Barnes & Noble Puts Out ‘For Sale’ Sign

By Tom Ryan

Describing its stock as “significantly undervalued,” Barnes & Noble
(B&N) last week essentially put itself up for sale. As e-books erode its
brick & mortar business, pressure from shareholder
activists were said to have
prompted the move.

B&N stated: “The board has concluded that a review
of strategic alternatives is the appropriate next step to take full advantage
of our compelling digital opportunities and to create value for shareholders,
customers, and employees.”

B&N’s chairman Leonard Riggio, its largest
shareholder with about 30 percent of the company’s stock, told its board that
he intended to consider participating in an investor group to acquire the company.

But
any deal faces complications. A report from Reuters said Mr. Riggio
has not found any backers. Any interested PE firms would also have to reconcile
Mr. Riggio’s stake as well as an ongoing lawsuit against the company by Ron
Burkle, who owns 19.2 percent of B&N’s stock.

Ultimately, however, any
prospective buyers would have to bet on a B&N
recovery.

On the positive side, analysts say Barnes & Noble’s brand remains
strong. It also managed to quickly garner a 20 percent share of the e-books
market and expects online sales to rise 75 percent to $1 billion this fiscal
year.

“They still have a sizable business — they are the world’s largest physical
bookseller and that business probably has a very long tail,” Morningstar
analyst Peter Wahlstrom told Reuters.

Some also saw benefits from going
private.

“Going head to head with Amazon and trying to become a different company
with the same investor base is tough,” Mike Serbinis, CEO of Kobo Inc.,
an online digital-book seller in Toronto, told The Wall Street Journal. “Going
private would enable them to transform the business without the pressure of
quarterly earnings. It’s hard to make the transition that they are trying to
make under the constant eye of the market.”

On the downside, any gains
in online sales might be more than offset by brick & mortar
declines. With fierce competition from Amazon and Apple, margins from online
growth are expected to be leaner than brick & mortar operations.

Veteran Journal reporter
Jeff Trachenberg noted that the irony that the once “fearsome retailing
force” that terrified both independent
book stores as well as publishing houses has quickly become antiquated through
technological advances.

“Anybody with their eyes open knows that the retail book market is increasingly
challenged,” Mike Shatzkin, chief executive of Idea Logical Co., a New
York consulting firm, told the Journal.

Discussion Questions: What do you make of the struggle for control of Barnes & Noble?
What does it say about the future of brick & mortar book retailing?

BrainTrust

Discussion Questions

Poll

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Roger Saunders
Roger Saunders
13 years ago

Books are not going to completely go away. Book retailers know that the consumers greatest interest is “content.” That “content” is going to be increasingly served up via e-readers.

Book retailers are going to have to find new models to keep their genre viable. It will involve work with authors, real estate, publishers, productivity in merchandising, and, most importantly CONSUMERS.

Necessity is the “mother of invention”, and Barnes & Noble has come to that “necessity” moment.

Gene Hoffman
Gene Hoffman
13 years ago

Barnes & Noble has some serious grief at the moment. The technological age has not yet clarified what role B&N should play from here forward…but there is a still hidden role available.

Meanwhile the B&N stockholders are anxious and rightly so. Their minds are molded by money. There will be a sale to some aggressive entrepreneur(s) with inventive, future-reaching ideas and therein will lie B&N’s future. Remember, TV didn’t kill off radio, it just changed its focus.

Dick Seesel
Dick Seesel
13 years ago

Barnes & Noble has been too slow to react to the sort of “outside the box” competition provided by Amazon…both in terms of printed books and now in terms of e-books. While B&N claims that the Nook e-reader is a big success, the company still stakes its future on traditional bookselling in an era when Amazon has already migrated over half its sales from hardcovers to e-books and continues to promote the Kindle very aggressively. B&N seemed to be satisfied with the slow decline of Borders instead of eyeing the true competition.

