In every great epic, there is the last stand: a waning of hope, a dutiful last charge, and a hopeful moment of deus ex machina.
It's all too tempting to imagine American publishers in a boardroom today using similar literary tropes in a dramatic analogy involving besieged Barnes & Noble locations and a fight to the last man against Amazonian invaders. Our analogy isn’t far off. Right now, B&N faces death but bravely holds fast to stave off private takeovers and Amazon at the gates a little bit longer.
The death of the last major American bookstore chain is significant. It leaves publishers with few major bookselling channels outside of Amazon, hundreds of American communities reliant on e-commerce for books, and a beloved brand and store experience only a distant memory for readers.
A drawn-out siege
Financially, B&N is in dire straits. The stock is trading a hair above $5, less than a fifth of their 2006 price before ebooks and Amazon consumed the market. Since then, stores have seen 11 years of declining sales and dozens of closures. After Feb. 12 lay-offs of 1,800 full-time positions, many stores now have no full-time employees.
B&N’s online sales have been steadily declining more than 25% in the last two years, despite occasional odd attempts at building unique online experiences. Meanwhile, Amazon currently sells one out of every two books in the U.S., according to digital publishing consultants Mike Shatzkin and Hugh Howey. While the overall book market grows a healthy 3% a year, it “is solely due to Amazon’s fast-growing online print sales,” says Howey. Last year, “all other channels shrunk.”
Without immediate action, B&N’s current path to improvement is between murky and nonexistent. In the last decade, management's turnaround plan (”improving navigation and discovery”), founder Leonard Riggio’s immobile majority shares, and a revolving door of c.e.o.s have made effective innovation impossible.
Go gentle into that good night
With an enterprise value under $500 million, hedge fund Sandell Partners says there is a good case to take the bookseller private. In July, Sandell penned a letter to the board asking for a fairytale ending to B&N. The letter outlines a plan for B&N to escape an “unconscionably low” valuation in a cruel public retail market, run off with a private equity firm, court a charming internet or media company, and emerge as a technology company’s brick-and-mortar face like Amazon’s Whole Foods.
Sandell’s deal makes sense on many levels. The bookseller is a gem in the retail bargain bin. Excluding goodwill reduction in B&N’s most recent quarterly report, the company’s enterprise multiple is 3.5, 70% lower than the average of all retail M&A in 2016. It’s a relative steal for an international and beloved brand with 630 locations.
B&N has three options moving forward:
- Wait for organic bankruptcy
- Sell to its FAANG overlord of choice, bow-attached
- Dramatically change to put up a fight against Amazon
To effectively change, B&N needs to leverage its most valuable assets while eliminating ineffective ones. It must focus on space, experience, and memberships while cutting book inventories and unprofitable departments. It would mean closing stores, departments, and products but also an intact American book chain.
Back to the community
In the same way that B&N’s share price is undervalued in the current retail market, its value for customers might not be reflected accurately in current offerings. Almost half of all declines in sales came from music, gifts, and DVD departments. Why on earth is a retailer using precious floor space to sell DVDs in 2018?
Another example is the Nook (shut down in the UK in March 2016) has almost never been profitable. If B&N had spent the $1.3 billion lost by the Nook, it could pay for laid-off employees 30 times over. Even if B&N could compete with Amazon’s prices or content selection, the resources to build out as robust a hardware team would be better leveraged towards B&N’s core competencies of space and community.
Co-working spaces are an undoubtedly popular answer to new work demands – over 65 percent of companies “plan to incorporate Co-working into their portfolio offering by 2020”, according to a survey by commercial brokerage firm CBRE. Many of these co-working spaces are not only in cities, but increasingly suburbs as well. For example, Serendipity labs, has found success opening spaces in suburbs like Sugar Land, Texas; Alpharetta, GA; and Rye, NY.
B&N could fulfill demand for work space with its large retail locations. Like WeWork, B&N co-working spaces could build community, with common benefits like printing, coffee, and fast Wifi. Even if charging a fraction of competing co-working spaces’ fees, the bookseller could leverage millions of underutilized square feet of existing, as Sandell Partners put it, “beachfront property” to hundreds of American communitie. For investors, a higher valuation as a coworking space could effectively rebrand B&N away from a wallowing traditional retail towards investor-friendly co-working. As the blockchain boom indicates, investors don’t mind when a company aligns with hot trends to look innovative.
Space: the final frontier
For a physical retailer that relies on local connections with consumers, airplane-hanger sized locations represent an engagement space for communities across the country. B&N should look at successful retailers like Blue Mercury, TopShop, and Best Buy, which all offer something that Amazon cannot.
Cafes make B&N a valuable space for American community with open spaces, late hours, and local events. The bookseller is already taking an active stand in integrating customer experiences into their spaces by testing five prototype stores in 2018 with 25 percent smaller floor plans, full-service restaurants, and $12 avocado toast. Although B&N’s full-service restaurants are far from an integrated brand experience, they are a step in the right direction.
With large spaces and store associates, B&N will have an easier fight against Amazon over community than margin or selection. B&N’s 160,000 books per store might seem formidable, but Amazon shoppers can choose between 20 times as many titles online. No store has better assets to create a retail experience that even the Whole Foods meat counter can't emulate.
A few hundred promoted titles with real-life reading nooks, community events, and book releases could replace B&N’s aisles of untouched puzzles and game and “get-in-get-out” shopping experience. Publishers can leverage B&N’s space to create meaningful and relevant relationships to their consumers with better curated spaces and personalized interactions. Despite a drop in goodwill on B&N’s balance sheet, the bookseller has remained the primary bookstore in hundreds of American communities and emerged as the lovable underdog against Amazon. “It didn’t take long for B&N to go from being the bad guy in You’ve Got Mail to the equivalent of the little shop on the corner everyone is rooting for,” writes Bradford.
B&N might never become Waterstones, but it is an important lesson that any bookstore or retail space can evolve, regardless of size or inertia. For B&N, it would mean radically redefining its experience, cutting stores and employees, and overhauling its history. Rebuilding store experience for customer needs is never easy, but if it’s done carefully and honestly over time, stores can evolve with their audience and market instead of fighting against a current.