Battle With Big Bookstores Puts Independents in Bind

At first glance, the bustling Third Street Promenade in Santa Monica looks like a commercial playground, full of pedestrians, popular stores and jingling cash registers.

But it’s also become a battleground in the increasingly nasty dispute between America’s independent booksellers and the nation’s two largest book chains, Barnes & Noble and Borders.

Last month, the American Booksellers Assn.--representing about 3,500 independent stores--sued the two chains, alleging that they get secret and illegal financial breaks from publishers.

As a result, the lawsuit contends, the twin giants have grabbed a huge share of the multibillion-dollar book market and are driving independents out of business. Both chains have denied any wrongdoing and insist that their growth is making significant contributions to the nation’s cultural life.

The tension is particularly acute in California, which has more chain superstores than any other state, and nowhere is it better illustrated than on this street in Santa Monica:

Barnes & Noble and Borders stand on opposite ends of the three-block promenade. In between is Midnight Special, a feisty, locally owned bookshop that’s been a fixture in Santa Monica since 1980. It is one of 26 stores, including eight from California, that have joined the ABA’s sweeping lawsuit.

The conflict has been simmering since the early 1980s, when large chain bookstores burst upon the scene, and the acrimony has grown through the years. Yet both sides agree on one thing: The battle is as much about ideas as dollars and cents.

“We’re fighting over freedom of thought and diversity in our culture,” said Margie Ghiz, who owns Midnight Special. “We’re trying to see if local bookstores survive, or if the decisions about what we read will be made by corporations.”

Barnes & Noble CEO Calls Suit a Gimmick

In a rare interview, Leonard Riggio, CEO of Barnes & Noble, the nation’s largest bookseller, charged that the ABA lawsuit is a gimmick designed to damage his booming business. But it won’t work, he said, because customers enjoy his stores.

“The cash register at a retailing store is the polling booth,” he said. “We have opened some of the greatest bookshops in the history of this culture. . . . We offer a greater selection for people than has ever been attempted.”

Fundamentally, the lawsuit is a battle over how books are sold. For years, most Americans shopped in small, locally owned stores that reflected the taste and personalities of owners. But today, more people are flocking to superstores, where espresso bars, video racks and CD bins are common, along with inventories of 150,000 books or more.

The competition is fierce, and customers have the greatest stake in the outcome of these book wars. If chains keep growing, will they raise prices and restrict the breadth of books available for sale? Or will superstores continue to offer customers an unmatched literary selection at discount prices?

“If you’re a book person, you want both stores to thrive,” said Morgan Entrekin, publisher of Grove-Atlantic Inc. “This is a legal fight that nobody in publishing really wants.”

Entrekin speaks from experience. When he published Charles Frazier’s “Cold Mountain” last year, independent and chain stores did what they do best: Smaller shops spread word of mouth about the unknown novelist, enabling him to attract crucial attention. At the same time, the chains used their deep pockets and floor space to sell thousands of copies--making Frazier’s book one of the rare works of literary fiction to survive in a market overrun with celebrity glitz.

“I hear the concerns of independent bookstores,” Entrekin added. “But if chains are succeeding, what can you do?”

The dispute is one more reminder that the world of books, like other businesses, is caught up in a wave of consolidation and corporate decision-making. Today, most New York publishing houses are conglomerates that just keep on getting bigger.

On March 23, for example, Bertelsmann, the large German media company that owns Bantam-Doubleday-Dell, announced it will buy Random House Inc. The newly formed giant represents $1.9 billion in 1996 revenue--or 26% of the American consumer book market, according to Publishing Trends Newsletter.

Meanwhile, on the bookselling end, Barnes & Noble and Borders rack up $5 billion a year in sales, which is more than the revenue of the top 10 publishers combined, according to Avin Domnitz, executive director of the American Booksellers Assn.

As the chains continue to expand--Barnes & Noble eventually plans to double its nearly 500 stores nationwide--independents fight to survive. Ghiz admitted the Midnight Special has had major economic problems since its two rivals set up shop three years ago. Yet she has no plans to throw in the towel.

“We’re a part of this street, this community,” she said. “And I think our survival is linked to the survival of other independent art forms and expressions. . . . I don’t think we’ll ever go down, but we’re heading into a pretty dark period.”

A Strong Start for Midnight Special

In the beginning, Ghiz saw only blue skies.

She worked as a volunteer for Midnight Special back in the 1970s, when it was on Venice Boulevard, and she was always impressed by the store’s community spirit. By 1980, when the shop had moved to Santa Monica, Ghiz took it over.

“All of us who worked here wound up doing a little bit of everything,” she said. “And our accountant once told us there had to be a million dollars of unpaid labor in the store. So you get the sense of how an independent bookshop grows.”

Although Midnight Special has long had a politically left-wing flavor, its managers have stocked books that all customers want, regardless of their views, Ghiz added. And that sense of reaching out has helped the store withstand major economic growing pains, including a long period of renovation and construction along the busy Third Street Promenade.

When the 5,000-square-foot shop reopened several years ago in an expanded location on the pedestrian mall, it offered a series of author readings, discussions and community debates on a variety of subjects, said Ghiz. Even as costs increased, Midnight Special could always count on the sales of best-selling books by authors like John Grisham and Stephen King to pay its bills.

Until 1995, when Barnes & Noble and Borders arrived.

Suddenly, the two superstores were offering books at 20% and 30% off the cover price, a discount that Midnight Special couldn’t match. The chains--duplicating what some independent shops had pioneered years before--also featured food, drink and musical products that were unavailable in the smaller Santa Monica store.