Regardless of the outcome of the battle for control of B&N stock, the company has a lot of work to do. The model of megastores with massive assortments may be harder to support–and there is evidence in the growing number of out-of-stocks. Other companies are developing smaller-format concepts in order to provide more focused assortments in a more flexible and cost-effective real estate model…Best Buy Mobile and SA Elite (from Sports Authority) are just two that come to mind. So it’s time for B&N to reinvent its bricks & mortar experience at the same time that it continues to push e-book sales.

Bill Emerson
Bill Emerson
13 years ago

B&N is one of the best-executed brands in the country. One of the main reasons for this is their rigorous devotion to a basic credo–“we are booksellers.” They are now suffering from being the pre-eminent leader in something that is undergoing a fundamental change due to technology. Not so long ago, any and all transportation in this country required horses. The village blacksmith was an integral part of every community. Seen any blacksmiths lately?

The first Kindle was shipped less than 3 years ago. Recently Amazon reported that e-books had surpassed printed books in unit sales. Compare the reported 20% market share that B&N has on e-books with the market share they enjoyed in printed books. Not even close.

B&N didn’t get to where they are by being dull-witted. Riggio is obviously correct to face this challenge now. I’m sure they will figure out a way to adapt and survive, albeit on a much reduced scale. Going private is absolutely the right approach to do this. The real question is where they will find the investors to enable an orderly transition.

Dan Berthiaume
Dan Berthiaume
13 years ago

I think books will travel a similar path to music and DVDs–large national and regional chains will be crushed by e-book content, while small independent niche retailers will survive by providing serious readers with out-of-print, hard-to-find and controversial authors mainstream chains like B&N most likely don’t carry. Many of these indie chains also do a brisk business as Amazon.com third-party sellers.

Camille P. Schuster, Ph.D.
Camille P. Schuster, Ph.D.
13 years ago

More people are reading ebooks. However, my guess (I don’t have the data) is that Barnes & Nobles’ share of the ebook market is pretty low. From my experience, downloading an ebook from their website is so frustrating I left the site and ordered my ebook from Amazon.

Barnes & Noble has a good brand and was able to stand up to Amazon with internet ordering. They will not stand up to Amazon in the ebook market unless they fix their ebook purchasing process. This is a reasonable fix that would bring value back to the brand.

Ed Rosenbaum
Ed Rosenbaum
13 years ago

Barnes & Noble decision to go private is a smart move at this time and under the current market conditions. While brick and mortar are not going to go away, the size of their Real Estate portfolio will require some hard decisions be made and closings will ensue. That should not to be taken as a bad thing. It would be the prudent move for the foreseeable future. Going private will allow them to re-brand and rebuild with out the market’s influence and ever watchful eye.

Yet, I write this thinking about the past weekend, walking down a local promenade window shopping. The local B&N continues to be one of the higher trafficked stores and yes, people are purchasing as well as browsing. So there will remain hope for the brick and mortar to survive as B&N’s braintrust goes behind closed doors and comes out with a new, modern version of what made them number one in their market. All they need is to find the sweetheart investors to see the plan and participate.

Kevin Graff
Kevin Graff
13 years ago

I recently did a keynote for the Canadian Booksellers Association. A bunch of nervous folks in the crowd, but also a very determined group. The reality is that the future will see far fewer book stores, but the ones that remain will be outstanding. They will be much, much less about the product (you can get that easier and probably cheaper online) and much, much more about the shopping experience. The parameters of that ‘experience’ aren’t set in stone. It could be brilliant staff, great events, store design or a intertwined product assortment that is more about total entertainment and not just books.

B&N may be the canary in the coal mine, but don’t count them out just yet. There is a future for book sellers…it’s just that there will be fewer of them.

Paula Rosenblum
Paula Rosenblum
13 years ago

Given the lack of growth potential for the chain, going private is an excellent idea.

That doesn’t mean an equity partner won’t make buckets of money–it just means B&N is no longer attractive to public markets. But I do think there’s a place for book stores. Certain types of books, like textbooks and coffee table books, won’t be going away any time soon, and B&N offering free e-reading while in the store is a great idea.

