Tuesday, June 25, 2013

Dragged Down By The Nook, Barnes & Noble In Financial Trouble Again; Will The Anchorage Store Survive?

Barnes & Noble is in financial trouble once again, and some pessimists doubt the chain's survival. On June 25th, 2013, the company issued its quarterly financial report for the fourth quarter of its fiscal year (which ended in April), and it shows a 7.4 percent drop in revenues and a $122 million loss. A major share of the blame is pointed at their Nook e-Readers, which show a 34 percent loss in the fourth quarter alone, and an overall 17 percent drop in revenues and a stunning $475 million loss for the device division in all of FY 2013. Overall, the company earned a mere $10 million in FY2013, compared to $177 million in FY2012.

CNNMoney takes the optimistic view, projecting that B&N will remain in business. They say that the company will stay the course on its e-reader business, but plans to pursue a partnership to help it make Nook HD tablets because the Nook has simply become too costly to produce. The company will continue to sell Nook tablets in stores, but future devices might be co-branded with the new manufacturer's name as well as the Barnes & Noble logo. The identity of the new manufacturer has not been disclosed, but it is known that Microsoft is considering the purchase of the Nook brand. Microsoft has already invested in the Nook business, taking a 17.6 percent stake in April 2012.

Yahoo Finance takes the pessimistic view. They claim the quarterly sales report also indicates diminished foot traffic in the stores and an absence of management focus on retail which they believe foreshadows the ultimate end for the company's 675 stores and perhaps its entire existence. Brian Sozzi, CEO and chief equities analyst at Belus Capital Advisors, thinks the odds are stacked against Barnes & Noble, claiming that the company is cannibalizing itself with its branded tablets and e-reader applications. One of the reasons the Nook is a difficult sell is the business model. When you purchase a paper book, it's yours for keeps; only one bite of the "consumer apple". But when you purchase a Nook, you not only pay for the reader, but you must also pay again for each e-book you load on the Nook. Multiple bites of the same consumer apple, euphemistically referred to by other sources such as the airline industry as "unbundling". Many people take exception to paying more than once for the same product, even if it is a matter of perception. Furthermore, how long will those e-reader tablets last when power is not available? At least with physical books, all you need is good old-fashioned sunlight.

But Leonard Riggio, the 71-year-old chairman and founder of Barnes & Noble, think the brick-and-mortar stores would make a good freestanding business in their own right. In February 2013, Riggio suggested he would attempt to detach the stores from the digital branch of the company. Riggio hasn't made his bid yet but analysts value the chain at anywhere from $500 million to $1 billion. Brian Sozzi conceded Riggio could make the stores a lucrative business in their own right, but only if Riggio dramatically reduces the store count, noting that Mom-and-Pop bookstores (like Tidal Wave in Anchorage) stay open because of select product offerings, great service and less square footage.

So whither the Anchorage store if Riggio buys and detaches the stores from the digital decision? One would think the Anchorage store would survive a subsequent downsizing, since it's the only one in Alaska, it's located in Alaska's largest population center, and has no effective big box competition since Borders died. But then again, K-Mart's Alaska stores were also profitable, but it didn't stop K-Mart from closing them to save other operations in the Lower 48. The fact is, the Anchorage store appears to be reasonably well-trafficked, with the parking lot in front of the store at least two-thirds full most of the time. The Starbucks contained within is a bit pricey, but is still a plus; in addition, the store offers free Wi-fi. Barnes & Noble is also a great place to hide out from kids on Halloween when the city library is closed.

Other factors possibly contributing to Barnes & Noble decline are highlighted in the Yahoo comments:

-- Too much browsing, not enough buying: Some people are critical of B&N's tolerance of browsers who don't buy. One person wrote "The last book I bought, had coffee stains on the pages halfway through the book".

-- Not competitive with online sources such as Amazon: One person wrote "Last time I went to get a book at Barnes and Noble, it was $28, $16 on Amazon. See the problem?" Yes, that's a problem, if you have the capacity and desire to shop online. However, another person disagreed, writing "The public has economic blood on its hands. Refusing to support brick-and-mortar stores in order to save 50 cents online is destroying the country. My local shopping mall has become a veritable ghost town with nothing but tanning and nail salons. Soon there will be nothing to on a Saturday except get a tattoo or a Check Into Cash loan".

-- Reduced selection of paper books: One person wrote "I used to enjoy B&N, but the selection has gotten to be 'top 40-ish'. There used to be a wide array of books not available at other bookstores. Not so now. Not interested in mystery writers who crank out a book a week with the same formula. I look to local bookstores anymore. Much better selections". This indicates that the Clear Channel Top 40 curse has spread to booksellers as well. In addition, some popular authors such as Harry Turtledove have scaled back their publishing, and not enough good authors have stepped forward to replace them.

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