Jewel in the crown

20.01.12 | Paul Smiddy

The US book retail giant Barnes & Noble announced its “holiday” sales a few days back (Christmas seems to have become a dirty word over there). They made for interesting reading. Digital content revenues rose 113% and sales of the Nook, its proprietary e-reader, were up 70%. Digital content is heading for 10% of B&N’s overall revenues by the end of its financial year in April.

More remarkably, sales of non-digital content—i.e. old-fashioned books—rose a praiseworthy 4.5% in like-for-like stores, with the children’s category being particularly strong. The closure of many Borders stores must have helped them along—there is a some virtue in being the last man standing, as long as your wooden leg is not succumbing to woodworm. But heavy marketing costs, and below-budget sales of the original (black and white) Nook Simple Touch, caused the company to lower full-year profit expectations.

Barnes & Noble also announced that it had started a “strategic exploration” of its Nook business. Given the Nook was its own baby, you might have thought that they knew its every, well, nook and cranny. Some investors had nudged the management into looking into ways of improving the group’s overall valuation. So they are now considering demerging the Nook business—the sort of job that brings at least a half-smile to a pasty Wall Street banker. The c.e.o.’s argument is that “One is a very stable, very mature business that is growing—our physical book sales grew—which we believe is undervalued. And there is this high-growth, high-flying digital business that we think is valuable, which is consuming more investment.” The subtext perhaps being that they do not feel comfortable with funding that Nook investment?

But just how sensible is a demerger? One can certainly point to some previous successes. Burberry, for example, is now one of the world’s most prominent luxury brands. Many will forget it was until only seven years ago buried within the imperial Great Universal Stores, better known as GUS (which then splintered into three businesses, two now floundering, one successful). Demerging certainly prompted the investment community to appreciate Burberry’s merits. It also must have aided the recruitment of world-class management. But it did not enhance the beauty of the rump that was left at GUS.

As booksellers stare into the analogue abyss, does it really make sense to spin off the group’s digital delights? E-readers seem most successful when they are marketed to the consumer from a vendor who can also supply content: pace the Kindle, but also W H Smith’s Kobo. De-Nooking Barnes & Noble would also reduce the reasons for visiting the stores. Having crafted a jewel, I would keep it in the crown.

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