How Can Barnes & Noble Avoid Borders’ Fate?

In the wake of declining sales and increasing debt, Barnes & Noble is struggling to deliver growth, increase foot traffic in its stores, sell more digital goods and otherwise race against the clock to find a winning formula before it suffers the same fate as former chief rival Borders.

Facing stiff competition from Barnes & Noble and online bookseller Amazon, Borders was forced to shut its doors in 2011 after it filed for bankruptcy but failed to attract any bids to save it. Now, it seems that Barnes & Noble’s fate could soon hang in the balance. “Barnes & Noble has the opportunity to get out of this mess, but they only have one shot and not enough time,” says Wharton marketing professor Peter Fader.

But the book chain’s end game is still unclear. In July, Barnes & Noble named Ron Boire, who had previously held management positions at Sears, Toys”R”Us and Best Buy, as its new CEO. A month later, the New York-based firm spun off its college bookstore business as a separate company. Meanwhile, the bookseller has continued to try to pare losses for its Nook e-reader and digital content business, and recently relaunched its website.

During Barnes & Noble’s fiscal second quarter earnings call, Boire roughly outlined what the retailer plans to do in order to boost sales. “Barnes & Noble has a customer base unlike almost any other retailer, and our stores have become community centers across America,” said Boire on December 3. “Barnes & Noble is a destination for personal development, learning, and entertainment, and I could not be more excited as we look ahead at our opportunities for future growth.” Boire said the chain’s stores have the opportunity to create unique experiences that are aligned with this view. For example, it recently held an “All-American Unwind” event encouraging children and adults to color and create artwork, and a Maker Faire at stores that included coding and 3-D printing workshops. “We believe we have further opportunities to create these one-of-a-kind experiences that are unique and make our stores a community destination,” Boire noted.

But Wharton marketing professor George Day says Boire’s comments reflect the chain’s aspirational goals more than reality. “Brand identities are really hard to change, and Barnes & Noble is known as a mega bookstore,” Day notes. “Consumers have locked in perceptions about what the store means [to them].”

Nevertheless, Wharton marketing professor Barbara Kahn says Boire’s concept is on target in terms of how the company could really make its stores stand out from the pack. The challenges are that Barnes & Noble will have to invest in people and new store concepts, and experiment and learn from companies such as Starbucks — which serves as a community meeting place — big box retailers such as Best Buy, brands that cater to children and even neighborhood libraries. “Barnes & Noble has to become more experiential,” says Kahn, who is also director of Wharton’s Baker Retailing Center. “But it is so late to the game that it’s a question of whether Barnes & Noble can find the right niche.”

“Brand identities are really hard to change, and Barnes & Noble is known as a mega bookstore. Consumers have locked in perceptions about what the store means [to them].” –George Day

The financial picture for Barnes & Noble, as well as spin-off Barnes & Noble Education, highlights the challenges ahead. Both companies recently reported disappointing financial results and outlooks, and the share prices for each suffered as a result.

Barnes & Noble’s second quarter results fell short of expectations with a net loss of $27.2 million, or 36 cents a share, on revenue of $895 million, down 4.5% from a year ago. Nook sales, which include devices and digital content, fell 31.9% in the second quarter to $43.5 million. Online sales also suffered because the company’s relaunched website experienced glitches. Black Friday weekend sales were up 1.1% from a year ago for stores open more than a year.

Meanwhile, the newly independent Barnes & Noble Education also disappointed. The company reported fiscal second quarter earnings of $33.4 million on sales of $755.9 million, up 0.6% from a year ago. Same store sales were down 3% in the quarter. Barnes & Noble Education noted that the company’s sales were hurt by falling enrollments at two-year community colleges.

Corporate Miscues

Aside from the obvious threat from Amazon and e-commerce, Barnes & Noble’s wounds are also self-inflicted. Wharton experts questioned the company’s moves to buy back shares, offer a dividend and spin off the college bookstore business, which previously offset seasonal slowdowns in Barnes & Noble’s core operations.

In its fiscal second quarter, Barnes & Noble’s long term debt was $192 million, up from $64 million in the same quarter a year ago. Barnes & Noble executives said some of the debt was due to preparation for the holiday selling season. In addition, Barnes & Noble also bought out two companies that owned a stake in the Nook business — Microsoft and Pearson.

Barnes & Noble chief financial officer Allen Lindstrom said on the earnings call that the higher debt levels were related to capital expenses, inventory, dividend payments, costs to separate Barnes & Noble Education and severance to executives. “Also, remember the debt levels are seasonal now, and it really comes to the forefront without college being in our business, [because] this was college’s peak,” said Lindstrom.

In filings with the Securities and Exchange Commission, Barnes & Noble said the spin-off of Barnes & Noble Education would give the latter better avenues to grow and land a higher valuation as an independent company.

But “the education business has legs,” notes Kahn. “The thing that I thought made the most sense for Barnes & Noble was its university bookstores.”

“Spinning off Barnes & Noble Education is a head scratcher,” adds Fader. “Barnes & Noble wants to be a community center and a hangout place, and the university bookstores were the one place where it had that. Barnes & Noble could have used the college bookstores as on boarding for the brand in the future.”

