Four Disadvantages for Barnes & Noble in the Bookseller Wars

Print Friendly

By Thad McIlroy, The Future of Publishing, @ThadMcIlroy

Editor’s note: Last week, we presented advantages that Barnes & Noble has in the bookseller wars. See second editor’s note below.

It was a busy fall for Barnes & Noble, the $7 billion bookseller.

After Amazon grabbed headlines with its $199 Kindle Fire, Barnes & Noble responded with the $249 Nook Color. Could Barnes & Noble possibly compete with a higher price? The doubters have been silenced now that post-Christmas estimates place Barnes & Noble into contention as a vendor of color tablets, its sales of 2 million units running a solid second to an estimated 5 to 6 million for the Kindle Fire.

Despite this success (and partly because of it) Barnes & Noble CEO William Lynch startled the markets last week with a press release that in effect put Barnes & Noble’s Nook business up for sale. The business is not getting the respect it deserves and exploring “strategic options” would unlock its value, Lynch explained.

The previous day, the The Wall Street Journal reported that Barnes & Noble’s $80 million publishing unit, Sterling Publishing, was already on the block. The seas seemed suddenly stormy. Could this signal the beginning of the end for Barnes & Noble?

As we reported last week Nook sales are up 70% from the same period last year while sales of content – defined as digital books, magazines and apps – grew by 113% over Christmas.

And while hardware analysts place the physical cost of these tablets around $200, the total costs, including packaging, marketing, software and support, are much higher. Barnes & Noble has never attached precise numbers to its losses selling Nook devices but it recently attributed tighter sales margins to “increased costs to support digital growth including advertising to support the launch of the Nook….” The operating loss in its online division (including online sales and “development and support” of the Nook) hit $66 million in its most recent quarter, up 17% from a year earlier, on a 26% increase in sales.

In the end, the only substantially profitable portion of Barnes & Noble’s business is its sleepy college bookstore business (4.3% of sales), followed by the general retail stores (2.1%). Online loses money, even as its sales grow.

But these aren’t the company’s only strengths. As discussed in last week’s article, Barnes & Noble also has:

1. A solid management team and deep bench strength.

2. Strong niches in kid’s books and romances.

3. Retail stores that are valued showcases for physical books and hubs for large communities of writers and readers.

Another strong endorsement was registered last year when legendary investor John Malone of Liberty Media placed a $204 million bet that Barnes & Noble will be a long-term player.

Now it’s time to consider the daunting challenges that Barnes & Noble faces in the bookseller wars.

For more insight into Barnes & Noble, hear a senior Barnes & Noble executive speak about the company and the future of bookselling at Digital Book World, January 23-25 in New York City.

 

1. Authors love Amazon.

But when it comes to publishing, Amazon and Barnes & Noble remain head-to-head competitors, but only on the surface.

Despite a few vocal detractors, most authors love Amazon.

Amazon’s infamous Christmas ploy that bribed its customers with a 5% discount if they used its mobile Price Check app to scope the competition ended up annoying some big name authors (even though the discount didn’t apply to books). Dennis Lehane called it “scorched-earth capitalism.” While Stephen King loves his Kindle he called it “invasive and unfair.” Pulitzer Prize winner Richard Russo sees Amazon as “half man, half dog and thus its own best friend” (while calling Barnes & Noble “last year’s bully”).

Still, Amazon now has 14 million-selling Kindle authors, those who have sold a million or more books through Kindle Direct Publishing, and 30 who have sold more than 100,000 books.

Thousands of different authors offer more than 75,000 titles exclusively through Amazon so they can be part of the Kindle Owners’ Lending Library and get their portion of a $500,000 monthly fund, bumped up to $700,000 in January, disbursed to those whose books are borrowed from the library.

(The only people who can borrow from the Amazon Lending Library are not in fact “Kindle Owners” but rather the subset of Kindle owners who are also Amazon Prime members. Amazon’s Prime program is another enormous advantage that the company holds over Barnes & Noble. Prime members’ spending at Amazon “already accounts for a 40% of the company’s domestic revenues.” As Jason Calacanis vividly describes it, Prime members are in a cult. He estimates that Prime “will reach 30 to 40 million of the 120 million households in the United States in the next four years.” Barnes & Noble offers a $25 “Barnes & Noble Membership” which offers free express shipping and savings on Nook hardware. The company has never discussed the success of the program beyond a vague claims of “millions” of members. Barnes & Noble would not comment.)

Amazon has its Kindle Direct Publishing service for e-books and CreateSpace for print books (and for film and music). Barnes & Noble’s self-publishing program, PubIt, is not nearly as big a success as Amazon’s diverse publishing efforts. For one thing it’s e-book-only; print books reach Barnes & Noble only through wholesalers. The biggest numbers Barnes & Noble has trumpeted for PubIt are 11,000 publishers and 65,000 titles.

An informal survey we conducted in early January reveals that 28% of the top 50 bestselling Kindle e-book titles on Amazon.com were not even available in Nook editions on Barnes & Noble.

