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TeleRead Asks: Why is Barnes & Noble Losing?

Posted By Dan Eldridge On January 4, 2013 @ 3:18 pm In B&N,Barnes & Noble | 11 Comments

[1]

To most readers, it probably seems unthinkable that Barnes & Noble and its Nook Media division might not be around at this time next year. But after B&N announced its embarrassingly low holiday season sales figures yesterday (scroll down to read the press release), that’s essentially what every media outlet covering the news seemed to be suggesting.

After thumbing through a few of the stories and considering the facts myself, I’ve got to say that my own personal faith in the company’s future isn’t exactly booming—quite the opposite, in fact.

If you’re not current on the story yourself, here’s the nut graf from a New York Times [2] item about the news, which explains it succinctly:

“Retail sales from the company’s bookstores and its Web site, BN.com [3], decreased 10.9 percent from the comparable nine-week holiday period a year earlier, to $1.2 billion, the company reported. More worrisome for the long-term future of the company, sales in the Nook unit that includes e-readers, tablets, digital content and accessories decreased 12.6 percent over the same period, to $311 million.” —Leslie Kaufman [4]

With the above in mind, here’s my prediction:

  1. At some point in 2013, B&N will either steer its business in a relatively new direction (focusing primarily on the education market, for instance), in which case they’ll manage to stay financially afloat, or…
  2. B&N and the Nook unit will continue battling with the other digital Seven Sisters [5] for marketplace dominance, in which case they’ll lose to Amazon and/or Google, one of whom will probably scoop them up for a song.  

[6]But here’s what I still can’t quite put my finger on: Why? Why exactly is B&N in the spot they’re in? What did they wrong? Or maybe: What are they still doing wrong?

I’ve heard all the standard explanations: Their digital ecosystem is too limited; the website isn’t easy enough to navigate; the customer service is poor, and so on. (Interestingly enough, you don’t often hear e-reading enthusiasts suggesting that Nook tablets are of poor quality. In fact, they’re generally praised for their open systems.)

At any rate, we’re genuinely curious to know what our readers think about the B&N situation, so here are our questions:

[7]¶ What do you think B&N and the Nook unit need to do—or what do you think they need to do differently—in order to save the company from what seems to be an almost inevitable downward slide to the bottom of the heap?

 What major mistakes, if any, do you think B&N and/or the Nook unit have made over the past few years that have led the company to its current position?


[Press Release]
Barnes & Noble Reports Holiday Sales Results
New York, NY (January 3, 2013)—Barnes & Noble, Inc. (NYSE:BKS) today reported holiday sales for the nine-week holiday period ending December 29, 2012.
The Retail segment, which consists of the Barnes & Noble bookstores and BN.com businesses, had revenues of $1.2 billion, decreasing 10.9% over the prior year.  This decrease was attributable to an 8.2% decline in comparable store sales, store closures and lower online sales.  Core comparable store sales, which exclude sales of NOOK products, decreased 3.1% as compared to the prior year due to lower bookstore traffic.  Sales of NOOK products in the Retail segment declined during the holiday period due to lower unit volume and average selling prices.
While Retail sales of NOOK products fell short of the company’s expectations, bookstore sales of core products exceeded the company’s expectations, and therefore, the company continues to expect fiscal year 2013 Retail comparable bookstore sales to decline on a percentage basis in the low- to mid-single digits.
The NOOK segment, which consists of the company’s digital business (including Readers, digital content and accessories), had revenues of $311 million for the nine-week holiday period, decreasing 12.6% as compared to a year ago.  Digital content sales increased 13.1%, while NOOK device unit sales declined during the holiday period as compared to the prior year.  Digital content sales are defined to include digital books, digital newsstand, and the apps business.
"We entered the holiday with two great new products, NOOK HD and NOOK HD+, both  highly rated media tablets of phenomenal quality," said William Lynch, Chief Executive Officer of Barnes & Noble, Inc.  "NOOK device sales got off to a good start over the Black Friday period, but then fell short of expectations for the balance of holiday. We are examining the root cause of the December shortfall in sales, and will adjust our strategies accordingly going forward."
As a result of the NOOK sales shortfall, the company now expects fiscal year 2013 NOOK Media revenues of approximately $3 billion, and NOOK segment EBITDA losses at a comparable level to fiscal year 2012.
The Company has made significant investments over the past three years building the valuable NOOK digital retailing platform, which has resulted in millions of digital customers buying content from Barnes & Noble.  The company’s digital strategy will continue to center around delivering the best digital reading, shopping and content experience in the market, while also being diligent about calibrating expenses to business trends in order to scale the business to profitability over time.
 [8]Barnes & Noble, Inc. will report second quarter results on or about February 19, 2013.


