SMOKE AND MIRRORS -- or

The Nail in the Shoe of the Horse of the General…

A Cautionary Tale and a Personal Plea for Action –

By Wallace Kuralt

(The writer is a bookseller of over 40 years and the former owner/operator of The Intimate Bookshop, Inc., a group of nine large general bookshops centered in Chapel Hill, NC, the last of which closed in 1998. In the 1980s and early 1990s the shops sold over $100,000,000.00 of books, some 1/10 of 1% of the national bookstore market annually, and were increasing in sales at a rate of $1,000,000 each year until, over a short period of time, some 22 new book “superstores” – the equivalent of about 180 mall-size stores – opened in the same market area, most within a mile or so of The Intimate shops and some within sight. After over four years of investigations with New York attorney Carl Person, Mr. Kuralt offers the following report).

Note: All of the statements in this Intimate Bookshop communication are allegations, as distinguished from statements of fact. The obvious purpose of having allegations below, instead of statements of asserted fact, is to avoid unnecessary litigation.

Subject to the foregoing notice that everything in this statement is alleged, this communication analyzes the damage done to the economy by many, if not virtually all, of the national chain retailers and their accounting professionals, officers and directors (collectively the "Professional Staff"), and concludes that

§ Wal-Mart, Barnes & Noble, Borders (and others) and their Professional Staffs deserve no support in their efforts.

§ The Professional Staffs have been paid more than they deserved for the professional work undertaken and performed; and

§ The Professional Staff members are not innocent bystanders who should continue in their efforts at siphoning off American savings and the U.S. economy into the pockets of themselves and other financial wrongdoers.

Here’s new data concerning the federal Robinson-Patman Act antitrust lawsuit of The Intimate Bookshop, Inc vs. Barnes & Noble, Borders, et al, fresh out of the discovery oven and you're one of the first to see it.

Smoke and mirrors

It's all really quite simple how Wal-Mart and other national chain stores, including Barnes & Noble and Borders, could blot out competition and take over retailing, but it’s taken over four years of subpoenas and discovery, depositions and argument to get at the facts which have been kept secret for so long

We have alleged that they have been successful for many years in secretly soliciting and receiving "DNA" benefits (discriminatory discounts, fees, allowances and other advantages) -- and we have ample proof as to Barnes & Noble, Borders, et al. (who do not, for the most part, dispute these findings at all) – and that their professional staffs have been or should have been aware of these practices and have failed to report them to their outside investors or lenders, and have themselves received outsized benefits.

We allege as well that these secret benefits are illegal under the Robinson-Patman Act, (“RPA”) and the court is studying our claims to see if we have a triable case.

Some would hold that it doesn't matter that these tactics have destroyed competition and caused havoc in the market -- so long as the customer benefits by virtue of lower prices. Now we can show that the customer benefits little, if any, from these secret and illegal machinations, while many others are seriously damaged.

Only the favored reseller gains. Why?

Result to the seller: As the publisher (or manufacturer) is pressured to give more benefits to the chain, it must still maintain its own revenues, which are not large enough to give exhorbitant discounts of up to an additional 30% of the original retail price of the item. So the publisher/manufacturer simply creates a new "list price" from which it discounts its price to all retailers – by raising the original list price often by as much as 50% -- and then discounts heavily to the chains and rather lightly to the independents.

Result to the retailers? An item originally list priced at $10 by the publisher is raised to $12.50 or $15.00, depending upon the negotiating power of the retailer, then sold at the same original cost of $6 to the chain and at up to $9 to the others. The chain can then offer a "discount" to its customers of 33% off the new $15 price (while its competitors can only discount at about 17%) and the chain can still make a healthy profit, while the competitor makes nothing.

Result to the customer? The original list price was to be $10, giving each retailer a typical profit of about $1.00 after all its expenses. The chain’s new "discounted" price is ... you guessed it -- still $10 or so. Smoke and mirrors. The customer receives a "discount" of a third or more (of the “new” list price and gains nothing. The chain store thrives, being able either

o To discount its competitors out of business or

o To make huge profits once there is no competition.

Result to the chains’ competition? The competition has a choice of going out of business or selling out to another company.

Result to the market – and the economy?

