Why Barnes & Noble Can't Combat the Disruption

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Executives at Barnes & Noble (NYSE: BKS) have not had a great start to 2013. After warning on Jan. 2 that holiday sales of its Nook Media division fell 12.6% from the previous year, the company released another ominous memo earlier this month.

Losses in the division will be greater than the previous year, and revenue for the year will fall far below the $3 billion projection the company maintained in the earlier bulletin. While the losses are disappointing, what’s worse is that Barnes & Noble has been unable to capture a significant part of the rapidly growing market that’s disrupting its legacy business.

It’s not the products

Going into the holiday season last year, B&N was set to capitalize on the growing number of tablet shoppers. Its newest entrant, the Nook HD, received excellent reviews from nearly every outlet, but failed to make a big splash in the increasingly cluttered tablet market. Buyers preferred options from Apple (NASDAQ: AAPL), Samsung, Amazon (NASDAQ: AMZN), and Google, and the Nook stayed inside those increasingly empty bookstores.

So if B&N has such a great product, the market for the product is growing, and it’s priced to sell, why can’t it move the Nook?

It boils down to one thing: branding.

Where is B&N in consumers’ minds?

When you think of Barnes & Noble, what’s the first thing that comes to mind? For most, it’s brick and mortar bookstores. The company has failed to position its brand in consumers' minds as an eReader maker or digital content distributor. Instead, it’s associated with a dying breed of retail.

The company has recently announced plans to close approximately 200 stores in the coming years. Up until 2009, the company had been opening more stores than it closed, but that year B&N shifted its investment focus to digital and started working on the Nook.

However, the shift in investment hasn’t been accompanied by a shift in consumers’ mindset. No matter how hard the company is trying, it can’t shake the association with traditional book retailing.

Barnes & Noble is not a tech company

Barnes & Noble now finds itself competing against tech companies like Apple and Google, on top of the already industry-disrupting Amazon. While it offers a nice device, with plenty of great features, consumers are less interested in specs than they used to be.

For example, Apple continues to thrive in the phone market despite consistent criticisms that its iPhone doesn’t offer the newest capabilities. Consumers don’t care. They place their trust in Apple, and it doesn’t disappoint.

Amazon offers extremely similar devices to the Nook with its line of Kindles, and it got off to a 2-year head start. It was able to leverage its position as the largest online retailer, known for books, to create an entirely new way to distribute eBooks. While the retailer doesn’t split out its business segment revenues, it did report that eBook sales increased approximately 70% compared to just 5% for physical books.

Barnes & Noble failed to be proactive in the market, and instead we found management reacting to the disruption of the book distribution model. The company had to create an entirely new digital infrastructure to compete whereas Amazon simply capitalized on its already existent deep content portal.

Going the way of the Betamax

The most disappointing thing about the recent memos sent out by Barnes & Noble is that Nook sales include both hardware and eBooks. Even with a lack of hardware sales, the growing number of eReader users still aren’t using barnesandnoble.com to buy new eBooks.

The Nook is becoming the Betamax of the digital reader industry. Hardware sales are declining and content sales aren’t softening the blow. It’s hard to see the company making a turnaround in 2013, but I’ll be listening to their earnings call later this week to see what they plan on doing to address the issues facing the struggling business segment.


adamlevy owns shares of Amazon.com. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. 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!

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