Is There Hope for Barnes & Noble?

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As readers of my columns know, Amazon is not my favorite bookseller. It is not because Amazon doesn’t offer value or quality service; it is because I fear Amazon’s attempts to monopolize the book marketplace vertically, that is, everything from acquiring and publishing to selling exclusively. Right now consumers, especially ebookers, are happy with everything Amazon because the prices are lower, the selection is existentially broader, and the customer service is great (especially as Amazon is more interested in market share than profit from the book division). But will all that change should Barnes & Noble follow Borders into the “I remember when” category: I remember when there was competition and prices were low and customer service was great — before Barnes & Noble went out of business!

Maybe I’m alone in my thinking, and maybe I’m alone in my willingness to pay a little bit more in hopes of keeping B&N and competition alive, but the demise of B&N is something I do think about. I have been thinking about it even more often with the latest revelations that B&N is thinking of spinning off its Nook business. My thoughts are now traveling along the lines of “what would you do if you were CEO of B&N?”

It is pretty clear to me that the future lies in the world of ebooks. I think that for at least the next 100 years pbooks will retain a significant place in our culture, but over those 100 years, the market share of pbooks will decline while that if ebooks will increase. This is the hurdle that B&N faces because of its brick-and-mortar (b&m) stores and publishers face as they have not yet come to grips with the reality that their growth and future lies in the ebook world.

Yet I think there is a role for the b&m store in the ebook world, and I think B&N needs to exploit this role, something that Amazon is not well-positioned to do. Thus I play “if I were CEO….”

The real value to B&N of the physical bookstores is the brand Barnes & Noble. That was really the only valuable asset of Borders when it went under. Consequently, I would look to franchise the Barnes & Noble name. Get the company out of directly owning b&m stores, and convert all current stores into employee- and/or small business owner-owned franchise stores.

As part of the franchise, require the stores to sell Nook products and B&N ebooks. But make it profitable for the franchisee to sell those ebooks. If it is to be believed that except for the heavily discounted loss-leading bestsellers, all other pbooks and ebooks can provide a decent profit, then B&N needs to offer franchisees at least 50% of the profit on an ebook in exchange for selling the ebook.

B&N showed some inventiveness with the Nook line. I grant that most of the innovation was done by others – for example, let’s give Sony the credit for the touch screen method that all of the competitors have adopted – but B&N needs to step to the plate and lead in innovating a seamless method by which I can enter a local B&N store, decide I want to buy a particular book but as an ebook, and buy that ebook before leaving the store, giving me the book, B&N the sale, and the franchisee the sale credit. I can think of a couple of ways to accomplish this, so I’m sure the engineers that B&N hires can come up with ways to do this as well.

This idea also has benefits for publishers. If Amazon succeeds, it is the publishers who will suffer the most first. Consequently, publishers need to become creative in how they support the local indie bookstore, including any B&N franchisee. One thing they could do is offer a payment to a store in exchange for the stores displaying a pbook version on the store’s shelves. There are other possibilities as well, things that can be done for a physical bookstore that cannot be done for a virtual bookstore, and that are not directly tied to a book’s price, thereby avoiding having to give the same break to Amazon. Something to think about, at least.

Then there are the indie booksellers. B&N’s survival is as dependant on the indie booksellers as it is on the Barnes & Noble branded bookstores. Even if not franchisees, these booksellers should be given the opportunity to participate in the ebook selling aspects. Because, as sure as the weather changes in upstate New York, if B&N neglects the indie bookseller, Amazon will not. B&N needs to follow Amazon’s lead and jump into a market area quickly and first. More importantly, B&N needs to think of its market in much broader terms than it currently does.

B&N needs to focus its efforts on the Nook and ebooks; it does not need to be distracted by b&m stores. Yet it cannot abandon the b&m market altogether because it is that market, which if carefully supported and nurtured by B&N from the outside, can lead to B&N’s ultimate survival and its ability to compete against Amazon.

