Better world books triple bottom line

Entrepreneurship Class- Case Analysis

Better World Books uses the power of business to change the world. We collect and sell books online to donate books and fund literacy initiatives worldwide. With more than 8 million new and used titles in stock, we’re a self-sustaining, triple-bottom-line company that creates social, economic and environmental value for all our stakeholders.

— www.betterworldbooks.com

It was almost time to present. Mike Miller, chief executive officer (CEO) of Better World Books (BWB), reflected on how much the company had changed during his short tenure at the company’s helm. He had successfully helped Better World Books develop its operations in his previous role as senior vice president of operations, but knew he had his hands full in guiding BWB toward maturity from its headquarters at the BWB corporate campus in Atlanta.

BWB was founded as a “B corporation,” one that is committed in its incorporation documents to meeting a triple bottom line of financial, social, and environmental performance. While traditional firms focus primarily on satisfying their shareholders, BWB recognizes that it has a responsibility to all stakeholders, including its employees, literacy partners, and “Mother Earth.” Over the past few years, BWB has grown significantly, from a small niche player frequenting college campuses to one of the most widely recognized social-entrepreneurship firms in the United States. As testament to its success, the company generated over $80 million in revenues for 2014 (see Exhibit 1). It has also raised over $18 million for literacy and saved over 150 million books from going to landfills.1, 2 Although BWB has successfully scaled to its current size, and investors are happy with the firm’s performance thus far, there were concerns as to how BWB would ensure future growth and continued triple-bottom-line results.

As Mr. Miller surveyed the crowd of students filling the auditorium to attend Georgia Tech’s iMPACT Speaker Series, he wondered how BWB’s transition from a start up to a mature company would affect growth and the expectations of investors and stakeholders alike, if at all.3 He was acutely aware of the growing competition in the online book market, both from companies like Amazon and eBay and from individual booksellers who now populate such online marketplaces. Similarly, the supply of used, printed books that BWB intrinsically relied on for donations was set to shrink due to the increasing popularity of e-books and e-readers like the Kindle. Was the company set to adapt to

Professors Frank T. Rothaermel, Marne L. Arthaud-Day, and Konstantinos Grigoriou prepared this case from public sources. We gratefully acknowledge Research Associate Michael McKay for updating some of the key data in this case. This case is developed for the purpose of class discussion. It is not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient management. All opinions expressed, and all errors and omissions, are entirely the authors’. © by Rothaermel, Arthaud-Day, and Grigoriou 2015.

Better World Books and the Triple Bottom Line

FRANK T. ROTHAERMEL

MARNE L. ARTHAUD-DAY

KONSTANTINOS GRIGORIOU

MH0034 1259927628

REv: FEBRUARY 26, 2015

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Better World Books and the Triple Bottom Line

the changing market and changing leadership? Would the necessary adjustment be at the expense of its triple-bottom-line approach or the company growth? Collecting his thoughts, he again began to mentally run through his talking points.

BWB’s History, 2003–2014

INCEPTION

As students attending Notre Dame University, Xavier Helgesen and Christopher “Kreece” Fuchs dreamed of jumping on the Internet bandwagon. In 1999, they developed a user-generated content application in which students could post teacher evaluations. The application quickly spread to other universities. Unfortunately, the dot-com bust halted their plans, and the pair was forced to sell the company at only a small profit.

Once again searching for a way to make some money, Fuchs and Helgesen went to sell their old textbooks to the campus bookstore. They left disappointed when the bookstore offered no more than a few dollars to buy back books that had cost them over $150. Believing that the books were worth significantly more, they decided to reach out to a wider audience and listed their books for sale on the Internet. Much to their delight, the pair found that Internet customers were willing to pay much higher prices: Books for which the bookstore was not offering even a dollar were selling for $50 online!4 Eager to take advantage of this business opportunity, they asked their friends for their old textbooks and sold those as well.