I can’t quite say the same about Borders…but I think B&N has a real shot at long-term survival.

Joan Treistman
Joan Treistman
13 years ago

What is the decision process for buying e-books? How do consumers become aware of their choices?

Of course e-book sellers are in touch with their prior customers to promote books that they are likely to be interested in. But there is something to be said about the experience of walking down the aisles in a brick and mortar store to learn about what’s out there…in fiction, mysteries, travel, business, self-help. Here may be an opportunity that has not been thoroughly examined or leveraged. Engaging shoppers with a satisfying experience that results in their acknowledged access to the variety and quantity of eBook options may be another avenue that will create online retail leadership…and loyalty.

There has been little mention of any segmentation within the book market, the various genres, categories, subjects, and other differentiating characteristics. And there has been little discussion of who the e-readers are.

Perhaps there is an opportunity to lead the field by engaging readers with the vastness of choices. I don’t believe that aspect of the business has been completely tapped.

David Dorf
David Dorf
13 years ago

B&N is the favorite retailer for book enthusiasts that prefer the experience of browsing. They have done a great job of augmenting the book-buying experience with cafes, free WiFi, and the new Nook boutiques. The key is to right-size their stores and use their physical presence as a differentiator over Amazon. If they can find the right formula, they will do fine no matter who owns them.

Ralph Jacobson
Ralph Jacobson
13 years ago

There will always be a section of consumers whom hold on to traditional comforts of tangible books. Just like vinyl LP record that are still produced today, books will continue for the foreseeable future. This reminds me of a sci-fi short story written in 1951 about kids who find an old book 200 years in to future. It’s a very quick read.

Joel Warady
Joel Warady
13 years ago

I would not write B&N off just yet. They certainly understand the challenges that they face, and more importantly, they are addressing these challenges. Let’s look at what they have done over the last 24 months.

1. They have reduced their inventory of physical books to free up cash flow for their digital strategy.

2. They have introduced The Nook, and more importantly have introduced a platform for downloading e-books to multiple devices, including the iPad and the iPhone.

3. They have moved the Nook to be physically positioned immediately when you walk into the store, calling more attention to their transformation.

4. They have introduced free WiFi to their stores, creating the opportunity to become more of a destination, and to cause people to linger longer.

5. They have introduced the opportunity to access ebooks free of charge for reading, while you are lingering in their stores.

6. They have their own content provider in Sterling Publishing, which they own. They will be able to produce their own content to be available on ebook format.

7. They are one of the largest college bookstore management companies in the US, and as textbooks morph into ebooks, they are best positioned to take advantage of this opportunity.

8. They own the best physical locations in the US, something that amazon will never be able to replicate.

9. People still love buying ink on paper books, and B&N is strategically positioned to “own” this market.

With all that being said, I think Len Riggio wants to take the company private, because he sees all of the above as well, and knows that over time, he will be able to reposition the Company to take advantage of all of these changes. In the meantime, the company is a bargain right now. He will find the financial backers, and if he is able to take the company private, he will prove to be the big winner.

Dave Wendland
Dave Wendland
13 years ago

Evolution is a scary thing. But I believe that with some good reinvention of the store experience and re-dedication to its loyal patrons, B&N will remain relevant to many. As suggested earlier in this dialogue, books are not dead.

Doug Fleener
Doug Fleener
13 years ago

While they should have done it a lot sooner, I like that B&N is expanding their 1,000 square-foot NOOK boutiques, and most important they’re aggressively staffing the area. These stores still generate a lot of traffic, and if done properly they can bridge the brick and mortar with the online. They may eventually have to reduce some stores, but I believe they can still be a viable retailer.

Doug Stephens
Doug Stephens
13 years ago

This isn’t a debate about whether or not books will exist in the future. It’s a fundamental argument about how we define “book” in the first place. And the truth is, a book is nothing more than content. No different than a record, a movie or a television show–just content.

