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Autopsy of an Indie Bookseller

Courtesy Andy Ross

For decades, Cody's Books was a Berkeley (Calif.) institution with an international reputation as a modern-day agora. From the start, the independent bookstore was about more than selling books—it was also about the ideas they represented and the people who came to read and discuss them. Almost every night, the store was a hub of literary and political culture, where a Pulitzer Prize-winning author, a baseball Hall of Famer, or a former U.S. President could be found giving a reading or signing books, while igniting some form of lively discussion.

Over the years, Cody's grew to three stores, stocking 150,000 titles. Jacques Derrida and Michel Foucault were perennial best sellers, although Danielle Steele and Dan Brown could also be found. During the '60s, Cody's stood at the center of the Free Speech movement and became known for its unwavering stand against censorship. When in 1989, the store was firebombed for selling Salman Rushdie's novel The Satanic Verses, Cody's employees voted to continue selling the controversial novel that earned its author a fatwa (death sentence) from Iran's Ayatollah Khomeini.

Then it all came to an end. Last June, Cody's shut its doors after 52 years, the victim of crushing economic factors and a slew of business decisions that couldn't keep it competitive. The story of Cody's, says Michael Levy, a professor of retail and marketing at Babson College, "is sort of an epitaph [of the independent book industry] in a way."

Dwindling Numbers

Indeed, times have been especially tough for independent booksellers, who have seen their numbers dropping steadily. According to the American Booksellers Assn., a trade organization made up of independents, based in Tarrytown, N.Y., in 1993 there were 4,700 indies. Last year, that number had fallen to 1,600, though Meg Smith, chief marketing officer of the ABA, cautions that many small bookstores continue to do well and says that 73 new shops opened last year.

The culprits of the overall decrease are many: the blitzkrieg of mega-stores like Barnes & Noble (BKS), with $5.4 billion in sales, and Borders (BGP), with $3.8 billion; behemoth discounters like Costco (COST) and Wal-Mart (WMT); the Internet; competition for readers' time; and the changing habits of readers themselves. Indeed, despite the gloomy numbers, the National Endowment for the Arts released a study this month that found that fiction reading has increased for the first time since 1982—especially among adults. The most recent blow has been the recession, which has put a vise on retail sales. In recent weeks, Stacey's Bookstore, the 85-year-old San Francisco shop, announced that it would close in March. Citing weak sales, the venerable Portland (Ore.) indie icon Powell's asked its employees to consider taking unpaid sabbaticals.

The community reacted to the news of Cody's end as if an important part of the social fabric had been undone. "Cody's was such an institution," says Debbi Hersh, who moved to Berkeley in 1978 and is currently the marketing director for the Oakland East Bay Symphony. "It is just so inconceivable to think that they are completely gone."

In many respects, Cody's rise and fall is emblematic of many booksellers' struggles in recent years. At the same time, it is also a cautionary tale about the myriad business decisions that scores of small businesses face every day—the kind that collectively can mean the difference between survival, success, or closure.

Cody's began in 1956 when Fred and Pat Cody borrowed $5,000 from family, friends, and Fred's life insurance policy and opened their tiny bookstore (without heat or a bathroom) on Euclid Avenue. Along with two other Bay Area bookstores, Cody's popularized the sale of low-priced (55¢ to 95¢) quality paperbacks.

Moving Up

While the paperback helped democratize literature—making scores of titles available to mass consumers—it also helped drive Cody's sales, and the store thrived. In 1960, the couple moved to a larger space on Telegraph Avenue. Five years later the pair moved into an even larger store up the street, which would become Cody's renowned flagship. The couple reinvested most of their profits back into the store. Pat Cody says that Fred never took more than $10,000 a year in salary.

According to Pat, now 85, publishing-house sales reps frequently called on Fred to pick his brain about up-and-coming authors and subjects of interest. "He had a real genius for knowing that something was going to have appeal, especially for our sophisticated audience," she says. In 1976, when Tom Robbins came out with Even Cowgirls Get the Blues, Fred ordered 1,000 copies. "My eyebrows went up," says Pat. "He said: 'Don't worry, honey.' We sold over 700 copies in two months."

By 1977, however, after 21 years, the Codys decided to move on. "We created something, and that was challenging," she says. "And we got a lot out of it, but once you do that, it is more or less about maintenance."

New Ownership

Thirty-year-old Andy Ross, who owned a small bookshop in Sonoma, bought the store. He shared the Cody's philosophy that books were meant to be discovered. Cody's, he says, "was a place of ideas."

Under Ross, Cody's computerized its inventory with the help of a part-time employee and Berkeley graduate student named John Gage—who later went on to help found Sun Microsystems (JAVA). Ross also set about to expand Cody's, adding about 15,000 sq. ft. However, as Cody's improved, the area around Telegraph declined and was soon abandoned by its middle-class residents. In 1997, Ross opened a second Cody's branch on Fourth Street, an upscale stretch in Berkeley.

Throughout the 1980s the store prospered. It is a period that Ross, in retrospect, calls the Golden Age of independent bookstores—before chain mega-stores and discount warehouses, before the Internet and Amazon (AMZN). Notable writers, from Alice Walker to Joseph Heller, made store appearances. "On a normal Saturday in 1989, we would do $25,000," says Ross. Ninety percent of the books sold were part of the store's extensive backlist. According to Ross, Cody's sold 10% of the country's copies of Walter Benjamin's Illuminations.

