Scholastic: Turning the Page on Tradition
By: Peter Lee
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Once Upon a Publisher
Scholastic is an American multinational publishing and education technology company best known for its book titles and elementary school book fairs. Founded over a century ago by Maurice Robinson, the publishing house came from humble beginnings starting with youth magazines. Today, it is a household name best known as the U.S. publisher behind Harry Potter and The Hunger Games. Over the decades, Maurice Robinson led the company to experience significant growth with a singular mission: to advance children’s literacy and education. Eventually, the family business was passed on to his son, Richard Robinson. Robinson took the business to new heights, creating and closing agreements with notable names such as Harry Potter, Captain Underpants, and Clifford the Big Red Dog, allowing it to become the beloved children’s publisher it is today.
Paper Trails and E-Book Sales: The Wake of a Digital Spell
Despite its beloved titles and book fairs, Scholastic has seen better days – the company’s market capitalization peaked at $2.7 billion in 2002, versus $1.2 billion as of December 2023. Much of this valuation decline can be attributed to several key challenges facing the publishing industry. For example, the rise of digital technology made it cheaper and easier to sell books in the electronic book (e-book) format, which deeply affected traditional publishing revenues, as seen by stagnant print book sales over the past two decades. In addition, counterfeit and pirated content has become more prevalent, further eating into the already declining industry.
Scholastic is gravely exposed to this industry decline, given that nearly 60 percent of revenues are derived from its “Children’s Book Publishing and Distribution” business – the segment representing publishing, book fair, and book club revenues. Other publishing houses have been able to navigate the challenging industry landscape by catering to new customer segments and demographics. For example, in 2022, Penguin Random House began upgrading its data and technology infrastructure in an attempt to become more competitive on a digital distribution front. Other competitors have opted to enter adjacent industries, such as education technology or education publishing space, in an attempt to escape the declining print publishing space. Scholastic, however, has been handicapped by management’s focus on preserving legacy over profitability. To understand this, one must dive into Scholastic’s complex family and legacy dynamic.
The Chronicles of Family Values and Mismanagement
As a business operated by the same family for over a century, Scholastic has historically been incredibly mission-driven. While competitors were actively moving away from traditional print book publishing, Robinson would reiterate that the business’ core focus was its “Children’s Book Publishing and Distribution” segment. Quantitatively, Scholastic’s return on invested capital has been declining since the early 2010s, suggesting the business was mismanaged and misaligned with shareholders.
Additionally, Scholastic’s complicated family and legacy dynamic led to operating decisions that seemed strange and even contrary to the success of the company. Scholastic actively pursued unprofitable initiatives to preserve its core business and uphold its mission. For example, Scholastic attempted to enter the education technology business in the early 2000s, but ultimately exited the endeavour through an unprofitable divestment in 2015 to have a “renewed focus on books and reading in schools and at home.” Scholastic’s commitment to its core values hindered its ability to grow. During a time when competitors were actively cutting costs, the company chose to maintain too large an employee base relative to revenues.
An additional complicating factor was that, despite Scholastic’s status as a public company, the Robinson family owned a majority of the outstanding super-voting Class A shares, meaning the business was effectively controlled by the family. Scholastic’s governance structure made it difficult for any outside attempt at changing the business, such as activist investors or a buyout offer.
Scholastic was facing a dire situation – operating in a declining industry with stagnating revenues, and helmed by a management team focused more on the legacy of the business than its future. However, Scholastic now faces a saving grace in the form of a new leader: Iole Lucchese.
Enter A New Protagonist Shaping Scholastic’s Narrative
Iole Lucchese, the former leader of Scholastic’s media and entertainment division, was recently appointed to take charge and turn the company around. As an outsider, Lucchese is the perfect candidate to provide an external perspective and break Scholastic out of its legacy-focused dynamic. So far, this has remained true – since taking over in 2021, she’s been able to lift Scholastic’s operating and net margins significantly through her push toward media, entertainment, and education technology as the next evolution of the business. In addition to her appointment to Chair of the Board, Lucchese was given 54 percent of Robinson’s super-voting Class A shares, making her the effective owner of Scholastic. However, unlike the Robinson family before her, she has been open to letting go of her equity in the business, and therefore control, having sold a percentage of her stock over time.
