David Gaunt,the co-owner of a humble but very popular bookshop in Sydney’s Glebe,can’t help but crack a smile.

Gaunt’s business Gleebooks has faced two years of slumping sales as the pandemic shut shops and drove readers into the figurative arms of “etailer” Booktopia.

But things have changed. Stores are now open and readers abound while at the same time Booktopia has found itself in the unenviable position of being out of favour with its investors.

“The industry is having a good old chuckle at its expense,well,some booksellers are at least,” Gaunt says.

“Publishers I talk to are profoundly interested in what’s happening,but they won’t necessarily talk about it because they’re now their biggest customer.”

While most book lovers are unaware of Booktopia’s troubles,it’s a page turner that has been gripping the book industry.

In recent weeks,Booktopia has been laying off staff through redundancy rounds despite six months ago being a growth business. (It is still recruiting for technology roles.)

A once great company has turned quickly from reader’s hero to an investment villain,wiping out close to $400 million in shareholder value. Its shares have sunk from a high of $3 in August to an all-time low of 17 cents on Wednesday this week.

The company itself has put this down to the huge rout in the share prices of e-commerce companies that had done well during the pandemic,pointing to the struggles of Adore Beauty,Kogan and Temple&Webster.

But some believe Booktopia has problems that go beyond a shift in behaviour by consumers after the lifting of pandemic restrictions,with concerns about the leadership of the company and the loss of investor trust.

Brave New World

Over the past 15 years,Booktopia has dominated the book selling sector in Australia,delivering more books than any other Australian operator. Along the way it has crushed its competitors by slashing the prices on its trove of titles ranging from new releases,self-help books,classics,to coffee table favourites,textbooks and a growing graphic novel business. It has 5 million customers.

According to its most recent shareholder update,Booktopia shipped a product every three seconds over the nine months to March this year. It dwarfs Amazon in terms of Australian market share,with its sales making up 54.7 per cent of the online book selling market compared with Amazon’s 11.1 per cent share.

With sales figures like that,it’s understandable that the business is loved by authors as it gives them a huge reach both in terms of Booktopia’s customer base and its significant social media presence.

Many publishers are also positive about the group that provides access to a huge buying market and at times allows some publishers to fill orders as they come in rather than printing piles of books that may never be sold. It’s a system that saves costs even if Booktopia takes a huge cut.

But just like a plot twist in a hit novel,the group is not as financially strong as it should be.

While its revenues rose 9 per cent to $194.7 million in the nine months to March,its earnings withered as costs rose across the business as it sought to keep up with surging demand. Once-hoped for profits are now gone,and the company is now guiding to a loss for the 2022 financial year.

After less than two years on the Australian Stock Exchange,Booktopia is valued at $23 million as of Wednesday this week.

In May,longstanding chief executive Tony Nash stepped down into a strategy role at the company he founded 18 years ago.

“It’s time to hand over the leadership reins to someone who is more capable than me at that job description,” Nash said.

Then,earlier this month,deputy chief executive Wayne Baskin left the company to focus on his new venture share trading app Superhero,the ‘Robinhood’ of Australia,though he remains a consultant to the company.

Nash’s diminished role within the business didn’t shock investors which include Regal Funds Management,Perennial and has included Washington H Soul Patts and Ellerston Capital. There is no love lost between investors and the entrepreneur who founded the company.

Death of a Salesman

The key sticking point is Nash’s decision to sell a portion of his large 16.63 per cent holding in the company on December 6.

Nash made $6 million off that trade selling his shares at $1.75 and retained a sizeable 14.09 per cent stake in the group describing the sale as “reluctant” in a statement to shareholders.

That share sale came a little over a week after the group’s annual general meeting on November 29 where Booktopia chairman Chris Beare told shareholders “we continue to enjoy the strong tailwinds created by the continuing growth of online shopping and the strong consumer sentiment created by the return to a more normal economy and society”.

But by early December unexpected bad news started coming.