Realizing that they could use the Internet to create a market connecting sellers and buyers of used books, Fuchs and Helgesen began to search for more inventory. Their first project was a book drive to benefit afterschool reading programs at a local community learning center. Their motive was twofold: They genuinely wanted to give back to their college community, and they recognized that people were usually more willing to contribute when a charitable cause was involved. They collected 2,000 books in just a few months and raised $20,000, splitting the funds evenly with the community center.5

Encouraged by their initial success, Fuchs and Helgesen decided to take their idea to the next level. With the help of classmate Jeff Krutzman, who had experience in investment banking and finance, they drafted a business plan. The venture they envisioned had built-in social and environmental com- ponents. By sourcing used books through book drives and selling them online, they could not only generate profits but also raise funding for literacy and education programs. At the same time, they would be keeping old books out of landfills and thereby helping the environment. Building on their community-center experience, they sought to form partnerships with worthy and appealing causes that people would be willing to support through book donations. Xavier boasted, “Social and envi- ronmental responsibility is the core of the initiative—it’s in our DNA.”6 Their idea won as “Best Social venture” at a Notre Dame University business-plan competition, netting the young entrepreneurs $7,000 in startup capital.7 David Murphy, one of the competition’s judges, saw great potential in the idea which they had named Better World Books, and he offered to advise the trio as they continued to build their business. His expert guidance led to his eventual nomination as CEO and president of the young company.

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Better World Books and the Triple Bottom Line

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EARLY GROWTH

The eager entrepreneurs expanded their book drives to university campuses nationwide, partner- ing with student groups who received a small royalty payment for each book collected. The incentive for student groups was threefold: get students involved in a good cause, raise money for their student organization, and help fight global illiteracy. BWB benefited through access to increased inventory.

Soon, other opportunities emerged. After discovering that libraries had millions of excess books, BWB decided to make them an attractive offer:8 They could donate used books to BWB, which in turn would use the proceeds to support both the donating libraries and world literacy programs. Libraries already had a system in place to deal with unwanted books—by holding book sales (“yard sales”) and community giveaways, and then hauling the leftovers to landfills. David Murphy, the CEO at the time, explained how they managed to convince libraries to send their books to BWB instead: “We don’t want to compete with your yard sale, but you are missing a huge opportunity to create revenue by not selling online.” The company now gets more than half of its revenues from ex-library books. One important advantage to libraries as an inventory source is that the supply is much less seasonal in nature. By 2014, BWB had received books from more than 2,300 college campuses and 4,000 libraries across the United States, Canada, and United Kingdom.9

The company also cultivated strategic partnerships with bookstores in order to increase its prod- uct offerings and access to consumers. For example, in 2009 BWB partnered with Alibris, the largest independently owned and operated marketplace for sellers of new, out-of-print, rare, hard-to-find, and used books. Alibris’ website featured over 100 million items, while BWB carried around three million. The partnership made Alibris’ vast inventory available through the BWB website, giving BWB’s customers access to a much wider selection of both new and used books. At the same time, Alibris listed BWB’s inventory on its own website, increasing BWB’s customer base. The alliance has been very successful: within the first six months, Alibris’ independent sellers netted $1.5 million in sales on BetterWorldBooks.com.10 Similarly, BWB reached an agreement with Powell’s, an independent bookstore carrying both new and used books, to sell books that Powell’s could not keep due to space constraints. BWB helped Powell’s create shelf and inventory space by taking over the shipping costs and providing a generous percentage of revenues. The deal was attractive to both companies, as they have different but complementary customer bases and sales channels. Books sold through BWB but sourced from one of its more than 20 online partner companies follow the same revenue distribution model as the books in BWB’s internal inventory.11 Affiliates receive between 5 percent and 8 percent of every sale they refer to the BWB website.12

As a result of the company’s efforts to increase in scale, inventory grew exponentially from 92,000 books in 2003 to over 8 million in 2013.13 Revenues doubled every other year with a total revenue growth of 120 times the starting value in the company’s first 10 years of operations (Exhibits 1 and 2).14,15 The company currently processes more than 1 million books a week, selling 25,000 books daily, and it is one of the top three online sellers of used books in the world.16 Roughly 25 percent of BWB’s book sales take place through its proprietary website, which the company launched in 2008.17

