Penguin books is the forgotten child of media group Pearson but this Christmas, it may finally have come in from the cold.
The publisher of authors as diverse as Jamie Oliver, Roy Keane, Nick Hornby and Zadie Smith is confidently predicting the festive sales period will be its best ever.
If so, it would be a suitable end to an upbeat year during which Penguin was responsible for a record number of bestsellers and finally emerged from the shadows of Pearson's more talked about assets - the Financial Times, and a growing education business.
Investors have reasons to be thankful.
The worst advertising recession in 30 years has shattered profits at the FT and bosses warn it may be another year before revenues recover.
The education business, largely based in the US, has so far weathered the economic storm but as the newest of Pearson's three divisions, it still takes up much of senior management's time.
Penguin, long seen by City investors as a low growth business that plodded along in the background and might even be better sold off, is now perceived to be a valuable source of stability. Last year, it made operating profits of £80m on turnover of £820m.
Although the global book market is growing at a relatively sedate pace of 3%-4% a year, the certainty it offers Pearson at a time of economic fragility is attractive.
Retail growth
Book sales were hit in the wake of September 11, largely due to the number of books sold at airports or bought elsewhere to read on planes and holiday.
Yet the growth of big retailers such as Borders and online outlets including Amazon, combined with the Harry Potter phenomenon, has ensured that reading remains a core leisure activity even in an age when television, radio, music and computer games are in greater supply than ever.
According to a recent survey by Gayle Feldman of Publishers Weekly in the US, more book titles than ever are being published these days.
Pearson's strategy under boss Marjorie Scardino has been to only own businesses that are number one or two in their market. So over the past five years, Penguin has been built up - largely through acquisition - to become one of the biggest and most profitable publishers of trade books anywhere in the world.
In 1996, Penguin's US position and access to bestsellers was transformed by the acquisition of Puttnam Barclay, the publisher behind authors including Tom Clancy, Saul Bellow and Clive Cussler.
Then in 2000, Penguin attempted to reduce its reliance on big name authors by snapping up illustrated reference publisher Dorling Kindersley. Full control of the Rough Guide travel book series was added shortly afterwards.
"We now have all the tools to be the best in the business," said John Makinson, Penguin's chief executive.
A former finance director for the whole Pearson group, Mr Makinson has been handed the task of improving profitability at Penguin - even though its profit margins are already towards the top end of the industry.
Supply chain
Mr Makinson believes that, over the long term, a further two points could be added to margins of 12% to 13% through the introduction of new computer systems and warehouses, the merging of back offices and better management of capital.
He is looking at every stage of the company's supply chain, from the amount of newsprint stored at printers to the number of books stored in warehouses to reducing the number of unsold copies returned and destroyed.
"There are merits of scale that we have not yet pushed the boundaries on," said Mr Makinson. "We're looking at all our businesses around the world for what we do well and we'll try to apply those skills to the benefit of other parts of the group. But we won't compromise the sovereignty of the different publishing houses."
One of the biggest challenges facing Makinson and other publishers as they drive to improve profitability is the rising cost of advances paid to authors ahead of the delivery of manuscripts.
Mark Braley, an analyst at Cazenove, says a publisher's key asset is its relationships and contracts with its leading authors. However, the cost of those advances has risen sharply across the industry with top selling authors demanding multi-mil lion pound fees for multi-book contracts. Sometimes it strains the relationship to breaking point. A few years ago, Penguin lost Stephen King to Hodder in the UK while this year, Picador lost Booker Prize winner Graham Swift to Penguin in a rumoured six figure deal.
"Talent is taking a larger slice of the overall pie," said Makinson. "There comes a point where if the advances we are paying authors are diluting our return to a level that is unacceptable then we will get to a situation where author advances start to fall."
To reduce the risk to the business if a big name author jumps ship, publishers look to other less well-known names and specific genres for growth.
Makinson sees the niches of cookery, gardening, travel and children's books as ripe for expansion. "They are areas where brands have value and author advances are less." Whether Penguin is capable of meeting Mr Makinson's margin target will depend much on the performance of DK.
The company was snapped up for £367m after previous management grossly over estimated demand for a tie-in book to the Star Wars films, leaving it with millions of unsold books and significant financial difficulties.
Cazenove's Mark Braley does not believe the deal has been a success. A further £80m has been swallowed up restructuring the business and this year it is likely to deliver operating profit of just £7m. A pretty miserly return, Mr Braley says.
Mr Makinson admits: "We knew it was a business in financial distress and operational difficulty but it has taken longer to fix than we thought. Long-term however, it will still be a great deal for us and it is now back in profit."
Perhaps chastened by the experience, Mr Makinson says Penguin is not looking to mount any more big takeovers.
Big presence
Rival publishers including Simon & Schuster and Holt are rumoured to be up for sale at the right price but Makinson is insistent. "Big deals don't interest us, but smaller, bolt-on deals, in particular niches where we can buy brand values, do."
Mr Makinson believes a more profitable growth area will be the education market, where Pearson has a big presence, particularly in the US. He says DK is ideally placed to develop school text and course work books that are more interesting than the norm.
If he can deliver growth and profits without harming the creative culture at Penguin, the personal rewards for Mr Makinson may be great. By moving from finance director to run Penguin books, many analysts believe he was looking to add a new string to his bow in preparation for the battle to succeed Ms Scardino when she eventually steps down.
Mr Makinson insists he is quite happy where he is, especially in the present business environment. "I can quite see myself spending the next 10 years running this business, it's very vocational and to be honest it's not a great time to be a public company chief executive at the moment. There is more than enough to do here."
The firm facts... not fiction
History
Founded in 1935 by Allen Lane as a publisher of affordable contemporary books. Later expanded into non-fiction and classic works.
Pearson acquired Penguin in 1970. Expanded into US in 1975 with acquisition of Viking. In 1981, Penguin bought New American Library/Dutton Books, also a US operation.
In 1996, Penguin's size increased by 50% through the acquisition of US publisher Putnam Berkley from MCA.
May 2000, Penguin acquires Dorling Kindersley, publisher of illustrated reference and educational works.
The rivals
The big English language publishers and their parent companies:
Random House: Bertelsmann
Penguin: Pearson
Simon & Schuster: Viacom
Warner Books: AOL Time Warner
Macmillan: Holtzbrink
HarperCollins: News Corporation
Orion: Lagarde
Bloomsbury: independent stock market quoted company
