AMS Finds Its Niche in Books and Expands It

Niche markets are not necessarily narrow or low-profit markets, as proven by the resounding success of Advanced Marketing Services, a San Diego company that specializes in selling books to discount warehouse chains, including Price Club, Sam’s Wholesale Club, Costco and Pace.

As discount warehouses have proliferated around the country over the past five years, so have Advanced Marketing’s sales. In business only since 1982, AMS is expected to post revenue of $110 million for the fiscal year ending March 31, a 59% increase over last year.

Profit for the nine months ended Dec. 31 was $3 million, a 57% increase over the same period in the previous year. On an annualized basis, the profit amounts to a healthy 20% return on shareholder equity.

And AMS’ sales and earnings growth show no sign of tapering off. The number of discount warehouse outlets where AMS books are sold--242 locations as of Dec. 31--will expand during 1988 by another 50, President Charles Tillinghast said.

‘Same-Store’ Growth

While “same-store” sales growth--the rate of growth in warehouses open for one year or longer--has slowed for most chains after feverish gains over the first half of the decade, same-store sales in the book departments of the warehouses are still growing at a healthy 15% rate, said Fred Wintzer, a retail analyst with Alex. Brown & Sons in Baltimore.

“Books (sold in discount warehouses) have been gaining in market share faster than the clubs themselves have,” Wintzer said. Also in the book operations’ favor is that they generate “well above average” gross-profit dollars per square foot of warehouse floor space, a critical indicator of profitability, he said.

AMS’ largest customer, by far, is San Diego-based Price Co., the operator of 38 Price Clubs that accounts for 40% of AMS sales. Price provided the impetus to Tillinghast and co-founders R. Craig Schafer and Loren Paulsen for setting up AMS in 1982 by promising them Price Co.’s book business. Schafer and Paulsen are now AMS vice presidents of merchandising and operations, respectively.

Now, just six years later, AMS has a virtual lock on supplying books to the discount warehouses nationwide, supplying a dozen discount chains and about 90% of the market. In the process, AMS has become a book industry powerhouse and one of the top 10 book distributors in the nation.

Although the company distributes only 200 individual titles at a given time, far less than other distributors, AMS expects to sell about 25 million books in fiscal 1988, up from 15 million last year.

Simon & Schuster, a major New York publisher, said that of its 20 largest distributors, AMS and Bookstop of Texas are the only two that have not been doing business with S&S; for 15 years or more, an indication of how far and fast AMS has come.

“I think AMS is creating a new market, an absolutely huge market,” said Dennis Hadley, an S&S; vice president.

AMS is breaking new ground in bookselling, Hadley and others said, by meeting the needs of a relatively new retail animal: the discount warehouse shopper. Unlike a typical bookstore browser, shoppers at Price Club or Costco typically do not shop with books in mind and will stop to buy them only to take advantage of big dollar savings.

Hence, the books AMS offers at the warehouses are typically “big ticket items”: best sellers, sets of books and expensive coffee-table books offered at deep discounts. AMS has also developed an innovative method of packaging how-to books on gardening, cooking and home maintenance with hardware, tools and utensils so that shoppers perceive a savings on both items. Roughly a third of AMS sales now involve sets and mixed packages.

Titles That Appeal

One of the factors in the success of AMS is the ability of Tillinghast, Schafer and Paulsen to select titles that will appeal to the discount shopper, an ability that is particularly critical in light of the fact that 90% of their selections are made prior to publication before sales trends can confirm their educated projections.

“Serious subjects do not do particularly well in a warehouse club environment,” Tillinghast said. “Coffee-table books selling at a deep discount do well because of the perceived value.”

AMS’ successful offerings include a how-to book on boomerang throwing packaged with a boomerang, the Rand McNally Road Atlas and a set of Disney children’s classics.

Buys From Publisher

AMS has been able to maintain its lock on the huge discount warehouse book market by offering services the warehouse chains have not, to date, been able to get from competing distributors or by buying books directly from publishers, said Darlene Boyd, a buyer with Costco Wholesale in Seattle.

“They offer deep discounts and service, such as return privileges on books that don’t sell, that competitors can’t match,” Boyd said, adding that AMS supplies books to all 43 Costco warehouses.

By dealing with books that are completely returnable for full credit, AMS eliminates “inventory problems of unsold merchandise” for its customers, said Irving Katz, director of research at Thomas Green/San Diego Securities. AMS also keeps close tabs on which titles are moving and fills most orders within 48 hours with the help of five distribution centers, Tillin ghast said.

This service, added to wholesale prices that are as low or lower than those available to discount chains directly from publishers, has helped AMS maintain a commanding position in a market with no apparent barriers to entry. Its low prices are due to the fact that AMS is able to turn its inventory as fast as it is billed for it, meaning “they don’t have any of their own money tied up in inventory,” Wintzer said.

From an equity investment of $7,000 in 1982, the three co-founders have grown a company now valued at more than $80 million, the market capitalization figured by multiplying the 5 million shares outstanding by Monday’s closing stock price of $13.50 bid. AMS raised $13.9 million in its initial public stock offering last July, selling 1.6 million shares at $13 each.

According to prospectus material issued after AMS’ initial public stock offering, each of the co-founders then owned 22% of outstanding AMS shares, a holding now worth $15 million according to Monday’s closing stock price.