Expansion in China Fueled
By Deliverymen's Young Legs
By G. BRUCE KNECHT
Staff Reporter of THE WALL STREET JOURNAL
SHANGHAI, China -- Like a literary missionary, Ken Hukan prowls the
bustling subway station beneath People's Square here, looking for young
people wearing glasses and dressed in modern styles. When he finds a target,
he closes in for the pitch: Join the Bertelsmann Book Club, he offers, and
know the world.
On a sweltering late-summer morning, Feng Tingting, a 17-year-old student,
succumbs. After Mr. Hukan describes the club's quarterly catalogs and the
requirement that members buy at least four books a year, she eagerly fills out
a two-page membership application. "Now I can have books delivered to my
home," she says, marveling at the idea.
The unsatisfied thirst for knowledge among China's 1.2 billion people is
enormous, but so is official distrust for foreign media companies. Stepping
into the middle, Bertelsmann AG, led by a gregarious 33-year-old German
named Ekkehard Rathgeber, has found a low-key way to overcome official
wariness. Sticking to approved titles and offering fast, easy delivery, the
German media giant is selling mountains of books.
In the past two years, the club has signed up 640,000 members, opened its
own retail stores and sold about five million volumes. Every day, it adds
about 2,000 members. Eight miles west of People's Square, about 60
Bertelsmann employees unpack crates of books and sort titles according to
individual member invoices in a 60,000 square-foot warehouse. The club
already has outgrown three previous warehouses, and Mr. Rathgeber recently
signed a lease for a building that will have 30,000 square feet of office space,
80,000 square feet of warehouse and land for expansion.
Bicycle Riders
By Mr. Rathgeber's reckoning, China has 180
million people who want to read books on a regular
basis. In attempting to reach many of them, his
biggest impediment is China's postal service: Post
offices aren't equipped to receive bulk mailings, and
they don't deliver parcels to residential addresses. So
the club created its own crew of 70 bicycle-riding
deliverymen in Shanghai, where half of its members
live.
On the same day that Mr. Hukan recruited Ms. Feng,
one of the deliverymen, dripping wet after riding a
cargo-laden bicycle through a sudden thunderstorm,
arrives at Feng Dunliang's apartment to deliver an
atlas. Mrs. Feng, a 52-year-old who is unrelated to
Feng Tingting, opens her front door and hands over
20 yuan (about $2.40) for the volume. What could be
easier? she asks. Last year, she and her husband, an economist, bought 10
books, about double what they bought the year before joining the club.
It may seem simple to her, but to Bertelsmann, the path to success has been
strewn with obstacles. Not least are Chinese government agencies, which are
refusing to let the club set up a delivery force in Beijing. "The government is
very surprised by how quickly we've developed, and they're unhappy that
we're doing so much better than Chinese companies," says Pan Yan, the club's
sales manager. Mr. Rathgeber predicts that approval will come eventually:
"The government always has some forward-looking people, and at the end of
the day I have to trust that they will prevail."
A Deep Understanding
Even now, the club provides Bertelsmann with a powerful point of entry into
the world's biggest emerging market. Beyond selling books, it has
accumulated a deeper understanding of the Chinese book business and reading
habits. (One surprise: The club's fourth biggest-selling book is "The Diary of
Anne Frank" with more than 60,000 copies sold in the past year.)
Bertelsmann hopes the club will help it to sell more books produced by its
own imprints -- which include Random House, Bantam, Doubleday and
Knopfand ultimately pave the way for it to publish and print books here.
For now, the focus is on expanding the book club. In addition to sending
dozens of recruiters like Mr. Hukan into subway stations and street corners,
the club has opened three bookstores here in Shanghai, which are used in part
to attract new members. The newest store, while not all that big, has bright
lights, a half-dozen eager salespeople and handsome wooden shelves. It also
has comfortable couches and prominently positioned tables for new titles and
"bargain books." A nearby state-owned store offers a sharp contrast: It has
just one saleswoman, and it's hard to examine books because most of them are
sheathed in cellophane.
Some club members visit Bertelsmann's stores to select their books. Li Guiyu,
21, is wearing the Bertelsmann watch she received when she joined the club.
"I can get new books and books from foreign publishers," she says. Her
51-year-old mother, Zhong Suying, has tagged along. She has asked her
daughter to order a couple of books for her, but won't join the club herself:
"It's a new thing, and young people are more interested in new things."
For Bertelsmann, book clubs are a cornerstone. Founded in 1835 as a
religious publisher and printer, it was physically and financially destroyed
during World War II. The modern-day company began after Reinhard Mohn,
a fifth-generation descendant of founder Carl Bertelsmann, returned to
Germany in 1947 after being held in the U.S. as a prisoner of war. He had
heard about American book clubs, and following his release, he created one in
Germany and others throughout Europe. Although today's Bertelsmann, one
of the world's biggest media companies, is best known as a publisher of books
and music, book clubs were the primary engine of growth during the 1950s
and 1960s, and they remain an important business line. Currently operating in
25 countries, the clubs distribute 700,000 volumes every day, about 8% of the
world's book sales, estimates Peter Gutmann, head of Bertelsmann's
international operations.