Fader says that even though the college bookstore business has been separated from the broader retail operations of Barnes & Noble, the two companies will have to partner for the benefit of both. “The spin-off shows a company not reflecting its mission,” notes Fader.

A Community Focus?

Despite Barnes & Noble’s corporate moves, experts at Wharton wouldn’t dismiss a turnaround for the company. For instance, Kartik Hosanagar, a Wharton professor of operations, information and decisions, says the goal to be a destination for personal growth makes sense.

“I think positioning Barnes & Noble as a community center rather than just a retailer of books is the right one,” he notes. “To do so, the company will need to think of what goes into personal development beyond reading books, [such as] bringing experts and mentors to the store and holding events and classes — with fees — around topics of interest to people in the local community.” Topics could range from self improvement to practical vocational skills, he adds. “There is an education start-up called General Assembly that provides courses and education for tech professionals. Barnes & Noble almost needs to do that for the entire community.”

“Barnes & Noble wants to be a community center and a hangout place, and the university bookstores were the one place where it had that. Barnes & Noble could have used the college bookstores as on boarding for the brand in the future.” –Peter Fader

With the community center model, Barnes & Noble could also use its real estate more effectively as an asset, says Hosanagar.

But Day isn’t convinced that Barnes & Noble can effectively pull off the community center strategy. The firm would have to invest in talent that could create programming, deliver events and offer an experience that is tailored to the many different localities and communities that it serves. The issue for Barnes & Noble would be scale, says Day. If it offered local in-store features in every locale, costs would surge. Meanwhile, Day says Barnes & Noble could still lose to libraries, which have reinvented themselves as community hubs with free Internet access, meeting spaces and events.

“Being a community center is hard to monetize,” says Day. “And the bind they have is that there are independent bookstores that are already doing what Barnes & Noble wants to do.” Day cited a Denver-based bookstore called Tattered Cover, which offers lectures and a film series at its locations, as a key example of an independent retailer that is thriving.

Fader says the other issue facing the concept of Barnes & Noble as a community center revolves around location. Starbucks works as a destination and community hub because the chain has so many locations. “Starbucks has arm’s-length convenience. We’ve been trained for years to go there and loiter. It’s a place to go when you have time between meetings,” explains Fader. “You have to drive to Barnes & Noble, and it’s a big box. You can’t just declare yourself a community center and hang out place.”

It’s also unclear what niche would allow Barnes & Noble to become a community destination. Kahn says the company could expand its focus on children’s books and toys. “The children’s market may make sense. Barnes & Noble could have parties and prioritize children’s events,” says Kahn. However, the kid market is already crowded, she adds. Meanwhile, self-improvement would also be a fuzzy concept for Barnes & Noble, she notes.

The most likely outcome for Barnes & Noble would to offer store-within-a-store experiences. For instance, Best Buy has areas where Samsung, Microsoft and Apple can pitch their wares. And Sephora, a makeup retailer, has created a shopping experience within J.C. Penney outlets.

“Compelling brands draw people in, and Barnes & Noble could copy the Best Buy strategy,” says Kahn. “But I don’t see a strategy in place now. Lego and American Girl have built experiences around toys. Barnes & Noble could do something similar with a store within a store.”

“Lego and American Girl have built experiences around toys. Barnes & Noble could do something similar with a store within a store.” –Barbara Kahn

Fader expects that Barnes & Noble will eventually adopt store-within-store concepts and experiment. “Self-improvement is a possibility, but it would take a lot of training to get people to go to Barnes & Noble to take up yoga, cooking and general house decoration and view it as a lifestyle place.”

In addition, Fader says Barnes & Noble could choose a few key demographics and cater to them. One emerging demographic would be empty nesters looking to join peers in book clubs, he says.

Barnes & Noble could also align itself around intellectual stimulation. “That approach wouldn’t be inconsistent with the community hangout goal,” says Fader. “If Barnes & Noble can make its brand a part of a monthly consumer routine that could be enough.”

Long Odds

To find the right niches, the bookstore giant could look at its sales data in stores and online to see what areas are most popular, explains Fader. Such data mining could highlight whether Barnes & Noble needs to cater to kids, book clubs or lifelong learning, he adds.

Day sees Barnes & Noble as a company caught in a vise. First, the company can’t compete with Amazon on digital content or book inventory. In addition, every category Barnes & Noble could expand to — be it activities for children, toys or self-improvement — has a bevy of competitors.

Indeed, Barnes & Noble is working against the clock with its retooling. Experts at Wharton say the company may have to close stores in order to focus on the most lucrative areas and experiment wisely. Barnes & Noble will also have to cut some of its costs and invest in new initiatives at the same time, says Fader.

“Barnes & Noble will have to invest in the physical and employee experience so you can walk in and say ‘whoa this is different,” adds Fader. “That investment may be a risky bet since it is not obvious to me that the upside is certain enough to justify the money.”

What’s unclear is whether investors will have patience with Barnes & Noble and its education spin-off. “If Barnes & Noble can shrink down to the best areas I don’t see why it can’t survive,” says Day. “Whether it can make enough money for investors is another question.”