On December 8,Booktopia announced it was facing action from the consumer watchdog over its controversial returns policy that only gave readers 48 hours to return books. And two days before Christmas,the group shocked the market with a dour update that was now forecasting a reduction in earnings of between 50 per cent and 43 per cent.

Booktopia said in an ASX statement the downgrade was in part due to the build-up of inventory for the Christmas period that had created bottlenecks in the unloading and shelving of inbound stock. Its shares fell from $1.60 the day before to $1.38 on the poor update.

The timing of Nash’s share sale riled investors.

“He’s the main target of investor disquiet. I think it’s the shortest time between a director sale and a downgrade that I’ve ever seen,” says a fund manager from an institutional investor holding shares in Booktopia.

“On an investment basis,the company is now too small to matter,but the way the company talked it up all the time,we didn’t know (it was heading towards a loss),” the fund manager says.

“I think it’s the shortest time between a director sale and a downgrade that I’ve ever seen.”

A representative institutional investor in Booktopia who declined to be named for professional reasons

Nash toldThe Age and theHerald in a statement responding to questions that the company did not believe the current share price for Booktopia reflected the value of the business.

“We are not distracted by the share price and have been focused on building a company with a long-term future underpinned by sustainable growth and earnings.

“At all times since listing in December 2020,we have provided a very clear picture of how our business performance and the impacts of COVID on our operations,particularly during the highly volatile first half where we were severely impacted by lockdowns.”

“We responded quickly to inform the market once we identified differences between external and internal forecasts for the business.”

Nash and his family have also shared the bath that investors have taken. While Nash himself has made around $10 million from selling down his shares in Booktopia over the course of its listing,his retained holding has withered from more than $58 million to just a touch over $3 million this week. As well as selling,Nash has been a buyer,picking up $375,000 worth of Booktopia’s shares in the company in May.

It’s a massive hit to a business that in many ways is still very successful.

Normal People

Nash founded Booktopia in North Sydney in 2004 with his brother Simon Nash and brother-in-law Steve Traurig.

The business set-up came shortly after the liquidation of the trio’s earlier business,a recruitment company called Best People International.

At the time Nash set up Booktopia he was bankrupt. His bankruptcy came shortly after he dropped Federal Court action against the ATO. Australian Financial Security Authority (AFSA) records show that Nash was in personal bankruptcy between 2003 and 2006.

But business failures and barneys with the taxman can be commonplace for entrepreneurs. Nash,who has self-declared that he prefers audio over the written word,has also never hidden his bankruptcy,mentioning in press interviews and in talks he’s given about his pathway to success.

While Booktopia started as a small business,it was quickly growing. Gaunt of Gleebooks estimates that it has been bigger than his business since 2007.

Booktopia’s business grew even more when it purchased the Angus&Robertson and Bookworld brands as online-only propositions in 2015.

That acquisition and its strong growth led the Booktopia team to explore an ASX listing – but it wasn’t easy.

Its first attempt to list in 2016 bombed after the market was spooked by the impact that Amazon might have on the home-grown business.

Its 2018,attempt to raise $10 million via a crowdfunding campaign was also thwarted after the corporate regulator intervened and asked Booktopia to revise its offer documents to emphasise going concern risks to investors.

In early 2020,Booktopia found new support from institutional investors who injected $20 million into its business and purchased the Co-Op Bookshop and a big slice of the scholastic market.

By December 2020,with the market for e-commerce stocks running red hot,Booktopia finally achieved its dream of an ASX listing,raising $43 million at $2.30 a share to plug a hole in its balance sheet and to pay out preference shareholders.

For a while,being a Booktopia shareholder was great. The company’s shares jumped 18.3 per cent on debut to close out its first day of trade at $2.72. Its shares would continue to rise amid positive earnings updates touching an intraday high of $3.00 in August 2021 after “smashing” (its words,not ours) its prospectus forecasts.

Things Fall Apart

Amid record earnings,some customers – albeit a handful of Booktopia’s total consumer base – began to complain on review websites.

