Autopsy of an Indie Bookseller

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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.