In the process, the bigger stores redefined what a bookshop is, said Ghiz: “People walk in and they expect a place for coffee, T-shirts, all sorts of things. They expect you to have 50 billion copies of one title stacked up in the front. When they come to us, they think we’re a used-book store!”

Business is rougher today, she concedes, because the financial cushion from bestseller sales is gone. So Midnight Special fights simply to maintain its share of the market.

The story is similar across the nation, except many independents aren’t so resilient. Some of America’s best-loved bookstores have succumbed to the chains’ economic pressures, including Shakespeare’s on Manhattan’s Upper West Side, the Guild in Chicago and the Westwood Bookstore in Los Angeles.

Although there are no precise statistics, the ABA’s Domnitz noted that his membership, which is mostly independent stores, has declined from 5,100 in 1993 to less than 3,500 today. In 1991, independent stores controlled 33% of the market, but now that figure has shrunk to less than 19%.

During this same period, by contrast, the book chains’ market share grew from 22% to 26%, according to Publishers Weekly. Last year, Barnes & Noble’s sales rose 13.6%, to $2.7 billion, and Borders’ grew 15.7%, to $2.2 billion.

It’s hard to argue with success, and Barnes & Noble is a textbook case of how a good idea turned into a gold mine.

Riggio began working as a clerk at Barnes & Noble in 1958 when he was attending New York University. He opened his first bookstore in Manhattan in 1965, and took over the company six years later. Riggio engineered its rapid growth in suburban malls during the 1980s, and has presided over the firm’s most recent transformation into a nationwide chain of superstores.

It’s been much the same story at Borders, which began as a small, family-owned Ann Arbor, Mich., shop in 1971. Sensing the same national appetite for mass marketing of quality books, the owners expanded their business from five stores in 1989 to 204 today. The parent company, Borders Group Inc., also operates 961 mall-based Waldenbooks stores throughout the nation.

Lumped together, the two companies dominate the hardcover general-interest book market, along with chains like Crown Book and Books-A-Million. And their steady growth is significant because it comes at a time when book sales have been generally flat for two years.

Chain expansion--and the healthy business in bestseller sales at outlets like Sam’s and the Price Club--has clearly come at the expense of smaller bookstores. So has the robust growth in book sales over the Internet, a market dominated by Barnes & Noble, Amazon.com and other companies.

Have Borders and Barnes & Noble targeted independents for extinction, as the ABA alleges? Richard Flanagan, president of Borders Books and Music Stores, declined to comment on the lawsuit. But he has no patience with the idea that big bookstores are evil forces.

“This is urban folklore,” he said. “You keep hearing the same story over and over, but we bring more selection out there, not less.” If an independent store fails to compete and goes out of business, he adds, “it’s a customer decision, not a strategic decision made by Borders and Barnes & Noble.”

Small Sellers Battle Book Behemoths

For small stores, however, that’s a meaningless distinction. If chains get sweetheart deals from publishers, said Domnitz, they can charge lower prices and squeeze the competition.

The ABA’s lawsuit lists a series of benefits which, it contends, are enjoyed by Barnes & Noble and Borders but denied to independents. These include discounts in the purchase price of books; special prices for new stores; “incentive” payments for selling certain titles; and cash deals on returned books.

Although the outcome is uncertain, there is some precedent for the litigation. Last year, the ABA settled the last of a series of legal actions against major publishers, contending that they had given the chains unfair deals. In one case, Penguin Putnam Inc. paid $25 million to the ABA, resolving charges that it had discriminated against smaller stores.

“The superstores get deals I’d never get,” said Doug Dutton, owner of Dutton’s Brentwood Books, one of three Los Angeles stores suing the chains, along with Midnight Special and Book Soup. “But this is not just an economic fight. . . . There are some very important intellectual issues at stake.”

In a recent essay, Andy Ross, owner of Cody’s Books in Berkeley (another ABA plaintiff), echoed Dutton’s concerns:

“Several years ago, the bookselling community was in a state of fear due to the terror surrounding the publication of Salman Rushdie’s ‘Satanic Verses,”’ he wrote. “America’s two largest chains responded by pulling the book from the shelves of 1,000 stores nationwide. Independent stores throughout the country rallied to the cause of intellectual freedom by continuing to carry this book even in the face of possible physical harm.”

But is it that simple?

Currently, Barnes & Noble is under indictment in Tennessee and Alabama for selling allegedly obscene or harmful photos of children in the form of art books. The company is fighting those charges, citing 1st Amendment issues. Along with a Washington independent bookstore, Barnes & Noble is also battling a subpoena by independent counsel Kenneth W. Starr, who has demanded records of book purchases by former White House intern Monica S. Lewinsky.

Given these actions, Riggio objected to the good guy-bad guy tone of the debate. He said independents have their own agenda.

The ABA, Riggio added, conveniently overlooks the fact that the majority of Barnes & Noble and Borders stores are on the fringes of mega-malls, nowhere near independent shops.

“The fact there might be an independent bookstore in an area is not what prompts us to go in,” Riggio said. “It’s [because] the demographics are a screaming bull’s-eye for us.”

Like the Third Street Promenade.

On recent evenings, all three bookstores have been luring customers with literary readings and community events. As usual, the big foyers of Barnes & Noble and Borders are filled with books focused on current events, upcoming appearances by writers and a potpourri of commercial bestsellers.

At Midnight Special, the windows have included books on poetry, ecology and the environment. One title in the front of the store is “Get the Rich Off Welfare,” and a counter-top display lists “The Ten Most Censored News Stories of 1997.”

Borders’ Flanagan said “we’re doing well” in Santa Monica, and Riggio offered a similarly rosy forecast. He predicted that his share of business on the Third Street Promenade will grow.

“I think competition is good. Every time a restaurant opens, the one next door has to be concerned.”