Modeling the Compounding Cost of Sustainability in the Book Publishing Industry

By Andreas Stobberup of 2K/Denmark and Victor Milligan of Cairnbridge Advisers

Margin expansion remains elusive in the book publishing industry—and it may get worse before it gets better. The more severe impacts of Covid have receded, hyper-inflation has eased, and most publishers have been able to rebalance inventories. But another wave of challenges is coming. Beyond the global tensions that are complicating supply lines, the most significant inflationary challenge for publishers will be sustainability and the associated cost of carbon. Our financial models show that, left unaddressed, global tensions and sustainability would reduce the margin per book in trade publishing by 36.6% between now and 2028.  

The Financial Impact of Sustainability

For years, sustainability has been a largely self-regulated, self-reporting informal market. The EU’s Corporate Sustainability Reporting Directive (CSRD) and the EU Deforestation Directive (EUDR) began the inevitable process of formalizing the integration of sustainability into core business practices and transactions. CSRD will be joined by the pending California climate laws, the slimmed down SEC rules, and new rules from China, Canada and others—all based on similar standards. In other words, the global marketplace will be increasingly influenced by a coherent set of sustainability regulations.

Despite the challenges and costs associated with regulatory compliance, the main impact on publishers will be financial. Rising carbon costs will directly affect energy, transportation, logistics and materials expenses, and will extend to internal carbon pricing tied to publishers’ Scope 1, 2 and 3 emissions. For example:

1. The cost of carbon: Although COP28 did not address Article 6 to create a global carbon price, the International Maritime Organization (IMO) is at the forefront of creating a de facto global carbon cost that is roughly $25 per metric ton today and expected to rise by up to 10% per year over the next five years. Carbon represents a new, real cost to publishers. It is already being applied to transportation and energy and will increasingly factor in material costs. And for those operating in supply chains, expect your downstream customers to integrate Scope 3 emissions into pricing/discounting decisions.
2. Transportation and logistics costs: Expect continued volatility driven by global tensions affecting the Red and Black Sea routes, China’s influence on global trade, and climate-induced complications to global (e.g., Panama Canal) and domestic (e.g., Mississippi River) transport. The net effect is increased transport time and distance, which will add to the carbon costs.
3. The effects of deforestation and virtual carbon markets (VCM): Increasing deforestation regulations and the demand for high integrity carbon credits could indirectly raise paper production costs and create supply uncertainties.
4. Mill capacity: Three scenarios that affect costs are possible as mills are under increased pressure to disclose and then reduce emissions. Firstly, paper costs increase as paper mills reduce supply to produce higher margin products such as containerboard. Secondly, paper prices are kept sufficiently high to compete for mill capacity. And finally, mills lift prices to cover the cost of reducing pollution and decarbonizing production.
5. Demand: Over the next three years, expect consumers to have a more significant impact on demand as they increasingly favor environmentally friendly products. Buyers with disposable income, which can represent up to 2/3 of the trade book publishing market, are already willing to pay an 11% premium AND shift their buying towards more sustainable products. Alternatively, the mass market has not shown demand for higher-priced products, as we have seen in the electric vehicle (EV) market. This will create a balancing act for book publishers who may be able to counter higher cost with a green premium acceptable to the high disposable income audience; but not at too high a premium to suppress mass market demand. 

In other markets like K-12, prior Covid-led funding support from the Federal government has ended and school systems are likely to be far more prudent in procurement decisions.

Financial Modeling the Impact of Sustainability

The combined effect of all these forces not only complicates margin expansion but may cause margin erosion. We wanted to understand what the impacts were out to 2028. As a result, we developed financial models to understand the impacts on both trade and education book publishing. We built the models without the application of margin protection or expansion levers such as print on demand (POD) to focus only on the impact of sustainability. 

We applied what we gauged as relatively conservative assumptions to reflect the likely scenario without going overboard in terms of the timing and magnitude of the effect of carbon costs.

The result was an average annual 10.8% decline in margins per book and an average annual 7.2% decline in margins per title (volume gains helped at the title level) for trade publishing. The 2028 cost of carbon is over $800k, assuming books sold would have increased from the 2024 200k books sold to 234k books sold in 2028. 

