventory risk for its customers. Because of a high number of book returns, the company set aside $4 million in provisions for mark downs in the value of inventory during the quarter that ended Dec. 29.
The provision resulted in a loss of $94,000 for the first nine months of the year, contrasted with a $3.1-million profit over the same three quarters last year.
As a result of all this, Advanced Marketing Services stock has taken a beating the past year. Shares closed Friday at $2 in over-the-counter trading, down from the initial 1987 public stock offering price of $13 each and down from the 1988 secondary stock offering price of $13.50.
As part of an effort to turn things around, the company Monday announced the hiring of James T. Dixon as executive vice president of marketing to help formulate “an overall strategy to enhance the company’s marketing function.” Previously, Dixon was vice president-marketing for National Foods, and before that held several marketing positions at General Foods.
Fish acknowledged that, in the past, Advanced Marketing Services has perhaps placed too great an emphasis on providing inventory and merchandising services to its customers, while neglecting “a more sophisticated” marketing approach to “maximize our return on products that we sell to our customers.”
In a sense, Advanced Marketing Services has been a victim of its own success. The company was founded in 1982 by Charles Tillinghast, who is still chief executive, and Loren Paulsen and Craig Schafer. The three, who started the company with less than $7,000 in cash, got it up and going with the full support of Price Co., which quickly grew to be its largest customer.
The company expanded its customer base to lessen its dependence on Price, adding other chains such as Costco, Sam’s, Pace Membership and Price Savers to its list, and opening seven distribution centers at key U.S. geographical points to facilitate deliveries. In the process, Advanced Marketing Services became one of the top 10 book distribution firms in the nation, a clue to how much and how fast the business grew.
Today, Advanced Marketing Services distributes books to 404 of the 430 discount warehouse locations now open, Fish said.
But the company’s healthy gross profits of 10% or more on its book and tapes sales quickly attracted the attention of its customers in an industry where Price Co.’s 8% gross margin is considered a benchmark, one analyst said. And, although Advanced Marketing Services could take credit for creating an industry, there were few barriers to entry. So a host of competitors sprang up, although most have so far limited their activities to specific geographic areas.
“What happened was that the companies that (Advanced Marketing Services) was serving also saw Advanced’s financial statements. Once Advanced got above the 10% gross margin line (the chains) went to them and said they were charging too much” for books and tapes, the analyst said.
Although Advanced Marketing Services’ financial strength is still unquestioned--the company has $13 million cash in the till, $38 million in shareholder equity and no debt--analysts expect Advanced Marketing Services’ market to get tougher in coming months.
“Wholesaling is a difficult business, and they’re losing the plum part of it. Price Co. now buys the big best sellers directly from the publishers,” said Irving Katz, director of research at Mason, Hunt & Co. investment firm in San Diego.
