Romance Publisher Harlequin Rejects Bookstore’s Deal

Case Type: operations strategy; new business; math problem.
Consulting Firm: IBM Global Business Services 2nd round job interview.
Industry Coverage: mass media & communications.

Case Interview Question #00233: Your client Harlequin Enterprises Limited is a Toronto, Ontario-based publishing company owned by the Torstar Corporation (TSX: TS.B), the largest newspaper publisher in Canada. Harlequin Enterprises is the world’s leading publisher of series romance and women’s fiction with approximately 120 new titles published each month in 29 different languages in 107 international markets on six continents.

Harlequin Enterprises sell its romance novels directly to bookstores. Typically, the company reimburses its customers at the end of the year for any unsold inventory. Now, one of Harlequin’s customers, a large retail bookstore, has come to it with an offer for a deal. In return for a 10% discount on wholesale prices, the bookstore will no longer send back any books at the end of the year. Should Harlequin do the deal or not? Why?

Additional Information: (to be provided to you if asked)

• Romance novel sales have been flat for a decade, and sales are expected to remain so in the coming years.
• Harlequin’s clients have to sell books at a price they dictate, no cheaper.
• In 2008, Harlequin sold 10,000 books to this retail bookstore. At the end of the year, the bookstore sent back 20% of its books to Harlequin.
• It costs Harlequin $5 on average to make a single book, and Harlequin previously sold books to the bookstore at $10.
• Harlequin’s Salvage Value for unsold books = 0.
• Note to interviewer: Have the interviewee explain how he/she will estimate/guess at a figure of how many books the bookstore will order this year, then give the projected number of 7500.
• MSRP of books is not relevant in this case.

Possible Answers:

Key elements of analysis to solve the case:

1. Math: Margin calculations.

• Don’t forget salvage value.
• Ask the candidate to explore rationale for the projected number (7500) of books that will be ordered this year (directionally up, down or flat?).

2. Opportunities:

• Reduction in operational complexity.
• Good will meeting customer/channel request.
• Open up new business model — may lead to additional distribution channels.

3. Threats:

• Cash Flow (with new model, Harlequin will get less cash flow upfront – a big problem in this kind of economy).
• Market Share (assuming fewer units sold).
• May affect other clients’ choices as well (i.e. first of many, not isolated case).
• Relationship with client (supply them with less books, they will view you as less important).

Note to interviewer: When mentioning cash flow, have candidate do the calculations. Previously, get $100,000 upfront, now only get $67,000 (see part 4 Calculations below).

4. Calculations:

• Pre-change: profit = 8,000 * ($10-$5) — 2000 * $5 = $30,000
• Post-change: profit = 7,500 * ($9-$5) = $30,000
• Pre-change: cash-flow: 10,000 * $10 = $100,000 upfront
• Post-change: cash-flow: 7,500 * $9 = $67,500 upfront
• Pre-change: market share at 8,000 books
• Post-change: market share at 7,500 books

Conclusion: The expected profit is the same, but initial cash flow is lower and market share is lower. There does not seem to be a direct financial incentive to take the deal.

Final Recommendation: The deal does not seem attractive on a financial or strategic basis. The expected profitability is the same but cash flow and market share will decline. Such problems are complicated by the fact that others in the industry may follow the lead of the first bookstore. Recommendation is not to accept the deal.

• Possible Risk: By not accepting the request of your client, you risk alienating the bookstore if other publishers shift business models.
• Possible alternative: Consider the differences in “blockbuster” books vs. lower-volume books. Perhaps new business model (at different pricing) may make sense for some titles.

Note to Interviewer: This case is primarily a quantitative math problem with margin calculations. Make sure that the candidate explore the calculation part in the case first and foremost; discussion of business and strategic alternatives can come later.