One could call media, entertainment, and education technology, Lucchese’s forte. She began her career as a junior editor at Scholastic, rising through the ranks to become a senior leader in the company’s entertainment division as well as head of its Canadian operations. Notably, Lucchese was responsible for bringing Scholastic’s intellectual property (IP) to the silver screen, generating significant revenue and buzz through the Goosebumps and Clifford the Big Red Dog movies. As a whole, her long tenure at the company, experience with Scholastic’s fast-growing media and entertainment business, and place outside the Robsinson family, leave her the perfect candidate to spark growth within the business.
From Pages to Premieres
Armed with a new, forward-thinking leader, Scholastic should pursue a strategic shift towards media, entertainment, and education technology as the next evolution of the business. Scholastic currently owns and licenses a slew of household names, including Clifford the Big Red Dog, The Magic School Bus, and Goosebumps, all of which have the opportunity to be further monetized. Successful examples of effectively utilizing owned IP include the release of the recent Clifford the Big Red Dog movie, which grossed $107.4 million at the box office. As the owner of the intellectual property, Scholastic is paid a percentage of project revenues generated through the various distribution streams – ie. Scholastic would receive an (undisclosed) percentage of the box office revenues generated by projects such as the Clifford the Big Red Dog movie.
Currently, Scholastic Entertainment, the media and entertainment segment of Scholastic, only makes up a negligible portion of the company’s overall revenues; however, Lucchese has expressed interest in ramping up Scholastic’s media business, announcing 4 new children’s television series in fiscal year 2023 alone. Scholastic also has dozens of tier 2 and 3 brands, mostly catering to children, that it could continue to monetize in the coming years in the form of television series or low-budget animated films. Given the historical success of its media releases and the sheer number of monetizable names within its roster, Scholastic faces an opportunity to enter the fast-growing media and entertainment industry and pivot its business strategy.
Scholastic to Begin the Quest for Ed-Tech Gold
In addition to media and entertainment, Scholastic faces significant opportunities within its education technology segment. Scholastic provides education technology solutions to elementary schools at the district level, offering services such as virtual reading programs or teaching resources for educators. Scholastic’s recent education technology efforts were driven by Lucchese, who recognized the opportunity to utilize the company’s brand name within elementary schools to cross-sell digital services; over 90 percent of Canadian schools participate in the Scholastic Reading Club, showcasing how well-known the brand is across all of North America.
Despite this, Scholastic’s education technology segment is still in its infancy: in 2020, the company only held approximately 8 percent market share within the elementary school education technology space, which suggests about 92 percent of additional white space to capture. This is due in part to the somewhat sticky nature of education contracts within the United States; contracts come up for renegotiation only once every few years, at which point there is a competitive bidding process between several service providers. Currently, the U.S. market is dominated by several incumbents including Pearson, Wiley, and Houghton Mifflin Harcourt (to whom Scholastic sold its education technology segment in 2015) – therefore, winning share would be a capital-intensive endeavour.
If executed correctly, however, education technology could be incredibly profitable: an ex-Vice President at Scholastic Education estimated that education technology could lead to $150 million in annual incremental revenues for Scholastic when discussing the idea in a Tegus interview.
Closing the Chapter: The Future of Scholastic
Over the past two decades, Scholastic has struggled to navigate the decline of the print publishing industry, an issue exacerbated by the mission-focused values of its old management team. A strategic shift towards media, entertainment, and education technology could drive up Scholastic’s revenues, revamping growth in a business with historically low growth. An added benefit is that media, entertainment, and education technology are higher margin ventures than traditional publishing, which provides the opportunity to expand Scholastic’s bottom line. For example, given the capital intensity of the entertainment and education software space, incremental sales would fall straight toward improving Scholastic’s profitability.
Scholastic faces a fork in its path, having to decide between continuing its course as a business in a dying industry or choosing to evolve and cater to the next generation of children and readers. The decision to pivot business strategy would serve to be a difficult one. Still, it would do the most for maintaining Scholastic’s long-term goal of providing education opportunities for children while keeping its family legacy intact.
