Pro-Bookstores Or Anti-Amazon
Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last week, over beers, my friend told me she was really hoping to get a Barnes & Noble (NYSE: BKS) Nook for the holidays. I told her how much I love reading on my Amazon (NASDAQ: AMZN) Kindle, and she looked at me in disgust. She explained to me how terrible Amazon is with a less than convincing argument, which I’ve summed up for the reader’s sake thusly: “I like bookstores, so I want a Nook”
“Are You Pro-Bookstores, Or Just Anti-Amazon?”
After my friend’s winded diatribe against Amazon, I asked a simple question to clarify her stance. “Are you pro-bookstores, or just anti-Amazon?” If you’re truly pro-bookstores, you’ll realize that Amazon is not the only thing hurting Barnes & Noble and hundreds of independent booksellers’ sales. It’s the industry’s reactive nature.
Being pro-bookstore would mean you’re not only against Amazon for selling books at lower prices and lower margins to steal away business. You’d also have to be against big-box retailers such as Wal-Mart, Costco, and Target for selling books at steep discounts to list prices. You’d have to be against Apple and Google for making tablets, electronic bookstores, and software for e-readers. In fact, taking the argument to its logical extreme, you should even be against Barnes & Noble for selling its Nook e-readers.
The fact is, digital books are here to stay, and as Egon Spengler said in Ghostbusters, “Print is dead.” Simply look at the recent history of the big chain bookstore. Last year, Borders shut down operations for good after years of disappointing sales numbers. Retail sales and profits for Barnes & Noble have declined for over two years now. It seems Barnes & Noble’s best chances for sales and profits are in its digital e-reader, the Nook.
Will Buying a Nook Save Bookstores?
Barnes & Noble has done a fantastic job of leveraging its brand name to compete with Amazon in the digital e-reader market. It’s estimated that the company commands about one-quarter of the market, and is second only to the “bookstore killer.” Nook sales continue to climb year after year, and earlier this year the company created a subsidiary Nook digital unit with a $300 million investment from Microsoft (NASDAQ: MSFT).
Yet, buying a nook won’t stop Barnes & Noble from closing down its bookstores. While the company didn’t close any bookstores last quarter, it closed two the quarter before, and will continue to close them as declining retail sales make keeping stores open unprofitable. Nobody needs to go to a bookstore to buy an ebook. What people will go to bookstores for is an experience.
“I’m pro-reader, not anti-bookstore. But sometimes being pro-reader makes it look that way. I think the nature of the free market is that you have to offer something your competitors don’t.” – Tim Ferriss, author of 4-Hour Chef, which was banned by Barnes & Noble after he published it through Amazon
Amazon can’t stage events or provide the personal touch of a brick-and-mortar store. Barnes & Noble has an opportunity to create crowd-drawing events that Amazon simply cannot do. Currently, their best events comprise of seminars on how to use a Nook, and story time for kids. While Nook seminars might improve digital sales, neither event is very likely to convert retail sales. Occasionally, a store might hold a book reading, or signing, but those have become fewer and further between.
Independent bookstores, on the other hand, are seeing mixed results. Those that have done well recently, are those that have a specific market niche that attracts readers with shared interests of the owner. They promote dialogue between patrons and the staff, and stage events that cater towards that niche. If B&N could emulate some of the steps the successful independent stores have taken to survive in the age of Amazon and big box retailers, perhaps they could keep their retail unit alive.
A Nook of Its Own
Of course, it’s a lot harder for a retail chain of over 680 stores to add a personal touch to each one of them. Perhaps, the best-case scenario investors can hope for is a Nook spinoff. Last week, Rick Schottenfeld, of Schottenfeld Group Holdings, called for a spinoff of the company in a letter to Chairman Leonard Riggio.
For now, cash flows from retail sales are fueling growth in the Nook. The efforts have done well, and the Nook is selling well with digital sales improving 5.6% year-over-year last quarter. Yet, as is well known, the investment in digital has come at the expense of retail. Schottenfeld sees upside in both, and is particularly wary of B&N selling off its retail segment at a cheap valuation.
I believe the Nook has become established well enough in the e-reader market for a spinoff to be feasible. If B&N uses cash flows from its retail segment to buyback shares and payout dividends, it could provide more value for investors that stick around. Right now, the combination of a mature retail store and a growing digital device brand makes it difficult for investors to value. A spin-off would provide more clarity.
The Future of Bookstores
I think Barnes & Noble is unlikely to go the way of Borders. Borders failed to adapt to the changing market, but B&N, now the premier bookstore chain, is keeping pace with consumers wants. Even if “print is dead,” there are still those that would rather have a physical book with paper pages rather than an ebook. Perhaps is the “book smell” or the rush of collecting or show casing how well read you are to friends, but the demand for bookstores will always be there. If Barnes & Noble plans to keep its retail segment alive, it may be best for it to spin-off the digital segment and reinvest cash into providing a unique experience at its stores.
adamlevy owns shares of Amazon.com. The Motley Fool owns shares of Amazon.com and Microsoft. Motley Fool newsletter services recommend Amazon.com and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!