Books that were ordered on the promise they were “in stock” were taking weeks to arrive with messages being sent to customers saying it was due to products not actually being in stock or publisher delays.

Other customers had noticed repeated chapters,split book spines,damaged covers,missing pages and jigsaws with missing pieces.

While these problems are not unique to Booktopia,and almost all booksellers have had to deal with printing issues,the company managed to pique the interest of the ACCC which took Federal Court action against the group in December alleging its returns policy to generally only refund purchases if a problem was reported in two days on receipt of the item was unfair.

As one exasperated customer told Booktopia,according to the ACCC’s concise statement of claim filed in the Federal Court:“I received a 1500 piece jigsaw,so I can’t put it together in two days to know that there is something wrong with it.”

Booktopia said in May that it expects to post another loss for the full-year in part because it expects a fine from the ACCC action. Nash says it has been in talks with the ACCC. “We are currently in discussions with the ACCC and can’t comment further on the matter,” he says.

Nash also concedes that Booktopia did face some delivery issues at the height of the pandemic due to staffing and lockdown restrictions that affected its distribution centre,but says shipping times have now returned to normal levels of one-to-two business days.

It is clear from Booktopia’s social media pages that it remains a very popular business with its customers and many review websites carrying far more five-star reviews than any other rating.

But some of Booktopia’s success has come at the expense of smaller booksellers like Gaunt’s Gleebooks.

Gaunt says Booktopia is well known for undercutting prices to appeal to consumers. “There is almost no e-tailing that doesn’t involve some kind of subsidy,” he says. “They’d have to have a very handsome discount (from publishers) because of their turnover.”

Robbie Egan,the chief executive of the Australian Booksellers Association,says it depends on who you ask whether Booktopia is seen as a good thing.

“Booktopia sells a lot of books and authors like the fact that they can link with them;they can do affiliate type deals;there are all sorts of avenues open that we’re working on getting for small to medium-sized bookshops,but they don’t yet do that.”

At the same time,Egan says it has been hard for smaller booksellers to compete with Booktopia.

“You can’t be an online only play and not pull certain levers and use certain modes of doing business that put you in direct contest with smaller retailers. And that’s a mix of things from deep discounting to special offers that may not be available to small and smaller retailers,” Egan says.

Gaunt says it’s natural for e-commerce retailers to leverage their lower cost model that doesn’t rely on bricks and mortar stores and the Australian market had needed a homegrown online bookseller.

“It was always clear to me that if somebody who could identify themselves as quintessentially Australian it would be successful for no other reason than it was not Amazon,” Gaunt says.

But Nash is firm in response to the suggestion Booktopia undercuts the market,describing the view as “incorrect”. “We have never wanted to be the cheapest bookseller in the market. We want to be competitive on price but,more importantly,have the deep range of titles that customers want and that they are in stock and ready to ship.”

Life After Life

Despite the headwinds the company is now facing,it is far from its final chapter. Booktopia is still a strong company with a huge business.

Nash says the group has a strong,growing and sustainable business with significant opportunities to increase its market share. “We believe our inventory base and distribution capabilities are superior to others and that our full-service business model is unique in the world,” he says.

Some in the market believe that perhaps Booktopia is better suited to a life as a private company where it doesn’t have to continually better itself half after half.

“It is waiting to be taken out by someone. You could find synergies for just the take-out cost now,” says one market watcher who declined to be named as they were not permitted to speak publicly.

But Nash insists the company won’t go private and says it will win back the market’s favour by delivering on its promises.

Australian Publishers Association chief executive Michael Gordon-Smith also thinks it’s too soon to write off Booktopia given its impact in the book sector.

“I think it’s always the case that if you’re a publisher… having a very large retailer is both an excellent thing,as it’s a major channel to market,and a challenge because very large companies have stronger negotiating power.”

“That said,it is a very large and successful retailer.

“Anybody who has promoted books to Australians and has done well is a good story.”

The Business Briefing newsletter delivers major stories,exclusive coverage and expert opinion.Sign up to get it every weekday morning.