Australia’s largest book retailer is mired in debt and slashing its range, leaving publishers anxious about the industry’s health.

Redgroup Retail, parent of the Borders and Angus & Robertson chains, has been forced to jack up prices, increase returns and extend trading terms with its suppliers, according to industry sources. The company told the New Zealand Stock Exchange in July it was likely to breach two of its banking covenants at the end of the month, with debts believed to be in the order of $50-75 million.

“A whole lot of publishers aren’t doing business with them at the moment,” a senior book publishing source told Crikey. “They are asking for payment terms to be extended to as far as 120 days, which nobody is prepared to give them. In response publishers are cutting their print runs by 30% in the run up to Christmas.” Another source told Crikey that Redgroup was looking to reduce stock on shelves, up recommended retail prices and increase return credits with publishers.

The retailer — which accounts for more than a quarter of Australia’s $1.5 billion book industry — is suffering a bleak period. According to industry figures, book sales were down 4% across the market in the first six months of 2010. Redgroup told the NZSX in July it was on track to deliver earnings of just $25 million for the year to August.

Gabrielle Coyne, CEO of Penguin, told Crikey it had been a “bumpy year” with “flat” volumes. “The next six months are crucial, as ever, given how important the Christmas season and therefore the last quarter is to publishing and book retailing,” she said.

Malcolm Neil, a spokesperson for Redgroup, told Crikey the book industry was suffering a downward turn after bumper sales on the back of the economic stimulus and blockbuster titles such as Twilight, Harry Potter and the Dan Brown series.

“Retail across the board is really struggling. You’ve got to work harder for every dollar of sales than ever before,” Neil told Crikey. “However, there has been a lot of work back of house. The basics of retail are still as important as ever. ”

Angus & Robertson and Borders are now apparently ordering books in very small quantities — “one or two at a time” — and stock is being turned over much more often. A senior book publishing source says this is affecting the company’s brand, especially Borders.

“Borders was renowned for having a very strong range, however that has changed considerably. You’ve got three months for a book to survive, then you are dead and gone. It’s the publishers who pay for that,” they said.

Tim Coronel, publisher of Bookseller+Publisher magazine, said Redgroup had completed a “big return push” before the financial year, a move that “wasn’t a great sign” for the retailer’s future.

“The admission they made recently is telling, because they definitely have a big debt burden,” Coronel told Crikey. “Redgroup are playing it down, saying it may have been overplayed. But they’re definitely under pressure.”

Redgroup says retailers are trying to get the right mix of stock and that publishers always want their title on display for longer than book shops can afford. Says Neil: “Retail is tough. We’re a sale or return business. When you are in a tough market everyone has to share the pain.”

Coronel says that any bloodletting for Redgroup is likely to come from Angus & Robertson’s 183 store-strong network: “A lot of that pressure is because they have a large range of big stores, in places like Westfield shopping centres. The overheads of running those stores from things like rent are huge.

“There is a moderate to high chance that you will see the branch network shrink, when franchisees pull out. They may not be offered the support that they otherwise would be.”

Despite tanking book sales, Redgroup’s flagship Carlton store in Melbourne has gone through a recent extensive refit and the company has rebuilt its website while heavily promoting the Kobo e-reader.

“They’re spending, spending, spending, because they have to,” said Coronel. “And now maintaining their retail stores is becoming an issue.”

According to Neil, the Borders Carlton rebranding is part of the company’s aim to sell books that come with add-on products in order to “extend the range”. But, he says, “the story is still the book. There is that feeling that when you talk about selling other things, that you aren’t focusing on the book. But that only works when the book is right.”

Coyne told Crikey “all retailers” are important to Penguin, including independents, mass market retailers and chains like Redgroup. But one senior publisher says the stakes are higher: “It’s the mass marketing publishers that are going to face the real strain if they go under. They need Redgroup to be working.”

Correction: The original version of this story said Angus & Robertson operated a “183 store-strong franchise network”. Crikey would like to clarify that not all 183 stores are franchises.