The following is a proposal made by Jack McKeown, former president and CEO of the Perseus Books Group and former president and publisher of the Adult Trade Group at HarperCollins. Currently he is director of business development for Verso Digital, the first vertical ad network for book publishers, and is president of Conemarra Partners, a media consultancy.
Last week brought the depressing news that Seattle's Elliott Bay bookstore is in financial distress and may be forced to relocate from its Pioneer Square home of the last 36 years. Facing an expiring lease and a maxed-out credit line, owner Peter Aaron said, "Finding a lender to keep us liquid is an ongoing battle." This has become an all-too-familiar story, of course. Securing adequate investment and working capital, never an easy task for independent bookstores, has been elevated to crisis proportions by the current recession. Is there a solution--one that could help independent bookstores maintain their local competitive advantage and even promote their expansion for years to come?
The Background
From my many years as a publishing executive, I always have believed that turbulent times in our industry foster opportunity as well as dislocation. The concept that I am floating is not especially complicated, but it does require a leap of imagination and strong leadership at the national level.
A thriving neighborhood bookstore is recognized as a key element in the social, cultural and economic fabric of any community. This is an opinion widely shared by urban planners, government planning boards, Smart Growth advocates and real-estate developers around the country. They will tell you that a bookstore offers a tremendous public amenity that should be built into the master plan of any new development or neighborhood revitalization. Primarily it has been the national chains that have been the beneficiaries of this perception, and their superior access to capital is a fundamental reason why.
But with the recession, chain-store expansion has ground to a halt and a period of contraction almost certainly will follow. (Barnes & Noble COO Mitch Klipper confirmed as much in an investor presentation last week.) This is part of a larger, radical reshaping of America's retail landscape. More than 400 of the 2,000 largest U.S. malls have closed in the past two years and data suggest that at least another 1,000 are in distress. This represents an acceleration of a trend already underway before the recession took root. Main Street retail was decimated when the malls exploded decades ago, but may well rebound with a tidal wave of mall closures. "One of the biggest consequences of mall closings is the loss of a sense of community, a place where people gather and socialize," said David Birnbey of the Shopping Center Group, as quoted in "The Vanishing Shopping Mall." Can independent bookstores be positioned to help fill the vacuum as commercial real estate markets begin their gradual recovery?
The Concept
Essentially, my concept advances a sustainability and neighborhood redevelopment argument, with the independent bookstore at its center. I would like to propose the creation of a Neighborhood Bookstore Development Bank (NBDB). It is inspired by such special-purpose investment vehicles as the Fresh Food Financing Initiative (FFFI)--a successful five-year-old loan program for independent, neighborhood grocery stores. It also incorporates some of the mechanisms behind the proposed National Infrastructure Bank, as described by Felix Rohatyn and Everett Ehrlich in their October 2008 article for the New York Review of Books ("A New Bank to Save Our Infrastructure").
The NBDB would be structured as a private investment bank, i.e., as an entity that evaluates project proposals and assembles a portfolio of investments to fund them. It would look to a prominent trade organization, such as the American Booksellers Association, to provide leadership in the form of a mission charter and board memberships, but otherwise would operate at arms-length. At the heart of the concept is a NBDB Commission, a committee of experts who would evaluate proposals to provide loans to existing or start-up bookstores on a case-by-case basis. The ABA would assist individual bookstores in assembling their business plans, but the bank's Commission would operate independently and with the highest transparency, in order to attract capital and maintain the bank on a sound economic foundation.
Mission of the NBDB
The NBDB's core mission would be to promote the expansion of healthy independent bookstores and to provide start-up funds to new bookseller entrepreneurs, while simultaneously generating acceptable returns to the bank's investors. Among its specific goals would be the following:
- Support capital improvements and expansion of established bookstores
- Assist established bookstores in converting from commercial rental to ownership of their storefronts
- Promote the creation of new bookstores in underserved markets or as part of new real-estate developments
- Convert buildings to bookstores through adaptive reuse of historic structures, acquisitions of distressed properties or by foreclosure sales
- Support established bookstores in upgrading their systems and websites, and in creating or expanding their e-commerce capabilities
- Finance the establishment of print-on-demand centers (e.g., Espresso Book Machines) within local bookstores to generate new revenue streams
A recommended balance of investments between existing and new stores would be 60/40--a conservative approach meant to mitigate some of the risk of a portfolio too heavily weighted toward start-ups.
Financing
The NBDB would be capitalized through an initial round of paid-in equity and then leveraged at a suggested conservative ratio of 3:1. So, for instance, $2.5 million in minimum seed capital would be leveraged to $10 million at the outset. The pool of initial investors could include the ABA itself, along with such interested players as the national wholesalers (e.g., Ingram and Baker & Taylor). These parties would stand to earn meaningful annual dividends as well as long-term appreciation on their investments.
All the while they would be supporting the growth of a core customer segment.
Additional seed capital could be secured from REITs (Real Estate Investment Trusts) and private equity companies, perhaps as part of larger real-estate development financings. Capital would be callable beyond the seed round, with the ultimate objective of achieving a ratio of $10 million: $40 million by year three. These sums may strike some observers as modest indeed, but their impact on creating a base of larger and healthier independent bookstores would be dramatic, considering the under-capitalized state of the business now.
Ultimately the bank's loans would be packaged and sold in the secondary capital markets, timed to take advantage of the recovery. The NBDB also would tap into the federal government's interest in stimulating capital investment in local, community-based development projects and in promoting sustainability. Government grants and guarantees could be part of the solution to jump-start the effort, as has been the case with the FFFI. In addition, the NBDB could provide an engine for private-public partnerships at the local level, including community-owned bookstore retail via chartered stock companies.
In conclusion, the NBDB could play a major role in changing the narrative on independent bookstores from one of decline to rebound. For an industry preoccupied with the discussion surrounding e-books and e-readers, it may seem like a counterintuitive strategy. But that could well prove its strength. It would play into larger demographic patterns, such as the imminent retirement of 78 million baby boomers, the urban migration of younger age groups and the contraction of America's malls. These trends point to the development of better bricks-and-mortar, neighborhood-centered retail. With adequate capital at their disposal, and equipped with strong business plans that meet the NBDB's test, independent booksellers could reposition themselves for a brighter future.