Barnes & Noble can succeed, but not by competing with Amazon
L ast week, Barnes & Noble announced that the chain’s chief executive, William Lynch, was stepping down. It’s never a good sign for a company when its CEO resigns, leaving it provisionally leaderless. In the case of a struggling chain like Barnes & Noble, it’s enough to make people wonder how long it’ll be until it declares bankruptcy.
But headlines, in this case, are deceptive. Lynch’s resignation doesn’t show Barnes & Noble is doomed in the age of Amazon. It shows how Barnes & Noble can survive — as long as it doesn’t try to compete with Amazon.
By most accounts, Lynch — the e-commerce executive who took charge of Barnes & Noble three years ago — did everything Wall Street would have wanted to see in a modern-day turnaround. Launching the Nook e-reader and turning over a portion of each store to its promotion sounded like a smart, ambitious way to bearhug the Internet and give consumers what they want. When Borders folded two years ago, its giant rival seemed like the one that might survive in a winner-take-all world.
The Nook was a surprisingly good piece of hardware, given that it was produced by an aging bookseller. But by June, its revenue was down 34 percent. Despite positive reviews, consumers seemed barely even aware that the Nook existed, preferring to go with the more versatile and better advertised Kindle Fire, Apple iPad and Google Nexus. And it turned out that having an integrated physical and online e-book store didn’t create enough of a sales advantage to beat the robust ecosystems already built into Amazon’s Kindle, Apple’s iTunes and the Google Play store.
“I think they didn’t figure out enough ways to get the two to work together as one,” said Michael Norris, an analyst with Simba Information, noting Amazon’s boundless content offerings. “Barnes & Noble had a strong book business, and when it came time to offer more content to the e-book consumer, for quite a while they were drawing a blank.”
If you’ve got a teleological conception of new technology as something that eventually drives the old into oblivion, Barnes & Noble is doomed. It sells physical things in a digital world, and other companies are better at selling digital things than it will ever be. Blockbuster and Tower Records essentially disappeared from the face of the Earth, after all, and we should have no illusions that Barnes & Noble won’t go the same way.
Even those physical retailers that do survive — such as Apple and clothing stores like the Gap — don’t have the problem of consumers ordering a book they find in a store on their phone for less and having it delivered the same day. And Amazon’s purchase of the bookworm social network Goodreads, as well as its self-publishing platform, have made the website a go-to place not just for bargain hunters but also for people who love to write about reading.
“It’s always a Hail Mary to try to beat Amazon, for anybody. And I think they did pretty well for a while there,” said Mike Shatzkin, a digital publishing industry analyst who thinks consumers are moving inexorably towards touch screens. “Before they give up reading printed books, they’ll give up shopping for them at Barnes & Noble.”
And, you might ask, who cares? We still have lots of music and movies, after all, and we’ll continue to have books long after bookstores have disappeared.
Here’s the thing: Bookstores, more so than movie rental and record stores, are oases in the middle of cities (and even in suburban malls). We go there to kill time, expose ourselves to new stuff, look for a gift without something specific in mind, and maybe pick up something on impulse while we’re there. Even Borders’ disorganized warehouses left holes in the urban fabric when they disappeared, and Barnes & Nobles would do the same — they’re a kind of public good, at a time when the public is getting less good at supporting libraries.
So is there a way for Barnes & Noble to survive? The answer is yes — in a vastly different form.
There’s a happy story line buried in Barnes & Noble’s overall revenue picture. The Nook disaster clouds the fact that the physical stores actually aren’t doing that badly, generating a comfortable $374 million profit in 2013. The chain got a significant bump when Borders closed 399 stores, and it’s now the only national bookstore chain in the country. It’s been shedding unprofitable real estate, letting expensive leases expire and consolidating into the spaces that actually generate revenue.
“When you look at the financials on the retail stores, it’s basically a pretty good business,” said Al Greco, a professor of marketing at Fordham University School of Business.
It’s also got a hidden weapon: the academic market. Barnes & Noble now manages about 700 university bookstores, which are essentially monopolies over high-priced textbooks as well as collegiate merchandise. They’ve been moving into textbook rental and e-books there as well, and the millions of students on financial aid that includes textbooks are more willing to shop local rather than scour the Internet for deals.
Finally, they’ve got an important friend: the publishers, who hate the idea of an all-Amazon world. To help keep the only large physical retailer alive, they might be willing to do things such as offer some inventory on consignment so that the bookstore doesn’t have to eat the cost of unsold books. They could even help offer e-books with the paper version at cut-rate prices on the Nook, whoever ends up owning it, or open-platform tablets like the Nexus.
The company’s management has noticed. Len Riggio, who started the chain and is now back running it, is interested in splitting off the retail stores and taking them private. Without the Nook, the business would get hammered by the markets anyway, so it’s best to avoid them. Absent the pressure of quarterly earnings statements, he might be able to try some radical new ideas, such as drastically shrinking their square footage and offering a smaller selection of books curated by a knowledgeable and passionate staff.
One model that could work is the smaller community franchise. Take Washington’s Ace Hardware stores: The owner names each of them after its neighborhood, but the small chain benefits from the buying power and branding of a national distribution network. Barnes & Noble never was a very good tech company, but it does know how to run a bookstore, and bricks and mortar could be its saving grace.
If all else fails and Barnes & Noble really does go into bankruptcy, some analysts think it might be to Amazon’s advantage to keep them alive, even operating them at a loss. It’s already opening physical locations in every state in advance of online sales tax legislation and is free-riding with the showrooming phenomenon. It’s better off with those stores open than not.
And besides, print may be one of those things that never vaporizes entirely, just as newspapers still put out daily editions because they pay the bills.