Margin Levers

The fact that the macro environment is challenging is not new to publishers who, outside surging demand caused by Covid, have been addressing the pressure on margins for some time. And that may be the issue: some of the levers to address margin have already been applied and may be either less available or less effective going forward. That is less true going forward. Levers used in the future must do two things: positively affect margin and be either neutral or positive to customer experience and demand, especially as buyers with disposable income increasingly prefer environmentally friendly products. 

The cost impact of sustainability is likely to compel an “all hands on deck” view of margin levers and, in a positive sense, catalyze new innovations in book publishing.

Sustainable Typesetting

One of those levers is sustainable typesetting. Typesetting itself can be viewed as a hidden craft, most likely seen as playing a small role in strategic decisions and financial performance. It may also be seen as disruptive or even antagonistic to designers and editors that feel a sense of ownership to what’s in place today. But, nonetheless, sustainable typesetting may be an extraordinarily attractive lever for CEOs and CFOs looking for ways to protect or expand margins without impacting their ability to grow.

Sustainable typesetting has universal potential across publishing materials because it is highly customizable to whatever a publisher’s current font may be. Certain elements need to be adhered to, but it can be applied to fonts such as Garamond, Arial, Times New Roman, if redesigned properly; or it can be designed uniquely for a publisher.

Readability research provides objective requirements to follow for accessibility and inclusivity of published material, e.g., most prevalent millimeter x-height of a letter contrast and layout principles. The objective functionality enhancements of Sustainable typesetting do not impair the subjective aesthetic requirements of a publisher. In terms of planning and execution, internal design and editorial departments are typically part of tailoring the solution that matches the specific publisher needs and preferences.

And this is the foundation of Sustainable typesetting: increased readability while reducing page count.

Assuming a neutral impact on customers, we wanted to better understand the financial impact and specifically the impact of reducing the number of pages per book. 

Modeling the Impact of Sustainable Typesetting to Trade and Education Book Publishing

We financially modeled the impact of sustainable typesetting on both a trade and a K-12 title. The intent was to isolate the sustainable typesetting lever specifically, noting that publishers can deploy other margin expansion or protection levers.

To do this, we built two scenarios: an “invest” model that applied sustainable typesetting and a “stay” model that neither deployed sustainable typesetting nor applied other measures – again, to isolate the impact of sustainable typesetting. We created both a per-book and per-title scenario.

The Trade Model reveals that publishers that invest can expand their margin, as the cost reductions driven by sustainable typesetting outpace the energy, transportation, and material costs. Alternatively, publishers that “stay” feel the impact of increased cost. Both scenarios kept sales volumes at the market rate (4%).

The Education Model reveals that publishers that invest can expand their margin, as the cost reductions driven by sustainable typesetting outpaces the energy, transportation, and material costs. Alternatively, publishers that “stay” feel the impact of increased cost. In this model, we lifted market growth from 1.5% in year 1 to 3% in the out-years. 

In the models shown above, we focused on the impact of cost and did not model changing demand. However, as noted above, we do believe that there is likely to be a change in consumer and customer purchasing behavior that expands the difference in these two models.

The Road Ahead

Sustainability and rising carbon costs are intensifying the challenges for publishers. These costs are unavoidable: it is not a matter of whether they play a role, it is a matter of when and how much impact they will have. At a minimum, publishers should model the impact of sustainability and the associated carbon costs simply because they represent new and material costs and an additional threat to margin performance. Additionally, financial modeling enables publishers to understand the likely impact of different margin levers, as we have shown with sustainable typesetting. 

Sustainability was never going to be easy. For most publishers, sustainability was not part of the strategy and not included in budget forecasts. And on a practical basis, other priorities commanded executive attention and budget resources. Nonetheless, left unaddressed, it will be a drag on margin. Act now to give yourself the time to determine what’s at stake financially and what levers, such as sustainable typesetting, most effectively protect or expand your margins. 

Andreas Stobberup of 2K/Denmark works with sustainability implementation and supply-chain optimization, with a focus on the publishing industry's supply chain to reduce waste, increase efficiency, and minimize environmental impact.

Victor Milligan is a partner at Cairnbridge Advisors, a consultancy that helps companies minimize the risk and capitalize on the opportunities presented by sustainability. Specifically, Victor helps companies develop risk and financial models to understand what's at stake financially, and to model various levers able to protect or expand margins.