PRODUCT DIVERSIFICATION

As BWB moves into a more mature stage of corporate development, it has started to pursue econo- mies of scope as well as scale. While print books remain the company’s main focus, it now offers more than 25,000 new and used audiobooks for sale on its website. BWB has also initiated an e-book

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Better World Books and the Triple Bottom Line

program in response to customer demand and carries about 5,500 titles in stock for use with iOS, Android, and laptop/desktop readers. However, BWB e-books are supported by neither the Amazon Kindle nor the Barnes & Noble Nook devices, which severely limits BWB’s growth in this market segment.

Additional product expansions include approximately 20,000 new or used traditional and digital games, as well as a limited selection of new or used movie DvDs and music CDs (approximately 1,000 each).

Social Entrepreneurship as a Business Model

Entrepreneurship describes the process by which people undertake economic risk to innovate—to create new products, processes, and sometimes new organizations. Entrepreneurs innovate by creat- ing new business opportunities and then assembling the necessary resources to exploit them.18 BWB represents a form of social entrepreneurship,19 which involves generating value to society and thereby enhancing social wealth.20 BWB’s social emphasis is evident in its mission statement, which describes the company as “a global bookstore that harnesses the power of capitalism to bring literacy and oppor- tunity to people around the world” 21 (see Exhibit 3).

As is common for many social entrepreneurship firms, BWB evaluates its performance based on a triple bottom line. The first pillar of a triple-bottom-line company is the traditional economic value created, which is measured using standard financial and accounting tools. The second pillar is a social commitment to business practices that promotes the interests of the firm’s full array of stakeholders. In BWB’s case, the stakeholders include employees, readers around the world, and local communities. The third pillar is an environmental commitment to sustainable business practices.

BWB was incorporated as a “B corporation” (benefit corporation) to signal the company’s commit- ment to economic, social, and environmental objectives (see Exhibit 4). The B corporation is a new form of business that voluntarily submits to external audits to ensure that the company’s business practices promote the interests of all relevant stakeholders.22 The B Impact Rating System is a man- agement tool to help companies assess their impact on each stakeholder and improve their social and environmental performance.23 Maryland became the first state to officially recognize B corporations in 2010. By 2014, 27 states had enacted legislation on behalf of benefit corporations, and another 14 states were considering similar legal protection (see Exhibit 5).24, 25 While the more traditional S and C corporations confer official IRS tax status, B corporations do not (yet). However, supporters of the B corporation concept are working hard to provide tax benefits to its members, with the first official tax incentive signed into law in Philadelphia in 2009.26

ECONOMIC PROFITABILITY

BWB is a for-profit company; this was an intentional choice by its founders, who believed that a business model provided greater assurance of long-term survival than did pure charity.27 Money raised through book sales is split three ways:

1. A fixed percentage of the net revenue is paid to the donor, based on the specific books sold. Libraries typically receive 15 percent of the net sale price of any books they consign through BWB.28

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Better World Books and the Triple Bottom Line

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2. The company makes a “social profit margin” of approximately 7 to 8 percent from each used textbook it sells, all of which is reinvested in the company.

3. Another 5 percent of net sales goes to one of BWB’s major nonprofit literacy partners, selected by the donor (Books for Africa, National Center for Family Literacy, Room to Read, and Worldfund).29, 30 Importantly, the literacy partners receive their designated share of net revenues regardless of whether the company earns an economic profit in that time period or not. This arrangement provides them with a reliable source of income.

