How Barnes & Noble Can Recover from the Nook’s Downward Spiral

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Wharton's Peter Fader and Emilie Feldman discuss Barnes & Noble's next step.

Now that Barnes & Noble and Microsoft have parted ways on a partnership to produce and sell the Nook e-reader, the book retailer is yet again faced with having to reimagine its business model for an increasingly tech-centric world.

For inspiration, it should look no further than the coffee shops inside many of its stores, according to Wharton marketing professor Peter Fader.

“Barnes & Noble doesn’t really know who its competition is,” said Fader, who is also co-director of the Wharton Customer Analytics Initiative. “It always thought it was Amazon or other companies that are selling books. In this day and age, [Barnes & Noble’s] competition is Starbucks Twitter . It should be a place for people to go and hang out and spend some quality time and learn a thing or two. That is where the money is to be made.”

Fader and Wharton management professor Emilie R. Feldman discussed how the retailer could emerge stronger after buying out Microsoft’s stake of the Nook business on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Feldman noted that Barnes & Noble’s electronic books collection is a “hugely valuable resource” that it could leverage to better compete with Amazon’s Kindle or other e-reading devices. “They could monetize that resource — sell the content and not worry about being in this hardware business, which is not a great fit in their operations,” she pointed out.

“Barnes & Noble doesn’t really know who its competition is…. In this day and age, their competition is Starbucks.” –Peter Fader

A Dream Team Gone Sour

It seemed like the perfect fit back in April 2012, when Microsoft and Barnes & Noble struck their partnership, said Feldman. Plans called for Microsoft to invest in developing the Nook business, while Barnes & Noble would create e-reading content, including applications for Microsoft’s Windows 8 operating system. The two firms hoped to attract hordes of new customers for the bookseller’s collections of e-books, magazines and newspapers. Microsoft had invested $300 million in the Nook. Barnes & Noble earlier this month bought back Microsoft’s stake for $120 million, or at a 60% loss in valuation.

“It has been a shift of fortunes for the Nook,” said Feldman. “When Microsoft made the initial investment, [the Nook] was faster growing, higher flying and doing better than the bricks and mortar Barnes & Noble stores. The Microsoft investment was viewed as a huge opportunity to fund this business and things just didn’t pan out.” Microsoft in June 2012 launched its own Surface range of tablets that would ultimately compete with the Nook, along with the iPad, Kindle and other tablets and e-readers.

According to Barnes & Noble’s latest quarterly financial results ending November 2014, the Nook’s revenues fell 41% to $64 million when compared to the same period last year. Fader said the company needs to stop “throwing good money after the bad” and acknowledge the Nook’s failure. “They should wave the white flag and say, ‘We tried, and it didn’t work. The market is different than we thought, [so] let’s move on.’” Feldman predicted that within a year, a technology company like Apple or Amazon would acquire the Nook business.

Recognizing the Competition

According to Fader, Barnes & Noble’s turning point will be in recognizing who its competition actually is. “If they want to be top of the mind when it’s time to go out of the house or the dorm and study, there is a lot of promise there,” he said. “Starbucks [currently] owns that share of mind. Barnes & Noble is in a very good spot to make that happen.” The company could use its larger-sized stores to differentiate itself from Starbucks, said Fader. At last count, Barnes & Noble had 658 retail bookstores and 714 college bookstores across the U.S., many of which have in-store cafes serving Starbucks drinks.

“The Microsoft investment was viewed as a huge opportunity to fund this business, and things just didn’t pan out.” –Emilie R. Feldman

Fader said Barnes & Noble should even begin selling the Kindle, possibly the Nook’s biggest rival. He suggested that the company could articulate its new strategy by saying, “We want to surround the right customer with a variety of products and services, some of which we may not make or make money on, just to show them that we are a trusted advisor and we have their best experience in mind.”

According to Fader, Barnes & Noble must move beyond simply selling books and educational toys for kids, and organizing book reading sessions by authors. “They need to ask themselves what can they create for people to want to come into the store on their own, where it doesn’t have to be an event [or] a Christmas shopping list — they just have some time to kill, they just want to hang out there. That’s very doable [and] it’s not very expensive.”

Feldman agreed with that strategy, and said the company should also continue to monetize its electronic content, perhaps with new partners. “They had a genius move where if you came in to a Barnes & Noble with a Nook device, you could read any book that was on their content list for free,” she said. “That’s a huge draw for people to come into these brick and mortar locations.”

Inventing the ‘Book Barista’

Continuing with his Starbucks analogy, Fader suggested that Barnes & Noble could have “book baristas” at its stores. “At Starbucks, one of the things that makes it so cool and hip is the barista — that person knows everything about coffee and you love talking to them, whereas at Barnes & Noble, for the most part it’s just people who sell books.” He noted that the bookseller could hire “unemployed or under-employed teachers who just love sharing knowledge [who would] just wander around and chitchat” about books.

In an attempt to reinvigorate itself, the bookseller earlier this year said that by August 2015, it would split into two companies. One company would be focused on Barnes & Noble’s retail bookstores and the other would have the Nook and its college bookstores. Feldman wondered if the plan for the second company is to eventually bundle academic content into the Nook, since most students these days use electronic devices for their studies.

In any event, Feldman and Fader agree that the plan does not make sense. Fader said the college bookstores are “money makers” and advised the company to keep all of its bookstores under one umbrella. “There are economies of scale on the supply side,” he noted. “Why not create this more integrated, holistic, consistent customer experience across them?”

 

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