Advanced Marketing Services, Inc.
Advanced Marketing Services, Inc.
Sales: $501.1 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: ADMS
NAIC: 422920 Books Wholesaling; 511130 Book Publishing
Advanced Marketing Services, Inc. (AMS) is the primary supplier of general interest books, hardcover bestsellers, mass market paperback books, and related merchandise to more than 3,000 membership warehouses, including Sam’s Club and Costco. AMS serves warehouse clubs and a variety of specialty retail stores in the United States, Canada, Mexico, and the United Kingdom through distribution centers located in Baltimore, Dallas, Indianapolis, Sacramento, Mexico City, and London. Book distribution services include advertising and promotional programs, in-store book department management, and customized book recommendations in accordance with region, customer base, and marketing strategy. AMS publishes books under three imprints. Thunder Bay Press publishes promotional and gift books, including coffee-table books; Silver Dolphin publishes children’s books; and Laurel Glen publishes general interest books on gardening, natural history, interior decoration, art, cooking, and other topics.
Beginnings in 1982: Anticipating the Supply Chain Needs of Warehouse Clubs
AMS originated in 1982 when its three founders saw an opportunity to provide wholesale book distribution services to the new membership warehouse stores. Warehouse clubs charged annual membership fees, but sold brand name goods at low cost, compensating for low profit margins with high volume sales. Charles C. Tillinghast III, Loren C. Paulsen, and Craig Shafer intended to grow their book jobber business along with the warehouse clubs by shaping AMS to the needs of warehouse club operators. To this endeavor Tillinghast brought experience in publishing; Paulsen, mass-marketing; and Shafer, book distribution.
The three started with $6,000, a 5,000-square-foot distribution center, and branch offices at their homes. They also had the promise of book business from Price Club through an associate of Tillinghast. Tillinghast and Paulsen delivered AMS’s first order of books, 25 copies of Baseball Becky, to a San Diego Price Club from the trunk of Tillinghast’s Volvo in August 1982. Within the first nine months of operation AMS served nine locations, including four Price Clubs and a Sam’s Club, a subsidiary of Wal-Mart, which received its first delivery in March 1983. For the fiscal year ended March 31, 1983, sales reached $2.7 million, with net income of $70,000.
AMS served the warehouse clubs by offering books at a low, 15 percent markup over AMS’s already low cost. AMS obtained volume discounts from publishers, paying less than the bookstore chains for inventory. This allowed the warehouse clubs to sell books at 30 to 45 percent below the publishers’ suggested retail price. In addition to addressing the club stores’ need for bargain-priced books, AMS merchandisers sifted through thousands of books published every year, as well as the million books in print, and advised customers on potential bestsellers and value-priced titles for fast turnover and high sales volume. AMS grew through the use of trade credit as book inventory sold before publisher billing.
As new warehouse clubs opened in the next three years AMS obtained purchase orders to serve those companies, including Pace Membership Warehouse, B.J.’s Wholesale Club, and Costco Wholesale. When the first Office Depot store opened in 1986, AMS provided the office supply superstore with low-cost computer and business books. After five years in business, revenues at AMS reached $70 million with 12 customers at 200 locations. A proprietary computer software linked the company’s distribution centers to the main office in San Diego, allowing for shipment of most orders within 48 hours. Just-in-time delivery gave retailers a high profit margin relative to the space used for display and inventory.
With a 90 percent share of the warehouse club book market, AMS’s success has been attributed to its ability to choose book titles that appealed to an upscale yet dollar-conscious consumer. For example, coffee-table books proved to be a popular impulse item for their perceived value in a discount shopping environment. AMS ordered special reprints of previously published titles, offered boxed sets of classics, and designed special packages, such as children’s coloring books with crayons and gardening books with pruning shears. From 170 publishers AMS provided a continually changing inventory of approximately 200 titles with flexibility for seasonal demand, such as gift books for the Christmas holiday and gardening books in the spring.
AMS became a public company in July 1987 with an offering of 1.6 million shares of common stock at $13 per share. At the end of fiscal 1988, AMS reported revenues of $110 million and net income of $3.6 million. That year AMS distributed 15 million books, with 42 percent of revenues garnered from 38 Price Club stores and 22 percent of revenues from Sam’s Club stores. Audio cassettes packages with children’s books and video cassettes accounted for nine percent of sales and calendars contributed three percent of revenues. A second offering of stock in August 1998 provided capital for large, seasonal printings and an in-house publishing company, Thunder Bay Press, established in 1990.
The 1990s: Challenges of Growth
Along with widespread growth in distribution and sales, AMS experienced the challenges of growing quickly. Despite revenues of $207.2 million, AMS reported a 50 percent decline in income for fiscal 1990. The number of office supply stores AMS served increased from 60 to 261 locations and the number of warehouse clubs rose from 283 to 357 locations; however, AMS lowered the price of its merchandise to compete in new markets while expenses increased. In anticipation of growth in market share AMS augmented warehouse support, as the company relocated two distribution centers to larger facilities, and hired additional merchandise service representatives. The company experienced a high volume of store level overstock and returns of unsold books. Because AMS purchased 85 percent of its inventory on a nonreturnable basis, the company decided to cut the volume of books purchased while it sought to gain a better sense of its clients’ customer base. AMS marketed excess inventory through eight new retail stores in factory outlet malls nationwide. The Publishers Outlet Service stores carried gift books, such as art and coffee-table books, basic reference books, and some children’s books.
