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The Curious Longevity of the College Bookstore

University Business, July/August 2012

Physical bookstores are in decline, and the signs of this are everywhere. Border’s demise was the most prominent recent example but countless small independent bookstores around the country are experiencing the same fate. According to a NY Times article about Barnes & Noble published in January of this year, “the United States has lost roughly 500 independent bookstores—nearly one out of five” since 2002, and about “650 bookstores vanished when Borders went out of business last year.” The reasons? More people are shopping online and they are increasingly purchasing digital books. As was reported recently from BookExpo America, the largest annual U.S. book trade fair, the industry is at once in mourning and also trying to re-imagine a role for itself. The only successful stores these days, one observer noted, are those that rely on at least 50 percent of their revenue from sources other than books. 

Given the extent of this market “transition” one might well wonder how bookstores on college campuses across the country are managing. Are the market forces in higher education essentially the same as those that bear on the general bookshops?

College bookstores have fared unevenly over the last several years. Large campus stores have generally managed better than smaller ones, and those that generate a larger portion of their revenue from non-textbook items also have tended to hold up better than those that rely mostly on textbook sales. According to a January 2012 Flash Report by NACS, the National Association of College Stores, year-over-year course material sales at four-year colleges and universities participating in the report show a decline against a backdrop of raising enrollment.

There is, however, a measure that is the single best indicator of a college bookstores likely success: the extent to which its sales are supported by financial aid funds. Each year, billions of dollars are available to students in the form of grants and, mostly, student loans to use for textbook purchases. The catch, though, is that these funds often arrive too late to be applied to third party textbook sources. Thus institutions have developed what appears to be a supportive system of fronting students credits or vouchers that can only be used at the official sanctioned provider, typically the campus bookstore. This financial aid component makes up roughly thirty percent of a typical college bookstore’s revenue—taken collectively, it adds up to over $2 billion each year.

Over the last several years, I have had discussions with hundreds of college business officers across the country about book operations. Many, if not most, such operations today are either no longer profitable or significantly less so. The one exception—really the only consistent one—is the situation in which the bookstore generates a large proportion of its revenue from financial aid. Whenever a college business officer tells me that his or her bookstore is profitable, my next question is: what portion of the students is using financial aid? It’s always a big number, typically more than 50 percent. Quite simply, the greater the percentage of financial aid use, the greater the financial performance of the store.

So what’s the problem? Businesses have been built around these particular circumstances, and they provide a value to institution and student alike, by allowing students to convert financial aid into their course materials and institutions to track and process these transactions. Everyone, it seems, benefits from this service.

Students, however, are mostly focused on purchasing or renting their textbooks at the lowest possible cost and the college bookstore is typically the most expensive option. In fact, it’s usually significantly more expensive than alternatives available through third parties online. By our company’s calculation—we process tens of thousands of both retail and third party “marketplace” transactions each term—we estimate that the overall cost differential between standard campus stores and online alternatives is at least 25 percent, even factoring in the rental programs that many on ground store now offer (as online rentals are typically less expensive).

Apply that 25 percent to the more than $2 billion in textbook purchases made with campus store-issued financial aid, and the “lost” savings is over $600 million. For a single college student, that difference could represent hundreds of dollars that often end up as long term debt. Take that away—it’s effectively a subsidy for physical college bookstores and, indirectly, for the colleges themselves (as they usually receive royalties or profits from campus store operations)—and the fate of the campus store would look a lot more like that of its general bookstore cousins.

Student preference for online alternatives, because of the cost-savings, is pervasive. And the internal data of almost any college bookstore supports this. If you are a college business officer, you can easily see this at your own institution. To determine “real” demand for third party alternatives, look at the textbook-only revenue and then subtract the portion that comes from financial aid (again, on average about 30 percent). Then subtract all the revenue from course materials that can only be purchased at the store—custom “bundles,” course packs, etc. (a college store manager should have this data). That winnowed-down revenue number represents what the school store generates when students are given more freedom of choice. Is it an amount sufficient to sustain a store? Does it correspond with student enrollment? Is it increasing or decreasing (when controlled for enrollment changes)? The truth is that the vast majority of students who are not dependent on institutions to front their textbooks costs purchase their textbooks from lower cost third parties. The data in this respect are incontrovertible.

In 2008, Congress passed the Higher Education Opportunity Act (HEOA). Among its provisions, there is a requirement that any higher educational institution that receives any federal funding in any form publish textbook information—prices and bibliographic information—at the time of registration so that students not only have a sense of the full cost of a course but also so that they have sufficient time and information to shop around for the best prices. While it’s often a challenge to coax booklists from faculty by registration time, most schools comply with these rules and thus have indeed helped lower textbook costs.

But when it comes to those students who depend on financial aid as a means of purchasing their books, the new law has significantly less value. Yes, these students too can learn about the cost of textbooks at the time of registration but unlike those purchasing through other means they have significantly greater obstacles to overcome to address it.  And so here’s the difficult irony: the students who are most in need of a break—those students who qualify for financial aid in the first place—often pay more for their books, and add to their debt burden, because their financial aid ties them to the campus store. One of the most beneficial aspects of the HEOA does not have a material impact on their lot.

Some college administrators and bookstore operators claim that the management of financial aid is complex and that, for reasons of security, timing, and tracking, vouchers can be used only at a single venue. While that may have been true some years ago, the technical means certainly exists today to address such concerns, and, in fact, some colleges have taken the initiative to do this. The real obstacle is more financial than technical: too many colleges have grown accustomed to the royalties or profits that such a system provides.

My sense, though, is that this subsidy will come to an end soon. Such a sizeable loophole in HEOA will not stand for long because it affects not only the students carrying the debt but also the sources of the funds themselves (especially the federal government): At a time of painful budget constraints, it’s a matter of making more efficient use of the money.

As such, college business officers should not count on the captive market of financial aid students to sustain their bookstores. They should, rather, be out in front of this issue and develop plans to help with the inevitable transition. For once it comes, the economics of the campus store will serve as an example that occasionally, and sometimes appropriately, higher ed. institutions do live in the real world and are subject to the same forces as other businesses.