Apple didn’t eradicate music. What they changed was the way a record’s content is packaged, marketed, sold and consumed. Had the retail bookstore segment focused more on this and less on trying to convince us that a book is only a book if takes killing a tree to make it, they might be better off now.

I suppose there’s also fear around unlicensed file-sharing of books but the truth is people have always loaned books to one another. It’s probably the most primitive form of file sharing known to man.

As far as the future of bricks and mortar book retailing…

There will always be a market for environments that are conducive to reading and enjoying books. The fact that guests are reading iPads instead of paper won’t change this. There’s no reason that a book retailer (or someone else) couldn’t define the digital reading experience and create a commercial proposition around reading.

There will also be an even greater market for antique and vintage (printed) books. Classics, limited editions and collectibles will skyrocket in value as the mainstream book market evolves away from paper.

As for those that maintain “nothing smells like a book,” I’m sure some people must have told Henry Ford that his cars didn’t smell like horses.

Kai Clarke
Kai Clarke
13 years ago

Adapt or perish! This is no longer a brick and mortar world for books, plus books themselves are declining in readership. This is a model-changing requirement that B&N needs to survive. Bigger is not better here. The poor performing stores need to be shuttered and sold-off. Anything that is not profitable needs to be sold and the revenues re-invested in the company as it transforms itself from a brick and mortar based company to one that is virtual and focuses on electronic media.

Phil Rubin
Phil Rubin
13 years ago

B&N’s problems, among others, is that for many consumers of content–in the form of books–they are increasingly irrelevant compared to Amazon. Their other problem is that Amazon is and will remain the leader in ebooks. Finally, their problem is that Amazon is obsessed with customers and B&N isn’t.

Going private is the only option for B&N, assuming they can strike a deal, which is not always easy when you have two large shareholders that not only don’t get along but probably also have unrealistic expectations about valuation.

More than anything, B&N largely failed to adapt to the new economics of information. This goes beyond what they sell–content and information–and in what form. It goes to the very core of their business.

That’s where Amazon is so fundamentally different that success for B&N is no better than number two in a declining market.

Amazon developed its business specifically for the new economy. It has leveraged data and information in ways that very few other retailers have done. And yet it’s not just about data and information. For Amazon is starts and ends with customers.

While people may get tired of hearing it, Bezos is among the few CEOs of major retailers that obsesses with customers. This is what ultimately makes the difference and that distinction is what makes Amazon attractive for equity buyers and B&N only attractive for hedge funds pursuing long/short strategies.

As someone else points out, fortunately for B&N there’s Border’s!

Ed Dennis
Ed Dennis
13 years ago

Value is a relative thing. We all have different values. When factors in the marketplace convince investors that they probably will receive a higher return by investing their money elsewhere people tend to sell one investment and move to a more promising investment.

Right or wrong, Barnes & Noble has failed to convince investors that their stock is a good investment. If their board feels the stock is undervalued, then going private is an alternative. However, if they are doing nothing to convince investors that their stock is cheap, then management must be condemned and held accountable for the loss in investment value.

I personally think they do a very good job of running a store, but a horrible job of running their business.

Mark Price
Mark Price
13 years ago

As a reading fanatic (3-4 books at a time) and a multi-channel customer (both Kindle and B&N), I was very dismayed to hear that B&N was offering to sell.

I believe, as do several other writers, that the physical book is not dying out at all. Rather, it is my hope that the overall market for books increases due to multi-channel offerings.

Barnes has been somewhat slow to embrace the digital book, and that delay has cost them market share and mindshare. The Nook is not a strong competitor to Amazon, which boasts the largest digital bookstore and the third generation of its reader as well.

Ultimately, I believe that B&N will form an alliance with Apple and offer the iPad in-store as a Nook replacement. If they can also get some coverage in the Apple Store or online, they will regain their momentum and take their place as the best browsing environment.