There are plenty of statistical measures for charting the progress of a company which is growing through the use of the DNA measures, and almost none to report the results of their activities upon their competitor companies, the owners and officers, staff members, investors and financial service centers, suppliers of goods and services, professional assistants, landlords, shopping centers, their taxing authorities or the governmental agencies who must step in and provide assistance to those who are put out of work and lose their benefits; there’s little with which to analyze the deteriorating retailing area and the crime that comes with failing urban centers and lack of jobs, and little information on the results of company failures on manufacturing and the jobs that end up on some foreign shore because of the extraordinary number of these failures.

Still, over 3,000 bookshops have closed just in recent years, and values far greater than their bottom-line profitability have been lost. We’re working on this disaster and hope you’ll study what we have to offer and keep in touch and help.

Please tell me what you think of this. I’ll be happy to talk with you at any time. WHK
Wallace Kuralt, 110 Watters Road, Carrboro, NC 27510 919 967-1716 whkuralt@aol.com

Carl Person can be reached at 325 West 45th St, Suite 201, NYC 10036 (212) 307-4444.

The website for these charges and Court papers is at http://www.lawmall.com/bookcase.

			SMOKE AND MIRRORS:
HOW WAL-MART AND NATIONAL CHAIN RETAILERS, THROUGH THE USE OF "DNA" (DISCRIMINATORY BENEFITS
GIVEN BY SUPPLIERS) CAUSES PRICES TO RISE ARTIFICIALLY, ALLOWING IT TO APPEAR TO BE DISCOUNTING
HEAVILY WHILE, IN FACT, THE CUSTOMER IS PAYING ALMOST EXACTLY THE SAME PRICE WITH NO BENEFIT --
EXCEPT WHEN COMPARED TO THE RETAIL PRICES OF THE WAL-MART COMPETITOR (EVEN IF DISCOUNTED).

Seller calculations	0.40		Seller calculations	0.50		Seller calculations	0.60
	$	% of list		$	% of list		$	% of list
Cost of manufacturing	2.00	20%	Cost of manufacturing	2.00	16%	Cost of manufacturing	2.00	13%
Administration	1.50	15%	Administration	1.50	12%	Administration	1.50	10%
Selling	1.00	10%	Selling	1.00	8%	Selling	1.00	7%
Overhead and profit	1.50	15%	Overhead and profit	1.50	12%	Overhead and profit	1.50	10%
Trade discount @40%	4.00	40%	Trade discount @50%	6.25	50%	Trade discount @60%	9.00	60%
Original list price	10.00	100%	New list price	12.50	100%	New list price	15.00	100%
Trade discount @40%	4.00	40%	Trade discount @50%	6.25	50%	Trade discount @60%	9.00	60%
Selling price	6.00	60%	Selling price	6.25	50%	Selling price	6.00	40%
volume discount	0.40	4%	volume discount	0.50	4%	volume discount	0.60	4%
Volume selling price	5.60	56%	Volume selling price	5.75	46%	Volume selling price	5.40	36%
prof (loss)	-0.40		prof (loss)	-0.50		prof (loss)	-0.60

Chain or independ.	0.40		Chain or independ.	0.50		Chain or independ.	0.60
*no discounting*	$	% of list	*no discounting*	$	% of list	*no discounting*	$	% of list
Original list price	10.00	100%	New list price	12.50	100%	New list price	15.00	100%
Trade discount @40%	4.00	40%	Trade discount @50%	6.25	50%	Trade discount @60%	9.00	60%
trade cost price	6.00	60%	trade cost price	6.25	50%	trade cost price	6.00	40%
retail price	10.00	100%	retail price	12.50	100%	retail price	15.00	100%
Gross profit	4.00	40%	Gross profit	6.25	50%	Gross profit	9.00	60%
Administration	1.00	10%	Administration	1.00	8%	Administration	1.00	7%
Occupancy, selling	2.00	20%	Occupancy, selling	2.00	16%	Occupancy, selling	2.00	13%
Overhead and profit	1.00	10%	Overhead and profit	3.00	24%	Overhead and profit	6.00	40%
Customer discount			Customer discount			Customer discount
Customer price	10.00	100%	Customer price	12.50	100%	Customer price	15.00	100%