B&N needs to focus its efforts on its brand and making people think of B&N first when it comes to book buying. I think B&N can pull this off, but only with much more creative thinking by its management than has been shown to date. B&N has unwilling allies in the indie bookstores because Amazon is a threat to all booksellers and because Amazon is very nimble in addressing marketplace needs. B&N has to convert these unwilling allies into willing allies because all their futures are intertwined.

We will know within a few short years, if not sooner, whether B&N has the wits to survive.

(Via An American Editor.)

15 Comments on Is There Hope for Barnes & Noble?

  1. With eBooks, there is far less reason to go to a b&m store than there already was in the age of Amazon. It’s not eBooks that killed Borders, but rather the ability to buy DTBs online. Further, locally owned book stores were the first victims of this reality. So locally owned B&N branded stores simply don’t seem viable. If b&m stores are going to survive at all, much less “save B&N” (I don’t think B&N is in any real trouble) what’s really needed is for there to be an incentive for bringing customers in to the store. Fewer books, more novelties, an expansion of the coffee house to include meals (maybe along the lines of Panera) and significant in store events. Make it a social experience for going there, one that excites especially the younger crowds (including kids). Pulling that off is not something many local owners can accomplish.

    That, or let the b&m stores die and concentrate on Internet sales, like Amazon does. It’s sad, but that’s likely what’s going to happen in the end, no matter what B&N does, so embracing it may be the best strategy.

  2. Hope for B&N? Sure.
    But, like Borders, it hinges on the storefront leases. Specifically, the ability to get rid of 90% of them. Fast. And they need to stop expecting brand loyalty and their name to save them.

    The challenge for B&N at this point is three-fold:
    – mainstream consumer print book total sales volume is declining
    – mainstream consumer print book retailing profit comes primarily from the relatively high-volume “bestsellers”, which are available everywhere, not just via bookstore
    – mainstream consumer buying habits for non-bestsellers are shifting sales to online, both for ebooks and print

    Together, the three trends are rendering their storefront size a liability.
    Their entire business model is built on the premise that regional-draw superstores with deep (for the times) catalogs can use the high-profile “bestsellers” to drive traffic to the store (and cover overhead) and the consumers will then fill out their order with higher-margin mid-list/backlist titles (which provide the profit). That worked fine twenty years ago. It hasn’t worked this century.

    We just saw B&N go through their peak selling season, in a market where Borders’ 17% market share was up for grabs, and end up with essentially the same result as 2010 when Borders was still around. They effectively captured *none* of the “freed” share. Big superstores are just not drawing customers. This makes them simply too expensive to own and operate in a market where “bestsellers” are everywhere and the rest of the catalog is just as readily available (and cheaper) on every computer and smartphone screen.

    My suggestion to B&N management would be that they need to clean-sheet their business. Turn it upside down; instead of expecting customers to go to them–dozens or hundreds of miles, and gas isn’t getting any cheaper–they need to start going to the customers. Get rid of the bulk of the superstores and replace them with a couple thousand Radio Shack/Gamestop-sized stores. Hit every mall in the land. A handful in every city of 100,000 or more.

    Franchising is one way to do it.
    Some folks have suggested they should set up a whole range of “B&N Book Nooks” ranging from airport kiosks to Payless-sized mall shops. Keep only a handful of the big stores for the big markets; Manhattan, Chicago, DC, Mall of the Americas. Places where people are going to go *anyway*. Because mainstream book buyers are *not* going to go out of their way to buy a book.
    Setting up a new chain or smaller shops is still doable but they’re going to have to move fast and they’re going to need cash.

    So, job one is to IPO Nook and sell at least 40%. Assign whatever portion of B&N debt is due to building up Nook to the new company while they’re at it.

    Job two is to triage the superstores and close as many as possible, replacing them with the new, smaller shops *and* regional depots. At least one depot per metro area. These depots will serve two purposes: feed inventory to the shops on a just-in-time basis (say three daily deliveries) and feed B&N.com to allow for next day in-store pickup. Depending on the product and time of day, they may even offerup to 30-minute in-store pickup. Get people buying online but picking up locally.

    Job three is that B&N needs to master inventory control and logistics, which are the core competencies of both Walmart and Amazon. They need to get out of the book warehousing business and into the book moving business. And if they do master these indispensable skills, *then* they will actually have something to offer franchisees other than a shiny plaque with “B&N” inscribed on it.

