Chegg Finds Partner to Handle Its Textbooks - New York Times

Chegg Finds Partner to Handle Its Textbooks - New York Times

For years, Chegg worked to become one of the biggest players in the business of renting textbooks to students. But since going public late last year, the company has suffered from a big investor concern: that its signature business was becoming obsolete.

On Monday, the company unveiled a partnership meant to convince the market that it is taking a big step into a digital future.

Chegg said that it has teamed with the Ingram Content Group, a big book distributor, to handle the business of physically storing and shipping those textbooks. The deal is meant to free the company to continue building out its digital operations.

It is the biggest effort yet for Chegg to prove that it can transform itself into a higher-margin digital services provider, with offerings like e-textbooks, test preparation materials and career counseling. At the same time, it reduces the expenses needed to maintain an inventory of physical books.

“What this does is that it liberates, just in the first part of the deal, about $25 million of our own capital that we have historically used to buy textbooks and take risk,” Dan Rosensweig, Chegg’s chief executive, said in a telephone interview. “That’s something we don’t have to do. That’s an enormous change.”

The nine-year-old company — whose unusual name comes from the “which came first, the chicken or the egg” question — has grown steadily in recent years, with sales rising to $255.6 million last year. But its loss has widened at the same time, growing to $55.9 million.

Investors have already shown little appetite for sticking with the physical textbook rental business, one that carries significant expenses to maintain and is facing competition from the likes of Amazon.com. Shares in the company have tumbled nearly 53 percent since its initial public offering in November.

But Chegg is betting that the partnership will lift shareholders’ spirits. The partnership with Ingram, which will begin this month and expand over the next few years, will free up an estimated $25 million of capital to start. And it means that more of the company’s sales, which will be classified as digital revenue, will carry significantly higher profit margins.

In short, Chegg hopes the deal, which was over six months in the making, will convince investors that it is well on its way to becoming a primarily digital company.

But the company will maintain what it regards as its most important asset: its relationships with students. Books will still be shipped in boxes bearing the Chegg logo, and customers will still manage their accounts through the company’s website. For students, Mr. Rosensweig contends, very little will have changed.

Because Ingram focuses primarily on serving booksellers and college bookstores, it is less concerned with building up a relationship with students, according to Mr. Rosensweig. The partnership simply means that Ingram will gain a big and growing partner.

One aspect of Chegg’s business may improve, however. As one of the country’s biggest book distributors, Ingram has warehouses around the country, meaning that customer orders could be delivered faster. Chegg sends out all of its textbooks from its one warehouse in Kentucky.

“This is a have-your-cake-and-eat-it-too deal for Chegg shareholders and students,” Mr. Rosensweig said.