By the end of fiscal 1993 AMS rebounded with a $2.9 million profit on $258.4 million in revenues. Participation in publishers’ promotions and strong sales of calendars, gift books, juvenile, and computer books improved the company’s profit margins. AMS operated ten outlet stores, which sold $4 million to $5 million in inventory annually, and planned to open another two stores in 1994. Improved distribution methods allowed AMS to reduce the number of distribution centers to four. In addition to consolidating the Atlanta facility into its Baltimore center in June 1993, AMS closed the San Diego facility a year later.
In alignment with the company’s intention to grow with the warehouse clubs, AMS supplied books to some portion of all 25 membership warehouse companies in the early 1990s. Growth followed international expansion as AMS supplied Costco stores in Europe and Price Club and Sam’s Club stores in Mexico. The company established subsidiary operations in London and Mexico City in 1993 and 1994, respectively, and AMS began to carry Spanish-language books. AMS reached an agreement with Kmart to supply both English- and Spanish-language books to six to eight stores that opened in Mexico in early 1994.
Although AMS maintained a 90 percent market share in book distribution for the warehouse clubs in the mid-1990s, the company again miscalculated its growth potential. In 1993 the company served 600 warehouse clubs and 650 office supply stores. AMS added 83 Sam’s Club outlets to its distribution roster in 1994 but reported an operating loss due to increased expenses related to international expansion, larger warehouse facilities, and an increase in staff. A weak economy resulted in slower store-level sales at warehouse clubs, producing a high volume of book returns and the expense of processing returns. In addition, the merger of Costco and Price Club led to some store closures and a reduction in sales. AMS cut costs by reducing the staff at its main headquarters by ten percent. The company rebounded in 1995 with strong sales in the computer, children’s, cookbook, and audio categories. AMS also added 65 Sam’s Club stores to its customer roster, becoming that company’s major vendor, serving 356 of 428 stores.
AMS uses its unique book industry expertise to source, distribute and promote general interest books and related media. AMS has owned the largest market share of book distribution to membership warehouse club since beginning operations in 1982. The Company’s insightful ability to provide exceptional service to this segment has driven its revenue growth and financial results. AMS intends to continue to nurture and grow its core business and solid financial position while leveraging its competitive advantages to accelerate further growth.
AMS continued to have a problem of high book returns, which the company addressed through implementation of the Vendor Management Inventory system (VMI) in late 1996. The return rate on unsold books increased from 22 percent in 1995 to 28 percent in 1997. VMI provided more efficient tracking of point-of-sale inventory at each store and stock replenishment forecasting based on historical sales data and comparable titles. In conjunction with Independent Service Representatives, who provided custom book recommendations, VMI improved the book supply mix and fostered store level turnover for increased sales. Through implementation at 600 Costco and Sam’s Club locations the return rate decreased to 21 percent in 1998.
Diversification and Expansion on the Agenda: Late 1990s
With 80 percent of AMS’s total revenues originating from Costco and Sam’s Club, AMS decided to diversify its customer base. In the fall of 1995 AMS created a new division to provide book inventory to online retailers, including the Home Shopping Network’s Prodigy outlet and America Online’s Global Plaza. AMS began to supply specialty retailers, including computer superstores, Petco pet supply stores, sporting goods stores, and catalog retailers. In April 1996 AMS gained Phar-Mor, Inc. as a customer, providing children’s books, bestsellers, and promotional and gift books to the chain of 96 retail pharmacies in the Midwest. To improve methods of supplying specialty retailers, which tended to order less than a full carton of one title, the company instituted the Acupak customer fulfillment system at the Indianapolis facility in 1996 and in Sacramento in 1998.
Diversification at AMS involved intensifying in-house publishing activities under the newly formed Advantage Publishers Group. To Thunder Bay Press AMS added two new imprints. Laurel Glen published general interest nonfiction for bookstore chains, including Borders and Barnes & Noble, as well as for the warehouse clubs. Under the Silver Dolphin imprint AMS published reprints of Curious George and other popular children’s titles. Silver Dolphin developed a series of children’s activity books, called Let’s Start, which included project materials, and a series of interactive nature books illustrated by award-winning, wildlife artist Maurice Pledger. The company’s largest effort involved publication of 100,000 copies of D.A.R.E. to Keep Your Kids Off Drugs.
Expansion involved new products as well as new clients. Through an August 1997 agreement with International Periodical Distributors (IPD), which provided magazines from 1,500 publishers to 6,500 retailers, AMS diversified its customer base as well as its product line. The agreement made IPD services available to AMS customers, while AMS offered book programs to IPD customers. New clients involved the distribution of books to ten Fedco superstores in southern California and paperback books to 228 Kmart stores in California, Oregon, and Washington.