Amazon significantly upped the publishing ante in 2011 by creating new publishing imprints and signing exclusives for compelling digital content that its largest competitor won’t be allowed to sell on the Nook. Barnes and Noble then announced a retaliatory measure: “We will not stock physical books in our stores if we are not offered the available digital format,” said chief merchandising officer Jaime Carey in a written statement. It remains to be seen how this exclusion will play out.

“Barnes & Noble can’t offer authors the same volumes that Amazon can,” Outsell analyst Ned May said in an interview. “The parallel is in the computer industry: getting developers on board. It’s the secret to Apple’s success with apps.”

The challenge, said May, is first of all to make it simple for authors to sign up. But more important, he said, “Make it rewarding.” And Amazon is far more rewarding than Barnes & Noble when it comes to e-book sales, mostly in volume, but also in margins (in most cases by paying self-published e-book authors a 70% royalty vs. Barnes & Noble’s 65%).

Magellan Media Partners’ analyst Brian O’Leary feels that it’s foolish for Barnes & Noble to attempt to punish Amazon by dropping titles where Amazon has a special deal with the publisher. “In general” he said, “it’s a mistake for any author or publisher to create scarcity in the channel. It sends the wrong message to readers.”

And in a world where Barnes & Noble needs to compete for authors, it’s not a good idea to alienate readers.

 

2. Barnes & Noble’s lack of international presence has become a liability.

Barnes & Noble had been sending out contradictory signals about its international plans.

In 2009 the company was said to be searching for a “head of [its] international business.” In December, The Bookseller in the UK reported that a senior Barnes & Noble executive said that the Nook will be available in the UK in the “not too distant future” but was uncertain by what means this would occur. Then, last week, a Barnes & Noble’s press release included a statement that the company “is in discussions with strategic partners including publishers, retailers, and technology companies in international markets that may lead to expansion of the Nook business abroad.”

On the Barnes & Noble corporate site, however, this statement appears unequivocal: “Barnes & Noble, Inc. has no outlets outside the U.S. and has no plans to expand internationally.” (Barnes & Noble would not comment.)

Amazon has established a series of strong subsidiaries throughout Europe and Asia, and continues to expand.

 

 

 

 

 

 

 

The Barnes & Noble version of the chart looks something like this:

 

 

 

 

 

 

 

“We’re seeing the emergence of global e-book retail platforms. For Barnes & Noble to reach a scale sufficient to compete with those giants they need to get international quickly,” said Eoin Purcell, publishing consultant and editor of the Irish Publishing News, offering an across-the-pond perspective. “Barnes & Noble must pursue e-book and device partnerships and e-book retail operations outside of the U.S. Without those they’re at a significant disadvantage to their competitors.”

 

3. Barnes & Noble’s network of stores is too costly in the face of decreasing gross product margins.

Barnes & Noble’s retail strategy is based on simple logic that looks shaky when scrutinized.

At the Liberty investors’ presentation last November, CEO William Lynch essentially said that everyone else is dead so we will live. This approach didn’t work for music retailers and it didn’t work for video sales and rentals. Why would books be any different?

Retail is already on a declining sales trajectory at Barnes & Noble (down 2% in the latest 26-week reporting period) but still accounts for two-thirds of overall sales. The story is buried within the company’s financial filings. (As with many companies, frequent changes to accounting practices can make it a challenge to find strict apples-to-apples financial comparisons.)

Comparable store sales, a key measure for retail, declined by 5.4% in 2008, 5.7% in 2009 (a shortened reporting period), and 4.8% in 2010. They increased by 0.7% in fiscal 2011, but then dropped by 1.1% in the latest quarter.

This was particularly disappointing for investors, as the company expected a significant boost from the demise of Borders. In his November presentation to Liberty investors, Lynch projected a $300 to $400 million bump on an annualized basis. Last week, Lynch revised the forecast to be “in a range of $200 million to $230 million in fiscal 2012.” Given that Borders last full year’s sales were nearly $3 billion, and that Barnes & Noble acquired its website and customer lists, these sales figures may be disappointing to investors. (They shouldn’t be surprising, however: Best Buy analysts expected a huge gain for the retailer following the demise of rival, Circuit City, but the ailing electronics giant only picked up a small percentage of the business, ceding much of it to Target, Wal-Mart and Amazon; more on this below.)

To make a long story short, Barnes & Noble retail stores are in managed decline, at best. Operating profit as a percentage of sales for retail dropped from 4.1% in 2010 to 2.1% in 2011 and hit a loss of 1.9% through October 29, 2011. Only the college operation remains consistently profitable.

“They can’t turn inventory fast enough with books,” said Magellan’s O’Leary, so they had to add other products to the retail mix, like toys and games. While Outsell analyst May sees advantages for Barnes & Noble in selling Nooks, he notes that “the cost of physical distribution creates problems (for Barnes & Noble) that Amazon doesn’t have.”

 

4. No one has yet succeeded in competing with Jeff Bezos at Amazon.com.

Barnes & Noble has enjoyed many days in the sun. When it went public in the fall of 1993 its stock “soared past its $20 initial offering price to close at $29.375 on the New York Stock Exchange.” In 1999, with Amazon yet to earn a nickel in profit, Barnes & Noble reported that its holiday online sales quadrupled from the previous year.