11 Comments (Open | Close)

11 Comments To "TeleRead Asks: Why is Barnes & Noble Losing?"

#1 Comment By d blevins On January 4, 2013 @ 3:28 pm

Our local B&N store is crowded most of the day and the ONLY book store within 10 miles. Even so, they are giving up their lease over a minor disagreement with the strip mall owner. Sounds like a company that wants out of the biz.

#2 Comment By MarylandBill On January 4, 2013 @ 3:40 pm

While I think the NOOK is well placed to compete against Amazon on ebooks, the Nook line is not well placed to compete against Amazon with respect to tablets. Yes, the Nook might be a nice tablet, but why would choose it over either A. The Kindle Fire or B. a more open tablet like the Galaxy, Nexus or iPad? I bought a Nook reader and will continue to buy Nook Books… but if I was in the market for a Tablet, I can’t see the reason to buy a Nook. The Kindle Fire has, for an $80 per year subscription to Amazon Prime, access to a huge library (compared to Nook) of movies and TV shows as well Amazon’s ebook lending library.

As much as it pains me, I think B&N needs to divide itself up into three separate entities. The Nook business which will be more focused on ebooks as opposed to all media. The academic business and finally the original book store, which in all probability will either become tiny or die.

One other possibility exists, if they could partner with Netflix or Hulu to provide premium video content it might make the Nook Tablet more relevant.

#3 Comment By Dan Eldridge On January 4, 2013 @ 4:42 pm

Bill – I pretty much agree with you in terms of B&N needing to split up in order to stay alive. I also think B&N needs to pick a certain publishing market and “own” it in order to keep from going under.

I think it probably seems unbelievable to a lot of people that the brick-and-mortar stores could fail, since B&N got rid of its main competitor when Borders went under. But something I found particularly interesting in the NYT story I mentioned in the post was the fact that while retail sales from the brick-and-mortar stores and bn.com fell 10.9 percent from last year’s holiday period, “The American Booksellers Association, which has not yet released official holiday sales, estimated Thursday that its members’ sales would be up about 8 percent over last year.”

That’s pretty wild – to me, anyway – and it may also be a sign that buyers of print books are finally going out of their way to spend their money at indie book stores. If that’s the case (and even if it’s not), it looks as if B&N does still have a major competitor: independent bookstores, or rather, independent bookstores that are members of the ABA.

#4 Comment By Felix Torres On January 4, 2013 @ 5:18 pm

Recommendations? Sure:

1- B&N needs to spin-off Nook Media as an independent entity to sell hardware and ebooks and serve the academic market with both. Free it from the need to be B&N’s salvation.

2- The remaining B&N should focus on selling pbooks in B&M and online, along with other entertainment products. Any tie between the two companies should be fully accounted and paid for. Odds are that if the floor space and staff effort going into trying to sell Nooks were fully amortized, the B&N storefronts would be profitable, if only barely so. B&N needs to refocus on serving its customers instead of managing a transition to digital. Much as Indigo did in Canada they need to stop trying to be something they are not qualified to be. Monetize Nook and use that money to build a 21st century B&N. Or shut B&N down and live off the billion dollar proceeds from the Nook sale.

3- Nook Media needs to be run as a tech company, not as a bookselling company, and it should end its obsession with customer lock-in. Each product and service should stand on its own merits; if they are going to have an independent android app store it should be available to all comers, not just Nook buyers, just as the Nook ebookstore is available to all comers. If they are not prepared to do that, they should either stop using android or license somebody else’s app store. Or get out of the tablet hardware business. But if they are serious about the academic market they should have some kind of tablet strategy; whether making their own or partnering with somebody else’s hardware.

3- Both B&N and Nook Media need to stop trying to be Amazon–they’re never going to be that–and they need to stop trying to destroy them. The temper tantrums and “high-minded” pronouncements make them look shrill, conceited, and downright silly. You cannot run a successful business when your entire business plan is to destroy your competitor at all costs. So far, the costs of trying to destroy Amazon look to destroy B&N’s and Nook’s future long before Amazon even notices them.