BWB has never paid economic distributions to company owners or employees.31 It was estimated that BWB achieved a positive EBITA by the end of 2010, and it will exceed $100 million in the near future.32, 33

The company’s other major economic impact has been through the creation of more than 365 full- time jobs with health care and other benefits. The account management team is based in Alpharetta, Georgia, with a technology and operations team in Mishawaka, Indiana, and warehouses in Mishawaka and Edinburgh, Scotland. The Mishawaka warehouse was previously an abandoned packaging plant in an industrial center that was hit hard by the decline of the U.S. automotive industry.34

In 2009, BWB took an innovative step to make sure that its nonprofit partners would share directly in its economic success. Books for Africa, Room to Read, Worldfund, the Robinson Community Learning Center (the site of BWB’s very first book drive), and the National Center for Family Literacy each received stock-option grants, making them partial owners of BWB. Orchestrated through Good Capital, a social equity investor, BWB set aside a 5 percent (combined) ownership stake for these five, as well as other potential future literacy partners. Subsequent grants will be in the form of performance-based options based on two metrics: (1) the ability of the nonprofits to achieve their own internal objectives for literacy and educational improvements, and (2) their effectiveness in promoting the collection and sale of books through book drives for BWB.35 More recently, other partners have been added to the list of non-profits sharing the companies economic success, namely Open Books, The Prison Book, and Ride for Reading.36

SOCIAL COMMITMENT

BWB’s second objective is to confer social power by promoting literacy and education through its network of nonprofit partners. On the company’s web page, a money meter counts the amount raised for global literacy. As of November 2014, the meter stood at more than 15 million donated books and $19 million in funds raised; of this amount, $8.6 million was provided to over 80 literacy nonprofits and $9.5 million was given to libraries (see Exhibit 6). BWB anticipates reaching a cumulative $25 million in direct funding to its literacy partners in the next few years.37

In addition, BWB has donated $3.6 million to college organizations that run book drives. These organizations have collected more than 45 million books, many of which have been sent at no charge to organizations such as Books for Africa, the National Center for Family Literacy, and Feed the Children.38 Nonprofits can also apply for grants from the Literacy and Education in Action Program (LEAP) to fund local initiatives aimed at ameliorating global poverty through education.39

BWB provides detailed data to make the case for literacy as a legitimate social cause. Globally, 781 million adults, 64 percent of whom are women, are illiterate. In the United States, 30 million adults have literacy-skill deficiencies. Of the world’s illiterate population, 73 percent lives in Asia.

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Better World Books and the Triple Bottom Line

In Africa, 42 million children do not attend school; in Latin America, most children go to school for an average of only 5.4 years.40 There is a clear correlation between poverty and illiteracy. The conse- quences of illiteracy are tremendous: literacy is the foundation for respect, opportunity, and personal development.

BWB has received numerous accolades in recognition of its social efforts. The company took first place in BusinessWeek’s 2009 survey ranking the “Most Promising Social Entrepreneurs,” receiving 36 percent of the vote and outscoring the second place honoree by a wide margin.41 Fast Company maga- zine called BWB a “social entrepreneur who is changing the world,” and Time magazine in September 2009 listed the firm as one of the “Top 25 Responsibility Pioneers.”42

ENVIRONMENTAL COMMITMENT

As a B corporation, BWB is also committed to protecting the environment through sustainable busi- ness practices. The company’s core operation is collecting and reselling used books, thereby prolong- ing their circulation life. By focusing on the reuse of an existing product, BWB eliminates the need for additional raw materials and production waste. Books that cannot be sold are channeled through the literacy partners to build libraries or equip schools in developing nations. Any books unsuitable for donation are recycled. BWB estimates that it has reused or recycled over 216 million pounds of books, equating to over 153 million books. In addition, BWB builds the shelves in its warehouses using old metal shelving from libraries across the nation. It has already reclaimed more than 900,000 pounds of metal shelving that would otherwise have ended up in landfills.43, 44