Chain calculations	0.40		Chain calculations	0.50		Chain calculations	0.60
*discounting*	$	% of list	*discounting*	$	% of list	*discounting*	$	% of list
Original list price	10.00	100%	New list price	12.50	100%	New list price	15.00	100%
Trade discount @40%	4.00	40%	Trade discount @50%	6.25	50%	Trade discount @60%	9.00	60%
trade cost price	6.00	60%	trade cost price	6.25	50%	trade cost price	6.00	40%
retail price	10.00	100%	retail price	12.50	100%	retail price	15.00	100%
Gross profit	4.00	40%	Gross profit	6.25	50%	Gross profit	9.00	60%
volume discount	0.40	4%	volume discount	0.50	4%	volume discount	0.60	4%
Administration	1.00	10%	Administration	1.00	8%	Administration	1.00	7%
Occupancy, selling	2.00	20%	Occupancy, selling	2.00	16%	Occupancy, selling	2.00	13%
Overhead and profit	1.00	10%	Overhead and profit	1.00	8%	Overhead and profit	1.00	7%
Customer discount	0.40	4%	Customer discount	2.75	22%	Customer discount	5.60	37%
Customer price	9.60	96%	Customer price	9.75	78%	Customer price	9.40	63%


Indep. calculation	0.40		Indep. calculation		0.40			Indep. calculation	0.40
*discounting*	$	% of list	*discounting*		$		% of list	*discounting*	$	% of list
Original list price	10.00	100%	New list price		12.50		100%	New list price	15.00	100%
Trade discount @40%	4.00	40%	Trade discount @40%		5.00		40%	Trade discount @40%	6.00	40%
trade cost price	6.00	60%	trade cost price		7.50		60%	trade cost price	9.00	60%
retail price	10.00	100%	retail price			12.50	100%	retail price	15.00	100%
Gross profit	4.00	40%	Gross profit			5.00	40%	Gross profit	6.00	40%
volume discount	0.40	4%	volume discount	0.50			4%	volume discount	0.60	4%
Administration	1.00	10%	Administration	1.00			8%	Administration	1.00	7%
Occupancy, selling	2.00	20%	Occupancy, selling	2.00			16%	Occupancy, selling	2.00	13%
Overhead and profit	1.00	10%	Overhead and profit	1.00			8%	Overhead and profit	1.00	7%
Customer discount	0.40	4%	Customer discount	1.50			12%	Customer discount	2.60	17%
Customer price	9.60	96%	Customer price	11.00			88%	Customer price	12.40	83%

Price differences	0.00					(1.25)	-10%		(3.00)	-20%

Effects of discriminatory pricing upon seller, the list price, profit to both chain purchaser and independent.

Top row of calculations shows the publisher's actions when forced by the purchaser to increase the discount given the

purchaser from list price, and also shows extra "volume discount."

Publisher must maintain revenues for costs of administration, manufacturing, selling and overhead/profit, regardless of

trade discount given from retail (shown as 40%, 50% and 60% in respective three columns). Extra expenses or benefits

must come from the publisher's own account for 'overhead and profit.'

If publisher gives a 25% increase in discount to the purchaser (from 40% to 50%), publisher must increase the list price

of the book by 25% -- from $10.00 to $12.50 -- in order to maintain its own revenues. A 50% increase in discount

results in a 50% increase in list price, to $15.00.

The result to the chain store of these list price increases and discount increases is to raise the chain's net profit from

$ 1.40 to $ 3.75 to $ 6.60, respectively, if the chain chooses not to discount the list price to the customer. This amounts to

net profit of 14% to 30% to 44% of the list price, including the earned volume discount.

Or, if the chain store chooses to discount the list price to the customer, the customer discount rises from $0.40 to $ 2.75

to $ 5.60 from list price (discount of 4% to 22% to 37%, while the chain store makes the same $ 1.00 profit on each sale.

However, the new discounted list price to the customer changes little -- from $ 9.60 to $ 9.75 to $ 9.40. The customer is

led to believe that the chain is discounting the book at 4%, 22% and 37%, respectively, from the list price, but the list price

has simply been raised by the publisher in order to allow extraordinary benefits to the chain store purchasing the book.

The independent bookstore, attempting to compete, gives up all of its profit (including volume discount earned), and is

able to discount by $0.40, $ 1.50 and $2.60, respectively, at 4%, 12% and 17% from list price.