Nook does some things well: Nook Study is a very good app, their support for childrens books and magazines is good, their hardware is generally decent, they have good US distribution channels.
They also do a few galactically stupid things.
- Trying to compete with Amazon on price is right at the top of the list.
- They whine publicly. Endlessly. And disingenuously.
- Their online systems are strictly second rate and their customer service doesn’t even aspire to that much.
- Their apps and ebooks are fractured: they barely do a thing with Nook Study, you can only read Nook kids books on Nook hardware, and the features of the apps are different on each platform with no effort made to synchonize them.

Too much of what they do is focused on serving B&N (and the big publishers) at the expense of their customers. (Lock-in, lock-in, lock-in. Plus their role in the Agency Conspiracy–acting as Penguin’s prozy to pressure Random House–was shameful if not outright illegal.)

In the end, while it is clear that the rank and file at Nook Media is competent and has a lot of good ideas to add value to their hardware, they are hampered by lack of resources and by the policies mandated from above that subtract more value than even the best engineers can ever add.

If Nook Media is to prosper it needs all-new top-level management devoted to providing customers with the best ereading experience possible; if that quality costs more than Amazon, so be it. If that quality limits their market share, let it. The whole lowball market share war has them stalled at 26% ebook share for the past three years (with signs of significant decline in recent months) and their tablet strategy has barely managed to move about as many tablets as RIM has moved Playbooks: about 1% installed base share after 27 months and 3 generations. For comparison, Amazon in 13 months has amassed a 7. 5% market share and Microsoft Surface RT in one month has raked up a 0.20% share. (Multiply by 120 million to get an estimate of what those numbers mean.) Apple, of course, has a 78% installed base share.

Nook works hard but the results simply don’t add up.
They rely too much on lock-in, on brand loyalty, and on the storefronts.

B&N, on the other side, relies too much on Nook to fight Amazon and have neglected their core asset; the storefronts. They don’t do ship-to-store. They don’t do good online pbook sales. They don’t do good audio book sales.
They need to refocus their stores on their customers and their core business and not take their customers for granted just because they are the only national pbook chain.
There are something like 30,000 businesses selling pbooks in the US. Over a thousand of them independent bookstores.
If B&N were to fail readers would adapt and we would all survive.
They are *not* too important to fail.

It is becoming clear that the combination of Nook and B&N is hurting both. They need a divorce and fast.

#5 Comment By P.A. Wilson On January 4, 2013 @ 7:32 pm

I think everyone has given some advice. I’ll weigh in from a different perspective. B&N seems to have a fortress attitude. They only allow US citizens to use Pubit – not that opening up will save them – so they add another layer of bureaucracy to the rest of us.
This tells me that they think of their digital business as another form of physical business, tied to one place.
For the digital business, they need to open to the global market as much as possible, or they will be left behind.

#6 Comment By Paul StJohn Mackintosh On January 5, 2013 @ 5:26 am

I wish B&N *would* open up to the global market, but I think they’re missing the one unbeatable opportunity they do have, which won’t scale internationally unless their chains do: to work more closely on physical store/emedia integration. Why not look at more and more imaginative ways to integrate those stores into the online offerings? People like being in bookstores: give them good incentives to be. Really push the book cafe model. Host concerts and reading events. Offer in-store previews of ebooks. Demos and tryout opportunities for new ereader technology. Flashmob sales. In-store print on demand. Big display sections for ereader covers, stands and accessories of all kinds. They’re the one firm that still has the opportunity and the resources to grow the traditional physical bookstore model – and they’re fumbling it.

#7 Comment By Geert On January 5, 2013 @ 6:21 am

The biggest problem for B&N is that they cannot afford the number of software developers needed to fix all their software problems.
B&N should stop developing Android tablets, and put the money saved in software development:
- Fix all the problems with the e-ink models firmware
- Create the best ereader software for iOS and Android
- Release Nook Study versions for iOS and Android
- Release the Nook Video apps we are still waiting for
- Fix all the syncing problems
- Build a new, improved version of the B&N website

Allow Google play to be installed on the current Nook tablets, and terminate the Nook apps store. That will save a lot of money needed elswhere.