BWB believes in maintaining a neutral carbon footprint for all of its business activities. A few cents from every customer transaction go to support wind-energy projects. Because the U.S. Postal Service uses less energy per package than any other carrier, BWB also offers an eco-shipping option that uti- lizes local post offices whenever possible. The company has worked closely with Sustainable Business Consulting to determine its carbon inventory, and it has partnered with 3Degrees to determine the appropriate amount of carbon offsets to balance its shipping and all other operations. CarbonFund uses these donations to fund third-party projects (planting trees, developing clean energy sources, and so on) and then retires the carbon credits created by the projects.45 BWB estimates that it has offset 44,000 tons of carbon on all BetterWorldBooks.com shipping.46, 47, 48

The company’s environmental efforts have not gone unnoticed. BWB received the EPA’s WasteWise Gold Award for Paper Reduction in 2009, and the WasteWise Gold Award for Climate Change in 2010.49 In 2011, the EPA recognized BWB as the Small Business WasteWise Partner of the Year.50 To ensure that its efforts to protect the environment continue well into the future, BWB has created a full-time management position dedicated solely to sustainability. The company’s 2014 B Impact Report on its environmental and social performance is provided in Exhibit 7.

The Online Used-Books Industry

The foundation of the online used-book industry dates back to 1995, when Amazon.com chose books as the first products to be sold on its e-commerce website.51 Amazon concentrated its opera- tions on selling new copies of books, which it kept stocked in vast inventory warehouses that totaled

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11.8 million square feet in North America alone.52 Since its early days, Amazon has added a wide variety of other products (music, toys, clothing, jewelry, video games, and so on) and services (customer ratings, recommendations, Prime shipping, and others) to its online offerings. Maintaining such a wide variety of books and other media in stock proved to be a costly strategy, so in 2001, Amazon opened its online marketplace to third-party vendors, vastly increasing its available inventory. In return for a referral fee and either a per-item or flat monthly access fee, outside vendors could list their products for sale through Amazon, and they could elect whether or not to have Amazon pack and ship their orders for them. This created an unprecedented opportunity for used-book sellers, who previously were limited to customers in their store’s local geographic area.

Half.com was actually the first company to develop the idea of an online used-books market. It began in 1999 by offering a fixed-price platform for selling used media including books, recorded music, movies, and games online. Sellers could list both used and new items for free on the website but were required to pass on up to 15 percent (depending on the selling price) of the proceeds to Half.com once the sale was completed.53 Users could search the website’s contents using several methods, includ- ing an item’s title, author, keywords, and International Standard Book Number (ISBN). Search results listed the current inventory available for sale, organized both by condition (New, Like New, Good, and Acceptable) and by best price in each condition category. When listing an item, sellers had access to statistics such as the price of the last such book sold and the average list price based on condition. Within a year of its launch, Half.com was acquired by eBay for approximately $350 million.54 In 2007, Half.ebay.com had 9.5 percent of visits to bookseller websites, second only to Amazon.com, which had a 62 percent share.55

Alibris started in 1998 as a marketplace portal for independent sellers of new and used books, music, and movies. Sellers pay a fee to join, an annual membership fee, and various other sales-based charges in order to have access to the Alibris marketplace, library sales channels, and a host of other partner sites, including Amazon.com, Half.com, eBay, and Better World Books (see Exhibit 8 for other outlets). Other services that Alibris provides include market-intelligence data to assist with item pric- ing, online inventory management, and a sales notification system.56 In 2010, Alibris merged with Monsoon Inc., a marketplace-selling services company, further enhancing its online sales capabili- ties.57 Alibris offers more than 100 million books for sale to its customers through its network of 15,000 independent sellers.58

Later entrants into the online book-selling industry include Half Price Books, which launched its own web store, HPB Marketplace, in 2011. The site is expected to provide HPB’s customers with access to an online inventory of more than 120 million book, movie, and music titles.59 Chegg.com, which started out as a textbook rental website, has also expanded into new and used textbook sales. Chegg’s differentiating feature is that it offers students the option of renting textbooks at a discounted price for a specified time (e.g., semester, quarters, 60 days, and so on). In a search, rental prices were one-fifth of the sale price of a new finance book and about one-third of the price for a new strategic management text. For students who need a textbook for a single course, renting is an attractive option because it can save the student hundreds of dollars each semester. Book rental services also address environmental concerns, as a textbook may be utilized by several students before the end of its circu- lation life. To further underscore its environmental commitment, Chegg partners with the American Forest Global ReLeaf Foundation to plant a tree for every textbook rented.60 More recently, Chegg has begun to extend its services to universities through an in-store textbook rental solution. They place an electronic kiosk inside the school’s bookstore that enables students to search for a given textbook on

