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.”
Join The Discussion
8 Comments So Far
Wayne Hastings
In my years of being involved with retailers I’ve not seen one who could successfully reinvent themselves beyond their entrenched brand. Years ago Sears tried to be Kmart and failed. Local bookstores tried to be Hallmark stores and are failing. Many stores try to be Wal-Mart and fail. It’s a slippery slope when any business tries to reinvent themselves. What if Norstrom tried to compete on price? Or, Bass Pro Shops sold tailor made clothing?
I truly hope B&N can be successful—I’m still a person who loves to browse book shelves and find great books to read. I love the experience only a physical bookstore can offer.
Dean Karrel
Borders faced so many different issues with some poor decisions back in the 90s’s and early 2000’s. Barnes& Noble also made some mistakes in hindsight but has also been more innovative in trying to remain strong. B&N like all brick & mortar retailers face the challenge of maintaining foot traffic.
(Footnote: My discussion today was with a student from NYU who happens to be Muslim. We talked about US retailing and the comparisons vs. Saudi Arabia. He shrugged about this article from Wharton saying he wouldn’t be allowed to go there since Trump, a Wharton Alum, would have blocked him. I told him Wharton wasn’t like that. Wow!)
Mukul Pandya
Speaking of retail, does the NYU student know that Mohammad Abdul Aziz Alshaya is a Wharton alum too? http://www.whartondubai09.com/bio-alshaya.html
Dean Karrel
To be honest I don’t know Mukul. Both Wharton and NYU are great schools with a diverse global population. Mr. Trump’s anti Muslim feelings don’t reflect the thinking of his Alma Mater. Wharton doesn’t need to say that, but they may at some point want to.
Mukul Pandya
Thank you, Dean.
Markus Anderle
1) Less successful attempts to turn retailers around have neglected to augment the digital shopping experience with a retail store experience: B&N provides one of the worst experiences to convert a digital shopper to one that visits a store (higher prices online, no discounts for in store pickup, poor use of digital data for recommendations, etc. ). Only if digital and brick-and-mortar shopping augment each to create a unique experience will shoppers come.
2) Every shopper is a digital shopper these days. Digital shopping provides (big) data that needs to be used for marketing, recommendations. Think: How to scale staff recommendations to serve the modern shopper….
Anonymous
I am SO glad Barnes & Noble has started to discuss using their stores as a destination. I’ve been telling my colleagues for years and posting on other Knowledge @ Wharton articles about Barnes and Noble. Until the recent experimental bookstores, Amazon did not have thousands of square feet of real estate to leverage.
Personally, I think B & N should court independent publishers. There was a time when they were shunned from events and book signings. Now they need to be courted. They will happily pay for events for the honor to be at a legitimate bookstore. I agree that B & N will have to hire different employees (event planners) to achieve success.
They also need to take a page from Kohl’s. Spend $50 and get a coupon for $10 off your next visit. Give customers some incentive to come back and get rid of the stupid rewards sign ups. Everyone is turned off by being asked to sign up for something when they make a purchase. A significant coupon for your next visit without having to do anything is the way to go.
Laurette Sullivan
This article is timely for me, and I will definitely be watching to see how B&N’s future plays out. We are expecting a new B&N in our newer and still growing “live, work, play” community in Loudoun Co. in northern VA. When I heard that the bookstore was coming, my first thought was, “do people go to bookstores anymore?” Don’t get me wrong; I love books and enjoy browsing a bookstore (and maybe even having a coffee while there) but didn’t think that was much the norm these days of e-readers, tablets, smart phones, etc.
The store-within-a-store concept makes sense, but what will that look like? I hope that for the sake of our community that the B&N is a success. I will be watching (and probably buying a few books!).