Table of Content Section1|2|3|4|5|6|7|8|9 Appendix1|2|3|4|5|6|7 Notes|Executive Summary|Download(PDF format, 798KB) SECTION FIVE - THE RETAIL MARKET 5.1        In the retailing sector, there are roughly 100 booksellers[14] selling school texts in Hong Kong. About 40, comprising some major booksellers, are members of the Educational Booksellers' Association (EBA). Independent retailers operate most of the bookstores although some booksellers are also vertically integrated into textbook publishing, e.g. Ling Kee and Commercial Press. There is no suggestion that these vertically integrated booksellers exhibit any anti-competitive practices such as refusing to stock competitors' texts on their shelves. It is unlikely that such conduct would occur, or be profitable, due to the fact that the books would in any event be available at other booksellers, and the main field of rivalry for publishers in securing a share of the textbook market is in convincing schools to select their texts. 5.2        According to EBA, booksellers are passive in the supply chain, where publishers have control of both marketing and pricing. Publishers stated that since they undertake almost all of the marketing effort in obtaining selection as a school text, the discount rate generally offered by them to booksellers is 20% off the list price. Discounts off the list price is a prevalent practice by retailers, and the most common discount at retail level during 1999 was 10%[15].  5.3        In the case of textbooks, there is neither volume discount nor consignment, as opposed to books of general categories. Textbook retailers have to face seasonal demands, bear slow-moving stocks and risk dead stocks. Booksellers' cost of carry is further increased by the need to source from a number of publishers as there are often over 10 recommended textbooks per subject per level.  5.4        In the present economic downturn, EBA submitted that publishers would withhold supply from those booksellers perceived to have cash flow problems. Particularly vulnerable are those viewed by publishers as being unable to make ends meet (such as those operating on very slim gross margins due to high retail discounts). EBA added also that some booksellers cherry-picked fast moving items to reduce the cost of carry, thereby enabling them to afford a higher discount. That explained why some booksellers did not carry the full line of textbooks.  5.5        On the printing of textbook lists, EBA commented that it was a service rendered free to schools, but could in no way influence the market demand. In textbook selection, subject panels recommend shortlists of textbooks for the schools' eventual choice. The shortlists may, to some extent, be influenced by publishers; but not by booksellers.  Second hand textbooks 5.6        A second hand textbook market exists in Hong Kong, although it is of a smaller scale than new textbooks. One of the publishers associations stated that the sale of new textbooks generally falls by 30% in the subsequent year following first year of publication. The association further submitted that the second hand textbooks market, especially for upper form textbooks, has a significant impact on the publisher market. In a rough estimation, the split of the textbook market for new and second hand textbooks was stated to be around 70:30.  5.7        Some second hand booksellers attributed the small share of the overall retail market for second hand textbooks to the low substitutability of second hand textbooks with new texts partly due to the revision of textbooks which rendered second hand texts relatively valueless. There was also a suggestion that there might be a reluctance on the part of some parents or students to purchase second hand goods[16]. The Council is unable to ascertain whether the reason why the majority of students buy new texts is simply because they prefer new texts over used texts. Nevertheless, in view of the fact that second hand textbooks, where they are direct substitutes for new texts, generally cost 40% to 50% less than new texts, the existence of a second hand market would be important in relieving the financial burden of purchasing textbooks. The extent to which there are frequent changes/revisions in existing textbooks would play a large part in determining the viability of such a market. Retail market shares 5.8        The Council was unable to obtain market shares between various booksellers due to an apparent lack of information maintained by the industry. EBA, which is believed to represent a sizeable section of the retail sector, was unable to provide an estimate of its members' market share, in terms of aggregate turnover, due to a claimed lack of research. Nevertheless, the Council is of the view that its members' presence would not be insignificant, as EBA is the only booksellers' association in Hong Kong comprising major booksellers. Some of its members have large-scale operations, e.g. Hon Wing Book Co, Jing Kung Book Store, Ling Kee Bookstore, T.H. Lee Book Co and the World Book Store.  Retail profitability 5.9        EBA claimed that the textbook retail market is contracting and for two decades there had been no newcomers willing to invest in the retailing sector. While this could be seen as an indicator of low profitability, it could also indicate that the retailing of textbooks may need to evolve towards other more efficient means of distribution, such as direct sales by retailers in schools or using other modes of delivery[17]. Any impediments that prevent restructuring would need to be closely examined and addressed[18].  Recent innovations in retailing 5.10        On the publisher side, as far as the Council is aware, Ling Kee started selling textbooks by Internet in 1999. In the same year, the multi-product retailing outlet adMart joined the textbook retail market, along with the sale of other commodities, through internet/call centres/retail stores to sell secondary textbooks. However, it was noted that adMart had not gained sufficient momentum given the unavailability of certain textbooks and some students who were relying on supply from that retail outlet ended up with no texts when schools started (1 September 1999, AppleDailyNews [19]) . Some schools also allow direct sales of both new and old textbooks on school premises, although this is on a small scale.  5.11        Recently, Commercial Press launched its CP1897.com service, selling textbooks via the Internet. Ordered textbooks are collected at Commercial Press stores, 7-ELEVEN stores, or certain real estate agencies.