Beginning of the End for Barnes & Noble?

For more insight into Barnes & Noble, hear a member of the executive team at Barnes & Noble, speak at Digital Book World, January 23-25 in New York City.

By Jeremy Greenfield, Editorial Director, Digital Book World, @JDGsaid

In the wake of rumors that book retailer Barnes & Noble will be selling its Sterling publishing unit and the announcement that it is exploring strategic options for its Nook business, analysts say that this might be the beginning of the end for the No. 1 bricks-and-mortar book retailer in the U.S.

“Physical book sales are down and the largest national competitor [Borders] shut its door in 2011,” said Peter Wahlstrom, an analyst at Morningstar who covers Barnes & Noble. “If you look out five years and ask if there are going to be more bookstores or fewer bookstores, I think there will be fewer. Barnes & Noble is facing an uphill, structural industry headwind.”

Yesterday, it was widely reported that Barnes & Noble is seeking bidders for Sterling, the New York-based publishing house that it acquired in 2002 for $115 million. And today, the company announced that it would be pursuing “strategic exploratory work to separate the Nook business.”

The Nook business has been a bright spot for Barnes & Noble amid the decline of its largest unit, its network of retail stores. How does a Barnes & Noble without its fastest-growing business grow in the coming years?

“It’s certainly not a business that grows organically when you’re selling physical trade books,” said Wahlstrom. “What do you have to do to remain in business? You have to be creative with costs, be creative with merchandising, look for additional opportunities and close underperforming stores.”

Barnes & Noble’s retail business was to get a lift when Borders closed its doors. The company predicted that it would pick up upwards of $300 million in new revenues. The same was predicted of Best Buy when its chief competitor, Circuit City, went belly-up. It didn’t work out that way for the challenged electronics retailer, as Amazon, Wal-Mart, Target and others picked up much of the business.

Indigo, Canada’s largest bricks-and-mortar books retailers, also provides an instructive example for Barnes & Noble. In 2009, Indigo spun off its Kobo unit. In late 2011, the e-reader company was sold to Rakutan, the largest online retailer in Japan, for $315 million. Indigo said at the time that it expects to see about $150 million of that sale price.

“Spinning off the e-reader/e-book business is exactly what Indigo did in Canada and that proved to be a very modest return for them and left the mother-ship vulnerable,” said Thad McIlroy, a Vancouver-based electronic publishing analyst who runs the site and has written for Digital Book World about Barnes & Noble. “They’re already a year or two ahead of Barnes & Noble on this particular strategy, so you’ve got a clear look at how it plays out. It doesn’t.”

To be sure, the publishing industry shouldn’t panic about this recent flurry of news, said analysts.

“The Sterling story is nothing. It’s as if they sold off the corporate jet. It wasn’t being used much so they’re going to get $50 million for it and that will be the end of that,” said McIlroy. Regarding the Nook announcement, “It’s way too soon to think or react or to know how it’s going to play out.”

Still, publishers who haven’t already should be taking a close look at their business and determine if they could survive in a world without Barnes & noble.

“’Where will I be without a bricks and mortar books business?’ Publishers need to ask that question and need to adjust their business model,” said Wahlstrom.

While the bricks-and-mortar retail books business may be in decline, decline is something that can take a very long time.

“Do they muddle in mediocrity in 50 years? Maybe. Do they shut the doors on January 1, 2020? Doubtful,” said Wahlstrom.

Barnes & Noble did not immediately respond to requests for comment.

Related: Seven Advantages Barnes & Noble Has in the Bookseller Wars

For more insight into Barnes & Noble, hear a member of the executive team at Barnes & Noble, speak at Digital Book World, January 23-25 in New York City.

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