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Chegg’s database, and then it is delivered to the bookstore for student pick-up.61 Chegg went public in late 2013, and in August 2014, partnered with Ingram Content Group to outsource textbook storage and shipping towards remaining competitive with Amazon, which now has its own textbook rental offering.62

With dozens upon dozens of websites listing the same book for sale or rent, competition in the used-book industry has become fierce. Search tools (such as directtextbook.com and dealoz.com) and aggregate marketplaces (such as Amazon and Alibris) provide price comparisons at the touch of a mouse, pitting vendors against each other and forcing prices downward. A search for a textbook on Amazon.com, for example, returned 43 hits with copies of varying conditions. BWB’s listing placed tenth overall in terms of price and fourth among vendors with books in good condition. A company called “goodwillbooks” had the same exact textbook selling for $40 less, while other companies were selling better-quality copies for less than the $153 that BWB was asking.

Meanwhile, the traditional printed book industry is facing challenges from technological advances that threaten to disrupt existing business models for new and used books alike. Amazon, Apple, HP, RIM, and Sony, among others, have all developed electronic book (or e-book) readers, and their popu- larity is mounting quickly. Kindle sales were estimated at 20 million units in 2013, while Apple sold 68 million iPads in the period from October 2013 to September 2014.63, 64

Ongoing price wars among the different e-book sellers have placed downward pressure on prices, which in turn has led to increased demand. Amazon reported that e-book sales for its Kindle out- stripped printed books for new releases for the first time ever in 2010. As e-books continue to gain in popularity, they not only constrain print-book margins (e-books typically sell for $9.99, significantly less than the price of a new hardback) but also decrease the eventual supply available to used-book merchants such as Better World Books.

Future Growth for BWB

The future growth of BWB in this competitive marketplace depends on how well it can transition to a mature going concern, which in turn is dependent on how the company manages its supply chain, internal operations, and brand image.

SUPPLY CHAIN

BWB has an advantage over its competitors because it builds its inventory through donations. However, in order to grow the business, Mr. Miller knows that BWB must continuously expand its donation sources. To date, the company’s two main sources of donated books have been campus book drives and libraries.

• Through BWB’s campus collection program, called “Book Drives for Better Lives,” local organizations have put together book drives at more than 2,300 colleges and universities. These activities remain an important source of inventory. BWB provides free advertising supplies and book collection bins to the sponsoring student organizations, which collect and pack up the books for shipping to BWB. BWB covers all costs including shipping; students receive a flat fee for each accepted book and also get to pick which nonprofit receives the associated donation. Competition for student textbooks has tightened significantly in the years since BWB first started its campus program, however, and

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remains seasonal in nature (based on the academic calendar).65

• BWB instituted its Library Discards and Donations Program in 2004, through which over 3,000 U.S. libraries have donated books they can no longer keep or shelve.66 Again, BWB covers all costs including shipping, while the libraries and a nonprofit literacy program of their choice each earn a percentage of net sales. BWB makes payments on a quarterly basis or holds them until a minimum of $50 accrues as payable commission.67

To supplement its inventory, BWB has also started to develop other supply channels, described more fully in the bulleted list that follows. Still, with the increasing competition for existing used books and the likelihood of a decline in supply as e-books become more popular, Mr. Miller wonders if the firm has cast a broad enough net to support its present and future inventory needs.

• Through its Reuse First for Booksellers Program, independent booksellers send their surplus inven- tory to BWB at no cost or obligation. BWB provides all necessary materials and shipping free of charge, plus it gives the vendor (and the designated nonprofit) a percentage of the commission.68