    Their existing business model is just a gussied-up version of the 19th century retailing model: pile stuff on a shelf and wait for customers to come to you. What both online pbook sales and ebooks offer is the exact opposite: books come to the customer. Unless publishers change their ways and stop selling their top-draw products through every pharmacy and supermarket in the land, expecting customers to come to you is a slow fall into irrelevance.

    Note that nowhere do I even bother with B&M ebook sales. That is just *not* going to matter. Oh, they *should* offer up free WiFi in the store and allow customers to download ebooks to their readers with it. And in some areas, customers without credit cards shoud be able to pay cash for ebooks to be downloaded to their readers. But, realistically, the revenue from those sales won’t even add up to noise.

    Live or die, B&N’s storefront survival hinges on the pbook buyers.
    Otherwise they might as well just split the two sides of the company and let the storefronts follow Borders into liquidation while they’re still worth something.

    Franchising isn’t a bad idea, but they need to offer the franchisees something of real value and ebook kickbacks aren’t enough. A full modern logistic chain might do the trick. If nothing else, it’ll keep them affloat for a decade or so while ebooks expand beyond the recreational reading market.

    Oh, and don’t fret overmuch over B&N going under.
    They’re not likely to completely disappear. Worst case scenario so far is just a quick rinse through Chapter 11 to get rid of their leases and a re-emergence as a leaner competitive player.
    In the absolute worst case, that they do go under, I could easily see Walmart or Amazon setting up a chain of franchise mini-bookstores.

    If B&N doesn’t do the Book Nooks, Amazon will.
    Especially if the feds start taxing internet sales.
    (After all, they already have the depots and the name recognition.)

  3. B&M have launched themselves into the world of the eBook an eReader for one reason. They know paper is terminal. They know that it is terminal in the next 10 years. Rich’s 100 years is the most astonishing piece of optimism I have read in quite a while :) Fair play Rich … but it ain’t going to happen :)

    That B&N are making such major efforts shows to me that it knows that in 20 years it sees itself as an online business. A digital business. It knows that bookstores will go the same way as paper. Those sad, boring, staid, wastes of space and people’s time will at last be removed from our streets.

    In the online digital world anyone can compete. Amazon is the big one right now but there are plenty of alternatives in the market. Remember when Yahoo was the big one ? The problem holding back competition right now is that the hardware is still locked in to it’s own retailer. That cannot last much longer in my view. It is deeply anti competitive and particularly in the EU, it will be changed.

  4. The fundamental problem that B&N faces is quite simple really.

    What is supposed to be its past – those dinosaur like physical stores – is the only profitable part of its business. Nook is the future, the growing part of its online operations, but also a giant fiscal black hole which shows no evidence of actually turning a dollar profit anytime soon.

    B&N has to turn its online division around, otherwise it is doomed. Nothing you have presented here seem likely to do the trick.

  5. Willem says “but also a giant fiscal black hole which shows no evidence of actually turning a dollar profit anytime soon.”

    Really ? What data is this based on ? because I don’t believe it one bit.

  6. The data can be read from their financial statements. As evidence I present the results from their previous holiday season in 2010, when the Nook Color was introduced. See for instance http://www.publishersweekly.com/pw/by-topic/industry-news/financial-reporting/article/47764-b-n-waits-for-the-digital-payoff.html
    “…In the fiscal year ended April 30 and BN.com had negative EBITDA (earnings before interest, taxes, depreciation, and amortization) of $204.6 million”, for a taster. As ebooks was rising as % of sales their losses actually increased, though of course B&N is mum on that.

    In that article B&N continues to whistle an optimistic tune, but note that just recently they warned that they will miss Wallstreet estimates, despite claiming a 4% increase in their physical store sales. Conclusion: Their online business was once again a big lossmaker during their latest holiday quarter. That “Digital Payoff” is looking a long way off.

    I stand by my statement.

