Listen to the podcast:
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?”
Join The Discussion
3 Comments So Far
Richard Truesdell
As someone currently in the publishing business, and who hopes that Barnes and Noble will survive, I read this article and listened to the podcast with great interest. But as someone who built a retail business from scratch 35 years ago, I couldn’t help but thinking that those participating in the discussion had never actually started or run a retail business.
There seemed to me, especially listening to the podcast, that the participants had this idea that Barnes and Noble would be best off if it turned its stores into giant Starbucks cafes where people could just hang out for hours on end, nursing their lattes while availing themselves of the free WiFi. It doesn’t work that way.
The reason why? Overhead. The typical Barnes and Noble is a freestanding building of 26,000 square feet. That’s a huge nut and you can’t sell enough five-dollar coffee drinks to pay the rent, much less pay staff and to maintain an inventory.
The size of the average Starbucks? About 1,500 square feet, a totally different business dynamic.
Did Barnes and Noble make a mistake with Nook? Certainly, having squandered, as the panel pointed out, many advantages. One issue, while having a competitively priced product, the Nook HD+, it botched its launch and crippled the device making it difficult to use the Android-based device as a real tablet.
So instead of being a viable iPad competitor (a device crippled in its own way, having a closed Apple operating environment lacking even a single USB port) at half the price, the HD+ was seen by the public as a Barnes and Noble-centric product bucking the wave of the open Android environment (the HD+ ran a heavily modified version of Android 4.0.3).
The other problem was its Nook partner, Microsoft. Who thought this was a good idea? At the time its partnership with Microsoft, it was just months away from launching its first generation line of Surface tablets, their lower-end RT models being a direct competitor to the Nook.
Barnes and Noble, because of its missteps with Nook, took its eye off the ball, diluting its advantage as the remaining book superstore after the demise of Borders in 2011. The case study, currently a work in progress, is the way Best Buy has reinvented itself after its big box competitor, Circuit City, closed in 2009. Its store-within-a-store concept was a managerial stroke of genius, giving companies, Samsung being the best example, a place to showcase their products without the cost of building an expensive retail infrastructure like Apple. And it has maintained a policy with being price-competitive with all retailers, most notably Amazon. If you got the customer into the store, sell the customer instead of letting customers use Best Buy as a showroom for its competitors.
Barnes and Noble is a book seller, not a coffee merchant. Be the best, most competitive book retailer you can be. That should be their goal. That you can get a cup of coffee and use free WiFi is an enhancement to that mission, not the mission itself.
david scott
As someone also currently in the publishing business, I agree with Truesdell, as far as his argument goes. However, having traveled to 60 countries (35 recently) on five continents to understand the book business in its polyglot multiplicity (also regularly attending the major international book fairs: London, Frankfurt, Guadalajara, New York–and smaller ones in Latin America, Africa and Asia), I can conclude few in the book business understand the business’ range and complexity (from authors to rights managers to pre-press and printing to marketing and selling–with their plethora of softwares, hardwares and diverse business models.)
That said, the Barnes&Noble (BNBN) on Rittenhouse Square (frequented by Wharton students) discourages customers from reading books, magazines or Nooks (or using laptops) in their Starbucks Cafe (where there are few plus for laptops) UNLESS they buy Starbucks products, and are shooed out by BNBN employees every half hour. And there are few chairs in the rest of the store save in the out-of-the-way mini-auditorium. A poorly planned, user unfriendly place. And not the exception that proves the rule. Lest I add their book return policy is hostile. Ironically, there is another BNBN across the street from the Wharton (and Penn — and Drexel–campuses), but that is another story.
Truesdell’s reimagined BNBN educational center is not a bad idea (of course, it competes –forget Starbucks–with local libraries which Philadelphia’s mayor is hell bent on shutting down–hoping to close 30 of Philadelphia’s extant libraries (alas, mostly in the poorer areas of Philadelphia). And we will not get into Philadelphia’s Dante-esque public school system.