By 1991, however, independent booksellers, which sold nearly 50% of all books bought in the U.S., found that the landscape was about to change. Cavernous superstores covering 25,000 to 40,000 sq. ft. of retail space began opening in their neighborhoods, encroaching on their territory. "They had a good selection, and they were everywhere, and we lost our regional business," says Ross.

Within a handful of years, the Internet became a factor. "It just kind of grew exponentially," he recalls. Around 1998, Ross says he first started noticing people walking in with printouts from Amazon. "We always had special orders, and we prided ourselves on being able get any book in print. Now customers could get them online." Although Cody's was an early adopter of online selling, Ross says it was difficult to compete on price because "Amazon was selling books at cost and they evaded state tax."

Ignoring Harsh Reality

Looking back, Ross says he was determined to turn a blind eye to some of the harsh realities unfolding all around him. "Amazon had a very good service," he says. "But we didn't want to admit it. We still had the experience of going to a bookstore, and we were a community center. We had author events every night, but the competition was stiff."

The writing was on the wall. Customers came into the store to browse, but increasingly they went home and purchased their books online—at a discount.

By the early 2000s, Ross says he was losing $300,000 a year. By about 2005, losses had increased to $500,000. However, his payroll and overhead costs continued to go up. Ross refinanced his house and began lowering his rent to himself on the Telegraph Avenue building that he owned. "I was subsidizing my losses and could only do that for so long," he says. "I was digging into my earnings. I was in denial. I didn't want to face up to the fact that there was little I could do."

As other independents took to creating community events and classes to pump up sales, focused on niche subject matter, cut back, or cut out their backlists altogether to focus mainly on best sellers, Ross dug in his heels. "We could have changed," he says. "We could have only sold best sellers, kept smaller spaces, and laid half the people off. Then we maybe would have made money. But then it wouldn't be Cody's, and I didn't want to be that."

Customers Wanted

In 2005, Ross opened a third store, in San Francisco, a decision that he hoped would pull Cody's out of its hole. Looking back, it may have also been his fatal mistake, he says. Ross dug into his savings and plowed $1.5 million into a 22,000-sq.-ft. location in the heavily trafficked Union Square. "We thought we would expand ourselves to profitability," he says. "All the factors were in place. It was a great location. We got a great deal per square foot: We had information about how much money per square foot you could make." There was, however, another factor that Ross says he ignored at the time: "Nobody was buying books."

On July 9, 2006, Cody's celebrated its 50th anniversary. It was a bittersweet occasion. Ross gave a speech in which he became so emotional in front of the group that included Pat Cody that he had to stop midway. His wife, Leslie Berkler, finished the speech for him. The next day, Ross closed the flagship Telegraph Street store and not long after sold the building as well.

By the fall of 2006, Ross was faced with two options: close down and declare bankruptcy, or sell. He chose the latter, selling Cody's to Hiroshi Kagawa of the Japanese firm IBC Publishing, one of the largest exporters of English-language books in Japan, who was said to have long admired Cody's. (By deadline, Kagawa was unavailable for comment.) Based in Tokyo, Kagawa kept Ross on as manager. And according to Ross, the two had several discussions about moving forward. "I thought we'd create an import-export business to Japan," says Ross, "another stream of revenue. There were a lot of discussions, but nothing bore fruit."

Compounding problems, Ross says that Cody's was being squeezed by creditors and stock was running low. There were even fewer books to sell to customers. Sales slipped further. On a good Saturday, Cody's rang up only $9,000 in sales. Revenues were down two-thirds from their high point 17 years earlier. Ironically, Ross says, as things continued to get worse, Cody's actually had gotten better at doing business. "We were reaching out to libraries and book fairs and other events, but it wasn't enough." Revenues were down to about $2.5 million (compared with the late 1980s, when there was only one store and Cody's brought in $8 million), and profitability continued to slide. Ross says the costs became unsustainable.

Kagawa, the new owner, made the decision to close down the San Francisco outlet in April 2007. According to Ross, Kagawa was having financial problems of his own, and he wanted to reduce costs at Cody's, narrowing inventory, and slashing staff. "When Hiroshi asked me to do that," says Ross, "I fell apart and quit—the stress was too great." By December, Ross resigned.

Dismal Economic Outlook

In 2008, the economic climate worsened. The entire book industry continued to skid. Nielsen Book Scan reported that sales during the early part of December dropped 6.6%. Even the large chain stores had taken big hits. In October, Barnes & Noble CEO Leonard Riggio sent out a company e-mail, noting: "Never in all of the years I've been in business have I seen a worse outlook for the economy. And never in all my years as a bookseller have I seen a retail climate as poor as the one we are in." Borders closed out the year with rumblings it might be on the block.

In March 2008, the rent tripled on the Fourth Street location, and the following month Kagawa moved the store to a new, smaller site on Shattuck. However, just two months later, Kagawa announced he was closing the last Cody's store. Kagawa released a statement that read: "Unfortunately, my current business is not strong enough or rich enough to support Cody's.…Cody's is my treasure and more than that, Cody's is a real friend of [the] Berkeley community and will be missed."

For Ross, who emerged as a literary agent, Cody's demise remains a deeply personal and painful subject. "If communities abandon their bookstores," he says, "bookstores will abandon their communities."

Flip through this slide show for more on Cody's.

Perman is a staff writer for BusinessWeek in New York.

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