  7. I will simply repeat what I said at Nate’s website:

    What is it with DRM and some ebook commenters? It is a misreading to believe that Amazon’s success has much to do with DRM, or that abandoning it would hurt said company. More the reverse really.

    I mean you have to be totally naive to believe publishers could get away with DRM free books at B&N and not Amazon. So where is this supposed advantage?

    “In the world I’m describing the best device and content provider wins.” We are already in that world.

  8. Hell, the previous was a misplaced comment. And I’m not even drunk yet!

    Sorry about that.

  9. Willem – I see no evidence whatsoever to support your claim that their digital business is “a giant fiscal black hole which shows no evidence of actually turning a dollar profit anytime soon”.

    “As ebooks was rising as % of sales their losses actually increased, though of course B&N is mum on that”
    So ? That would be perfectly consistent with an existing book business that is losing more money every year.

    Nothing in this content support your assertions in any way whatsoever.

    That does’t mean you’re wrong of course. Though I do hope you are wrong, for B&N’s sake.

    Any new business involves investment, running costs and development costs and I am sure their digital business is still losing money. It would be utterly astonishing if it weren’t. But from your referenced content there is no sign that the digital business is not developing positively and no sign that it won’t be profitable in the near future. Indeed their margins are good and their market share is not bad. All good signs.

    How profitable and how much of the market they can gain is of course uncertain. Whether they can be a global player is doubtful considering their parochial marketing strategy.

  10. “That would be perfectly consistent with an existing book business that is losing more money every year.”

    And your evidence for this is what exactly? My whole point was that as digital became a larger percentage of their online sales their losses online have risen. B&N themselves note that their torrid online growth since end of 2009 is largely due to ebooks and ereader sales. More online sales, digital a higher percentage every quarter, losses higher every quarter as compared to years before. Clearly this cannot continue for much longer.

    I will leave it to others to explain where these losses are coming from, if not the Nook side of their business.

    “Indeed their margins are good”. I doubt very much that this is the case on their ereaders. On ebooks they get thirty percent margin from the agency publishers. Should the agency system disappear tomorrow B&N would be stuck in a pretty uncomfortable position. Match Amazon and see their margins vanish, or price themselves out of the market.

    But we shall see with their next quarterly statement what exactly is going on. If losses online has increased from last year… well B&N will have to start explaining to investors when exactly their online business will turnaround.

  11. Mr. Torres has said it all very well.
    * Reduce the number of superstores
    * Increase the number of smaller storefronts through franchising (I also suggest a unique type of franchise with independent booksellers)
    * Yes, there is still a need to permit purchase of ebooks in physical stores. Either to someone who does not want to use a credit card or perhaps this scenario:
    Customer knows the book is not in ebook form (or wants a pbook for a gift) and goes to store.
    Same customer sees another book and looks to see if it is available in ebook form.
    Customer can then purchase both the pbook and ebook at the same time.

    In-store ebook purchases may not be large in volume but it allows an additional incentive for a person to go into a book store.

  12. willem:

    ““That would be perfectly consistent with an existing book business that is losing more money every year.”

    And your evidence for this is what exactly? ”

    Mathematics. if a business’ core business is making more losses every year, then even a new section of the business increasing it’s % of sales would not compensate. It seems perfectly obvious to me …

    The rest of your reasoning is just a waste of time.

  13. Elizabeth – I find your suggestion about franchising curious. Why would someone invest in a franchise for a business model that is on the way out ? It would make no sense.

  14. Multiple people have suggested selling eBooks in store “for someone who doesn’t want to use a credit card”. Without a very big change in how they handle DRM (not likely to happen) this can’t be done. You have to have a CC associated with your account, which is used to “lock” the book under the B&N DRM scheme.

  15. @wekempf: yes, that is how the Nook ebookstore works. But it’s not the only way Nooks themselves work. Nooks also support the (admittedly flaky) Adobe ADEPT DRM.
    It would not be too hard to implement credit card-less sales, at least technically.
    As I said, I doubt it would be much of a business volume-wise but as long as you’re spending other people’s money… 😉

    (Certainly easier to do and much more likely than the “when the matto-grosso freezes over” scenario of B&N selling DRM-free Mobi.)

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