There are two fabulous and fabulously different bookstores in Sao Paulo and Buenos Aires with amazingly different marketing models (Amazon recently entered Brazil), but BNBN appears frightened of the international market. Pre-demise Borders had an interesting store in San Juan.
With one US and one Australian exception, all of the major book publishers are European owned. Scholastic is an exception unto itself. USAID’s educational efforts worldwide are a dog’s breakfast. Publishing software innovation, especially multilingual software is taking place largely in Russia, India and Egypt–not in Palo Alto or Ann Arbor. In the book business, it not “What’s the matter with Kansas?” it’s “What’s the matter with the United States?” Publishing used to be based in Philadelphia, New York, Boston (and Toronto). No more.
Wharton, if so motivated, could be a laboratory for innovation in learning. But if you want to major in video game technology, go to Abertay University in Scotland. If you want to design comic books and Manga, go to Northeast Brazil. And on and on.
Few (especially in America) have explored the digital download opportunities in America’s public libraries. Is innovation in the book business (especially in America) ass-backwards? Obviously. And Wharton seems hitched to the train’s caboose. For starters, enough said.
Anonymous
First of all, great article and podcast.
Being a self-published author, I find Barnes and Noble’s dilemma quite interesting. In fact, I wrote a blog about it last year. Here’s my take on their plight:
1. Barnes and Noble needs to take advantage of its real estate. Prior to this year, Amazon did not have bricks and mortar stores. B & N did. They could easily take advantage of that real estate by sponsoring more live events, even on a daily basis. How about informational seminars for an older generation that typically reads books the old-fashioned way? How about mini-concerts by local artists? Bring in the foot traffic. Heck, charge a cover for events too. If seminars are put on by authors, have them sell books afterwards. Concerts? Let the band sell CDs and get a cut. Barnes and Noble has way too much space and overhead to be just a library or another Starbucks. There’s a book printer in the Atlanta area that gives free seminars on various publishing and writing topics and a free continental breakfast just about every Saturday. I would be they sell a lot of printing serves too.
2. Take advantage of self-publishers. In 2013, 600,000 to 1, 000,000 books were published. Many of them were self-published. Instead of discouraging self-published authors, why not charge those authors to have book-signing events at their locations? Self-published authors need the exposure and would pay for it. Plus having a signing in a bookstore helps those authors feel more legitimate. There are all kinds of vendors who see the value in catering to self-published authors from Kirkus that charges $425 for book reviews, to Smashwords that charges for e-book creation and distribution. Smashwords did about $20 million in revenue last year.) Even traditional publishers like Simon and Schuster are taking advantage of this crowd by launching self-publishing companies like Archway Books. Self-published author packages would sell and bring in foot traffic.
3. No more freebies. When I go into a Barnes and Noble, it’s because I want to read a magazine from cover to cover for free or use the free Wi-Fi. Barnes and Noble cannot be a library. Why let people just hang out with hopes that they will buy something eventually? Charge for Wi-Fi. Stop the free reading, especially in the magazines section. Give browsers time limits. Libraries don’t need to be profitable. Bookstores do. Make money.
4. Take a page from Kohl’s. Kohl’s has a great customer loyalty program. Spend $50 and get $10 off your next purchase. It not only encourages customers to spend more on that first trip but it also encourages them to keep coming back. What’s Barnes and Noble’s loyalty program? Buy a loyalty card and save 10% on all purchases or something like that? That doesn’t encourage me to buy more or to come back.
Who are Barnes and Noble’s competitors? For starters, it’s mobile phone developers. Just like mobile phones killed the stand-alone GPS market, it has the potential to kill the e-reader market. I use the free Kindle app on my Samsung phone if I want to read on a device. Why should I buy a Nook besides maybe getting a bigger screen?
As for the other competitors, they are libraries, toy stores, Walmart, Amazon… The list goes on and on. Anything but Starbucks.