In the United Kingdom AMS diversified into supplying books to specialty retailers through acquisitions and new clients. AMS made its first acquisition of another company in March 1998 with the $6.8 million purchase of Aura Books plc, a supplier of books to department stores and specialty retailers, such as garden centers, gift shops, and the Mothercare chain of superstores for baby and toddler goods. Under AMS Aura Books expanded distribution to Mothercare from 73 to 340 stores. In March 1999 AMS acquired Metrastock Ltd., a book supplier to specialty retailers in the garden, craft, and gift markets. New distribution agreements for AMS involved Center Parcs, a prestigious vacation resort company, and Focus Retail Groups, a chain of home improvement stores, with increased distribution from 67 to 180 stores. AMS consolidated operations of Metrastock, Aura Books, and AMS at a new 74,000-square-foot distribution center that opened in Bicester, Oxfordshire, in December 1999.
To facilitate international expansion AMS created a new position, vice-president—international, for which the company hired Bruce Derkash in November 1998 for his marketing experience in Latin America, Asia, and Europe. Under Derkash international distribution spread to Korea, Indonesia, Argentina, and Australia. Despite earlier efforts to improve operations in Mexico, when AMS had added staff with expertise in Mexican products and Spanish-language books, the subsidiary continued to operate at a loss. AMS developed relationships with Mexican publishers to provide Spanish-language books to Spanish-speaking markets in the United States as well as for distribution in Mexico. In 1999 AMS’s distribution in Mexico grew to include VIP’s, an eatery that combined book and music sales into its concept. In addition, distribution to Office Depot grew from 16 to 32 stores.
AMS involvement in North American distribution grew with the September 1999 acquisition of a 25 percent interest in Raincoast Book Distribution, a traditional book wholesaler based in Vancouver. Raincoast’s operations included the exclusive distribution for 40 publishers and in-house publishing of books on travel, health, popular science, personal finance, and other topics. Raincoast also acquired the rights to publish books for Canadian markets, such as J.K. Rowling’s bestselling series of Harry Potter children’s books.
Expectations for Continued Success into the Future
At the end of the 1990s the volume of AMS’s purchases from book publishers ranked fifth nationally in the late 1990s, giving the company the advantage of the highest discount available from publishing companies. AMS purchased books from 295 publishers in 1998, with 15 percent of purchases from Penguin Putnam, 12 percent each from Random House and Bantam Doubleday, 11 percent from Simon & Schuster, and ten percent from Little, Brown. AMS was the number one customer for many publishers and often purchased 30 percent to 100 percent of a first printing. In 1999 AMS purchased 700,000 of the first 2.5 million copies printed of John Grisham’s book The Testament.AMS estimated that 25 percent of recent bestselling books sold in the United States had been distributed through the company.
- First Sam’s Club delivery.
- Initial public offering of stock.
- In-house publishing is established.
- International subsidiary is formed.
- Company begins diversification of customer base.
- Advanced Marketing completes its first acquisition.
- Stock value increases 120 percent.
Although growth in sales and income was steady at AMS, reliance on a few customers made potential investors reluctant to buy. Costco and Sam’s Club still accounted for more than 75 percent of AMS’s revenues as comparable store sales rose more than six percent in 1998 and 1999. Trading of AMS stock on the NASDAQ increased as growth in earnings continued and the company paid its first ever stock dividend on fiscal 1998 income of $9.1 million, a 42 percent increase over 1997. In 1999 AMS’s stock value rose some 120 percent. Much of that increase occurred after the July/August 1999 issue of Equities placed AMS among the “Fastest Growing NASDAQ Companies Rankings” in America. Of the 5,000 companies on NASDAQ, AMS ranked 77th based on earnings over the previous five years with a 39 percent compound annual earnings growth rate. The company’s stock split twice, in January 1999 and January 2000, and AMS planned to pay quarterly dividends adjusted for the increase in shares.
AMS continued to improve operations and to seek growth in new domestic and international markets. As the Vendor-Managed Inventory system continued to improve the rate of return on unsold books, the company began to close its outlet stores in 1998 and 1999. AMS formed a team of sales associates to sell returned product, thus providing for a low overhead method of sales. A distribution agreement with Borders bookstores helped to improve sales for the 1999 holiday season and AMS expanded distribution with Borders in the spring of 2000. In March 2000 AMS acquired Bookwise International of Australia, which generated $4.1 million in sales to 2,500 customers in New Zealand and Australia. For more than 50 years Bookwise distributed specialty books on fine art, architecture, photography, music, wine, and other topics to traditional bookstores, chain bookstores, and department stores.
Advanced Marketing Europe, Ltd.; Advanced Marketing S. de R.L. de C.V. (Mexico); Aura Books plc (U.K.); Metastock Ltd. (U.K.).
Baker & Taylor Corporation; Chas Levy Company LLC; Ingram Industries, Inc.
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