A Quick Learner
Mr. Rathgeber first came to China in 1988 as a 23-year-old student at Beijing
University, after he impressed a scholarship committee with his ability to
learn Mandarin. Although the violent crackdown in Tiananmen Square in
1989 cut his scholarship short, he says that, too, contributed to his education:
"I learned a lot about China's government, very quickly."
Mr. Rathgeber vowed to return to China once he finished school in Germany,
ideally by finding a company that would send him. But in the aftermath of the
bloody Tiananmen incident, potential employers didn't share his enthusiasm:
"They said, 'Maybe in 10 years.' " Only Bertelsmann seemed somewhat
encouraging. Mr. Rathgeber started work in corporate development and
informally began telling colleagues he "would do anything to go back to
China."
His chance came after he spent a year working for the German-language book
club. Senior Bertelsmann officials said he could take a three-week exploratory
trip to Asia. Concluding that Chinese-speaking countries provided the most
attractive opportunities for a book club, the final choice came down to
Taiwan, a relatively small market but one where books sold at American
prices, vs. China, an obviously vast market but one in which book prices
rarely topped $1.
Taiwan didn't have a book club, but the rest of its book industry was
relatively mature and competitive, meaning that start-up costs there would be
substantial. The required investment in China, Mr. Rathgeber believed, would
be much lower though the opportunity was far greater. (So far, Bertelsmann's
total investment in the China club is $4.5 million.) The problem of low prices,
he reasoned, would diminish as people made more money and were willing to
spend more.
The more immediate obstacle was the need to obtain approval from officials
wary of foreign media. "Their question was, 'Why on earth would it be good
for us to let a foreign media company earn local money for selling books --
many of them foreign books -- to our people?' " Mr. Rathgeber says.
Bertelsmann's Answer
"Our response was that China needs to have a reading population, and book
clubs can help provide that," he recounts. He also noted that many bookstores
were being pushed out of prime locations by more lucrative kinds of retailing.
Finally, he said the club wouldn't harm Chinese businesses: "We said we
would promote reading and expand the market by creating a new distribution
channel, and that we would help publishers by giving them information about
readers."
Following a year of fitful negotiations, approval came at the end of 1994.
Renting a small office in Shanghai, Mr. Rathgeber spent the next two years
experimenting with advertising and recruiting methods while also setting up a
warehouse and working to explain the book-club concept to some of China's
550 publishers.
The deliberate pace wasn't well received by Bertelsmann's Chinese partner,
Shanghai Scientific & Technical Publishers, a state-owned bookstore owner. It
ultimately stopped contributing its share of the club's start-up costs; its
ownership position was reduced to 10% from 30%, although it has the right
to repurchase that 20% at a later date.
But Mr. Rathgeber and his superiors viewed the experimentation as
successful. "We learned," Mr. Rathgeber says, "that we could sell a lot of
books, and that people honor their commitments."
In September 1996, he started a large-scale effort to recruit members and
convince publishers to offer their books through the club. There were almost
12,000 members by December, when the first catalog, with about 200 titles,
was put in the mail. Within a month, about half of the members placed orders.
In 1997, the club began buying more ads and organizing promotional events.
In January, Franz Beckenbauer, a former soccer star and a Bertelsmann
author, toured soccer-crazy China, appearing on television and radio talk
shows to promote the club.
Quarterly Catalogs
By the end of 1997, the club signed up more than 100,000 members and sold
one million books. The employee roster ballooned to 150 from 15. Since then,
quarterly catalogs, each with about 50 pages of detailed descriptions of about
220 books, have been mailed to members. Given low book prices and
relatively high distribution and service costs, Mr. Rathgeber says the club
won't be profitable for three to four years. It now has 420 employees, whose
average age is 28.
Fiction accounts for about a third of sales. How-to books, particularly English
language lessons, are popular. Bestsellers have included everything from
"Learning Revolution," a guide to more-efficient learning, and "Super
Success," which was published by a Chinese publisher, to James Redfield's
"Celestine Prophecy," Toni Morrison's "Beloved" and "The Diary of Anne
Frank."
Lu Feng, the Bertelsmann employee charged with deciding which books will
be included in catalogs, regularly visits Chinese publishers to learn about
coming titles and keeps detailed statistics on how different kinds of books sell.
Under its permit with the government, Bertelsmann isn't allowed to publish
books here, so it can offer only those published by Chinese companies. Mr.
Lu says about 40% of the selections are originally published in China; the rest
are published outside China and translated into Chinese by a Chinese
publisher. He says some publishers have yet to accept the idea that the club is
legitimate: "We're so new that some publishers don't know if we are a legal
channel."
Even so, the office where Mr. Lu and Mr. Rathgeber work, located just a few
blocks from the Bund, Shanghai's 1930s-era waterfront, is a whirl of activity.
In one room, media planners evaluate which magazines and newspapers are
the best forum for advertising the club.
Down the hall, the customer-service department answers calls from club
members. One worries that she wasn't home when the deliveryman passed
through her neighborhood; a new date is set. In the next room, 16 clerks are
opening envelopes containing membership applications. A running total is
recorded on a chalkboard.
While Mr. Rathgeber worries that Asia's economic decline will damp the
demand for books, he plans to create more Asian book clubs anyway. He sent
four people to South Korea to lay the groundwork for one there a few months
ago, and he is thinking about expanding to Japan, India and Thailand. "We
have a very powerful concept," he says. "The challenge is finding the precise
model for every market." |