Yet, based on recent share prices, Barnes & Noble is worth less than 1% of Amazon. In the last year, Barnes & Noble’s shares have dropped by over 30% in value (much of that in the last month), versus 4.4% for Amazon.

In the ongoing battle for bookselling supremacy, Amazon CEO Jeff Bezos consistently outguns Barnes & Noble’s management. Amazon has established a commanding market-share that it uses to bat Barnes & Noble around – and Amazon doesn’t care if it makes money selling books; Barnes & Noble has to.

As Richard Brandt notes in his new book, One Click: Jeff Bezos and the Rise of Amazon.com, Bezos is Amazon’s main weapon. “Anyone could have copied Amazon’s strategy and reproduced its software,” he writes. “Several executives tried.” But Bezos has “an original vision” that has kept the company ahead of its competition. Both publishers and competitors “think Bezos is ruthless.”

Brandt quotes Owen Teicher, CEO of the American Booksellers Association, as stating that Bezos “uses books as loss leaders to sell everything else. He’s acquiring customers in order to sell them whatever he can ultimately sell them.”

Still, customers love the Barnes & Noble brand. It ranked first in the 2010 Forrester Research “Customer Experience Index,” its second year in a row.

But they love Amazon just as much. In ForeSee’s annual Holiday E-Retail Satisfaction Index Amazon scored 88 on a 100-point scale, “registering the highest score from any retailer in 14 consecutive studies.” Barnes & Noble certainly had a strong showing, but nearly 10% below Amazon at 81 points.

 

Best Buy as a Case Study for Barnes & Noble

The shape of things to come for Barnes & Noble is presaged by the recent struggles that Best Buy faces as Amazon steps up the pressure in the electronics retail business. Like Barnes & Noble, Best Buy is primarily a bricks and mortar retailer.

The death of Borders is failing to deliver the hoped-for sales boost to Barnes & Noble. Michael Nowacki of Nowacki Asset Management notes that Circuit City’s bankruptcy had also led analysts to expect that Best Buy would reap major sales benefits. “Best Buy, however, did not see a significant increase in business. In fact, they have been struggling to grow same-store sales and profits,” he wrote. Like Barnes & Noble, Best Buy is facing sales declines in brick and mortar while online sales increase – but not fast enough.

Barnes & Noble is turning to toys and games as a safe-haven in a turbulent retail climate, while Best Buy is clinging to appliances, where it doesn’t face as much competition from Amazon and other online retailers. As The Wall Street Journal recognizes, defending against Amazon.com comes at a “steep cost.”

 

Looking to the Future

Peter Wahlstrom, an analyst at Morningstar who covers Barnes & Noble said last week, “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.”

May at Outsell stresses that Barnes & Noble has been “making solid strides in the tablet market.”

O’Leary remains optimistic for the prospects of the once-dominant books giant. “Barnes & Noble has to compete toe-to-toe with Amazon and I think they can,” he said.

Write to Thad McIlroy

Thad McIlroy is a publishing consulant and analyst who makes his home at thefutureofpublishing.com.

 

Editor’s note No. 2: For this article series, we repeatedly contacted Barnes & Noble communications executives asking at first for access and participation and then, most recently, merely for comment. After being ignored for many weeks, we finally received response that Barnes & Noble would not be participating in the article. We were given links to publicly available resources about the company. We have also received no response to fact-checking emails intended to verify the facts presented above.

As a journalist, I find it disturbing that a publicly-traded company would refuse to engage with members of the press. Strategically, I think it’s silly that Barnes & Noble, which is, quite frankly, struggling in the public -war against its chief rivals would treat the possibility of talking to an important industry publication with so little regard.

I still welcome comment from Barnes & Noble. I can be reached via email here or at 212-447-1400 x12266. The lines are open on our end.

For more insight into Barnes & Noble, hear a senior Barnes & Noble executive speak about the company and the future of bookselling at Digital Book World, January 23-25 in New York City.

Related Posts:

  • No Related Posts Found

4 thoughts on “Four Disadvantages for Barnes & Noble in the Bookseller Wars

  1. Had a B&N membership card for a long time, but cancelled when I realized my \discount\ just brought the price down to Amazon’s price. The last straw was realizing many of the books I wanted weren’t available at B&N. The only real \perk\ was the discount I got at the Starbuck’s inside my local B&N. If you want to keep customers, give them something for their money!

    • It’s sad but true. I didn’t have the “space” to report on all of the author comments I found that disparage Barnes & Noble. Amazon does a great job selling books and works brilliantly with authors. B&N seems to be slowly emerging from its slumber here, and I do advocate that authors make their books available on all platforms (including Kobo, Apple, etc.). But Amazon is going to bring in the lion’s share of an author’s revenue, and has the international presence as well.

  2. Books ordered from Amazon (when I can’t find them locally) frequently arrive damaged – I’ve had to return so many! And watch for them to raise their book prices once they’ve killed all the wonderful brick-and-mortar bookstores.

    I thought America is supposed to embrace the concept of competition – not support these mega companies that kill so many jobs.

    It’s Barnes and Noble all the way for me.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>