Also hurry up with international expansion. There is a whole ePub based world our there where Kindle is not attractive because of the lack of ePub suport and Sony and Kobo are building their market share there now, while B&N keeps waiting.

#8 Comment By Felix Torres On January 5, 2013 @ 8:10 am

@Geert; Yes, B&N needs to get their software development effort aligned. Right now they have different readers for the eink gadgets, their tablets, and generic android even though all run off the same base OS. They have Nook Study which is a great reading app but is only available on PC (and Mac?) but nowhere else. And the Nook Kids books that run on the tablets but nowhere else.
That suggests a fragmented shop with different groups doing different things with no coordination. Clearly in need of repair.
But in the B&N worldview it is more important to pick a public fight with Time Warner over comic books than to get their own house in order.

#9 Comment By gous On January 5, 2013 @ 8:32 am

Their whole Nook business has become an anchor threatening to drag the whole ship down. They need to cut the rope, and fast. Spin it off and sell it pronto. It’s bizarre that they are in the ‘we sell at cost’ tablet hardware business anyway. There is grave doubts that anyone – yes even Amazon – is going to make that old bromide of ‘giving away the razor and sell them the blades’ actually a profitable business.

Certainly not B&N, who has neither the content ecosystem nor the needed hardware sales to try and make it work. You have to wonder how much of the Nook business is ultimately a result of Riggio’ ego, his wish to be a power. We all now how that ended for Saruman.

#10 Comment By Alan J. Zell On January 5, 2013 @ 8:46 pm

When one’s resources havedrastic changes, it affects everything a business does. B & N faces some of the same problems other retailers face – they are all selling the same merchandise.

Go into any mall or shopping area and see just how many stores are selling the same things with the same labels or the same things with different labels. What makes each different is the store layout, the salepeople or lack of same.. Then, there is too much selection that if someone does not have a particular book or type of item in mind,

For bookstores they are facing the fact that there are almost 1 million books published each year, some by major publishing firms, more by indie publishers and DIY publishing. To decide what to buy/show is not an easy task when one gets past the books that have received good reviews or have be advertised so that people will know about them. My guess is that this is less than 1% of the new titles published each year . . . and the books stocked, even with store with a large selection, it is no more than 2%. Plus, stores have books from previous years that still are vaiable. In retailing there is the expression that in order to add something new, something has to go (much lik one’s clothes closet) The tradition in the book business is that major publishers have a trade-back system that opens up shelf space. (more or less, the books are put in on consignment) But that does not open space for indi and DIY published books.

Book stores and other retailers do not make a profit on markup only. It takes markup and turnover (i.e. how many times in a given year is an item bought/sold, bought/sold, bought/sold etc. Each day a store has something not sold it costs them more money due to interest the money could be earing interest or paying off a loan.

My guess is that, someday, book stores will only carry samples or a very short depth of any book and when one is sold another will be ordered or shipped by the publisher. POD publishing for both hard and soft cover books will make this possible.

Still, that does not alleviate the need to make the public aware that such and such books are available. Books without using marketing methods become a well kept secret than only the author and publisher know exists.

Alan

#11 Comment By Damir Fonovich On January 8, 2013 @ 12:25 pm

Here I am not just speaking as an eBook/App developer, but also as a former B&N employee. I am still a huge fan of B&N, and think they could be a worthy challenger to Amazon if they took advantage of obvious competitive advantages. The things mentioned already are all true. Nook Media needs to spin off, and the book stores need to be on their own. If that happens, the Microsoft partnership can truly blossom, and Microsoft can stop trying to compete with Apple by opening Microsoft stores. Instead, existing B&N bricks&mortar stores can liquidate their Music Departments and start selling XBox devices, games, etc. Downloading stations for mobile devices can be added for people to buy movies, music and videogames directly to their mobile devices as well. Also, there are probably about 100 more stores that could close because of two issues, 1. Proximity to other B&N stores, and 2. underperformance.


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[2] New York Times: http://mediadecoder.blogs.nytimes.com/2013/01/03/barnes-noble-reports-tepid-holiday-sales/?ref=technology

[3] BN.com: http://bn.com/

[4] Leslie Kaufman: https://twitter.com/leslieNYT

[5] digital Seven Sisters: http://www.teleread.com/ebooks/digital-publishing-in-2013-meet-the-new-seven-sisters/

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