Even if the independent gives up all of its profit, the difference between its discounted price and that of the chain is

$ 0.00, $ 1.25 and $ 3.00. If it chooses to keep its scheduled profit of $ 1.00, the differences are $ 1.00, $ 2.25 and $ 4.00.

The above figures show that the chain stores, averaging some 60% discounts from the list price of the book, can discount

the "list" price of the book (as set by the publisher) by nearly 40% and still make a healthy profit from the sale of the book,

while the independent store -- even when giving up all of its profit -- can discount only at less than half that of the chain.

Independents who choose not to discount can make 24% gross profit of $ 3.60, but not for long, as customers will

soon desert the store for the chains. Those choosing to discount must make up the shortfall by increasing their sales

dramatically, an unlikely result in the face of superstore competition and heavy discounting.

The independents are also put at a serious disadvantage when the list prices rise, in that they must pay higher costs for

the same book ($ 9.00 versus $ 6.00) and must come up with more cash just to keep the same amount of inventory in

stock as before the price rise. This is no problem for the chains, who never pay for their purchases until well after the

books have been sold, and thus never actually "own" any of their inventory.

Too, the chains often return as much as 40% and more of the merchandise they purchase, and collect the "invoice" price

of about 55% of retail for the returns. Thus the chains collect about 15% of retail for every book purchased (in advertising

and slotting fees and other benefits) even if the book is never sold to a customer. The independents typically lose 4% or

so on books which they return (including shipping).

The publisher typically loses all of its revenues on every book returned, requiring that it face a Hobson's Choice: It can

make up the loss by raising its own selling price (thereby lowering the book's sales expectations) or it can lower its own

expenses, (thereby reducing its ability to compete). Some revenues can be recovered through "remainder sales" of

returned books. Ironically, the publisher then gives the chains the greatest access to these remainders, also.

The Nails, the Shoes, the Horses and the Generals have Failed.

The American system of “fail-safes” for economic activity has failed, from the nail right up to the general.

Any business activity relies upon the owners and operators of the business to act in a responsible and legal manner. The officers of that company must be honest. The spirit of the entrepreneur is violated when the company simply misrepresents its products or its operations in order to extract gain for itself at the expense of others, and so – often – are the spirit and the letter of the anti-trust laws of America, particularly the Robinson-Patman Act of 1936.

If anyone on the staff of the company violates the law, it is up to the professional staff to right the wrong and prevent any such recurrence. Otherwise, the first fail-safe mechanism of business is lost and the nail is just about to fall out of the shoe of the horse.

If the company, itself, is the violator, it is up to the officers and auditors of these business people to report the fact, especially to current and potential investors in the company and lenders and suppliers to the company – and especially if the illegal activities materially affect the profitability and the viability of the company. This is done through “comments” on the financial statements (whether audited or not) noting any exceptions to “Generally Accepted Accounting Practices,” or “GAAP,” detailing the nature of any departure from the standard -- or the presence of questionable dealings or the failure to achieve certain acceptable business ratios. Otherwise, the nail falls out.

If, as in the Andersen/Enron case, the auditor is also a paid consultant to the company (particularly one advertising that it can help the company solve antitrust legal problems), the fail-safe mechanism of the public has been compromised seriously, and the horse has lost its shoe.

If the state attorneys-general fail to investigate claims on unfair business practice, but, instead defer to the federal government, and if the Justice Department declines to take action (passing such claims on to the FTC) and the FTC abdicates its responsibility to investigate and prosecute such claims (stating that it “has no credible evidence”), then the horse is lost and – because all of the work of the legislature in enacting antitrust legislation has been felled – the general is lost, as well.

Fortunately, there is another general to take over the battle – the federal district court for civil action under the Robinson-Patman Act (“RPA”).

The journey to success in this battle is a long, difficult and expensive one, however, and few cases between purchasers have reached decisions in the 65-year history of the RPA.

Even an unqualified success under RPA can bring recompense to the damaged party of only a tiny fraction of the profits to be gained by those breaking the law. There are no criminal penalties. Even if injunctive relief is achieved – preventing the lawbreakers from repeating their acts – there is little power for anyone to act in bringing charges of repeat violations, short of the mounting of yet another difficult full legal action.

We have ideas. Pass them along if you like them. Argue with us if you do not. The facts are there to read. The problem is real. The time to act is now. WHK