Bookoff and the Book Retail Industry in Japan

The Japanese nation is a nation known for its addiction to reading. The majority of the largest bookstores in Japan have existed since World War 2. In 2008, Japan had around 17,000 bookstores. The retail bookstore industry in Japan is dominated by small bookstores. In the last 10 years, the book market in Japan has fallen sharply, resulting in the industry's sales rate dropping by 20%. This resulted in thousands of small bookstores having to close down their businesses.

Industry dynamics

- Suppliers

Retail bookstore owners typically purchase books from wholesalers and sometimes directly from publishers. The level of competition at the book distribution level is relatively low. The two major traders, Nippon Suphan Hanbai and Tohan, control between 70% and 90% of the book wholesaler market. This is also known as a consignment system, which allows retailers and wholesalers to return unsold books to the publisher without being charged a discount/fee. This helps reduce risk and high supplies for wholesalers, particularly retailers. On the other hand, because these bookstores can return unsold books for free to publishers, these bookstore managers tend to have a large inventory of books, which makes them inefficient. Therefore, publishers and wholesalers prefer to ship their books to major stores first. The more books that can be sold at the big bookstore means that fewer books are returned to the publisher. This condition makes the profits of the big retailers bigger, because they get priority from the publisher to get a supply of the newest and most popular books. Likewise for wholesalers whose profits are increasing because they don't have to worry about books being returned from major bookstores.

The policy of publishers to prioritize supplying new books to large bookstores has made small bookstores in Japan go bankrupt. Consumers looking for new published books will naturally go to the big bookstores first. So small retailers are faced with a paradox: Publishers will not supply new best-selling books to small shops because of their declining sales and high risk of book returns. On the other hand, the decline in book sales in small shops was due to publishers unwilling to supply best-seller books with potentially profitable profits.

- Buyers

The growing interest in the internet has had a profound impact on the book selling industry in Japan. Japanese people not only use their cellphones to buy books, but also to read books.

- Competition between bookstores (Interfirm rivalry)

Competition in the book sales industry in Japan is characterized by the large number of small bookstores. There is no dominant retail bookstore. In Japan there is a rule that bookstores must sell a price-fixing system. This means that stores are not allowed to give discount prices to consumers. This law of fixed pricing is known as the Saihan system. This results in not allowing price competition. The types of books sold in these shops are also relatively the same (undifferentiated).

Apparently this condition is not an obstacle for newcomer, Bookoff, to enter the bookstore industry in Japan. Despite struggling to fit into an already saturated and undifferentiated industry, Bookoff pursues a very different dramatic strategy for being successful.

Bookoff

Bookoff, which is a franchise bookstore from Japan, takes advantage of the Saihan system that prohibits discounting new books. Bookoof sells used books with the same quality as new books, so Bookoff can use price to compete. Bookoff has a 'buy-back' policy: Bookoff buys books from consumers at 10% of the list price and resells them at 50% of the list price. This strategy is considered brave enough considering that the Japanese are famous for their image conscious. That is, they always maintain their image by consuming quality goods. This Bookoff strategy seems to really attract the attention of young people in Japan who feel they care about the environment.

The Japanese habit of "crazy" reading has of course also attracted the attention of other players in the book industry, both domestic and foreign, to try to get into the industry. Bookoff management has begun to see an opportunity to franchise its business in other places (countries).

Question:

1. What do you think will happen if this Saihan system is abolished by the Japanese Government? Explain.