What this Retailer can do to Improve Relevancy

Tom is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Small, in the specialty retailer segment, anyways, is the new big.  For years big box specialty retailers including electronics giant Best Buy (NYSE: BBY), office supplies stores including Staples (NASDAQ: SPLS), and books retailers like Barnes & Noble (NYSE: BKS) have dazzled consumers with wall-to-wall inventory displays that cater to consumers with differing brand loyalties, product feature needs/wants, and pricing constraints.  With the dramatic surge in online shopping and the ability to compare pricing and product features without making a trip to a physical store, however, many specialty retailers have been rethinking their legacy big box businesses in favor of smaller and more efficient scaled-down stores. 

Best Buy Mobility stores, which focus on the fastest moving and highest margin goods such as smartphones, tablets, and laptops, and new Staples concepts including the urban store (much smaller with tighter product focus) and copying centers (high margin service offerings) have proven to be significantly higher-returning than their big box relatives. 

Barnes & Noble has yet to make such a migration away from its fleet of more than 700 big boxes, partly because a smaller store concept would have little relevancy – would it simply consist of a table of the hottest and most current bestsellers? – and because the inherent characteristics of its product offering have dramatically changed with the increased popularity of digital books. 

The bookseller’s growth initiatives thus far have more or less mimicked the moves of its much larger, efficient, and popular counterpart, Amazon.com (NASDAQ: AMZN).  Barnes & Noble has effectively warded off its obsolescence with the 2009 release of the Nook and the subsequent development of its e-book retailing segment on its website (both released after Amazon’s Kindle and its e-book store). 

Although Barnes & Noble has made a stab at shifting away from the reliance on physical book sales, it seems that there is so much more that the retailer can be doing to make a further splash into the digital content world.  In its most recent quarterly filing, the company touted its ability to increase total sales and same store sales by 5% and 2.8%, respectively, versus the comparable quarter last year.  Although its Nook business, which increased 38% to $542 million in sales, accounted for a substantial portion of the increase, management continues to put an increased emphasis on the actual brick-and-mortar space.  Expanded product offerings including toys and games, as well as the reworking of existing stores to include boutiques that highlight different publishing houses, are short term, superficial tactics that will continue to take focus away from the obvious future of the brand – the Nook and e-reading material.

  • Ubiquity

With the rise in popularity of cloud computing in the end-consumer space – being able to access all of one’s digital belongings anywhere, anytime – the idea of being tied down to a particular hub for digital content is becoming increasingly less attractive.  Without its own cloud service, users of the Nook are essentially tied to the physical e-reader and the retailer’s website.  Consumers of Amazon’s digital content, on the other hand, not only have access to purchased material on their home computer, but can also automatically push all of the digital goods to their Kindle, smartphones, tablets, and other computers (work computer, for instance), with the cloud service.

  • Exclusive Content

Amazon is leaps and bounds ahead of Barnes & Noble in terms of exclusive content.  Considering that the bundle of services wrapped around a given product, and not the product itself, is generally the key for captivating consumers, exclusive content will be one of the primary frontiers for e-reader manufacturers to conquer going forward. 

Amazon currently offers its KDP Select program, which, through a $6 million annual fund, seeks to attract the works of independent authors and publishers.  Those who choose to make their books exclusive to Amazon’s Kindle Owners’ Lending Library earn a share of the fund based on how frequently the book is borrowed.  Likewise, authors/publishers will be given tools by Amazon to promote their works on the site, much like the “shop front” services offered to eBay (NASDAQ: EBAY) -based online retailers.  As available through eBay’s service, Amazon’s KDP Select allows the artists to market their works as they originally intended. 

It is no secret that some small independent booksellers are slowly starting to publish their own content as a way to highlight local and upcoming writing talents.

Barnes & Noble can unlock a huge market by not only mimicking Amazon’s harboring of exclusive content through its online retail site and the bookstore built into the Nook, but also by teaming with this growing base of local independent publishers.  The ownership of such exclusive content would not only help to gain consumer captivity for those comparing the Kindle and the Nook side by side, but Barnes & Noble can drastically improve the slowly diminishing relevancy of its brick-and-mortar locations as seen by local book readers by releasing certain exclusive content on a localized basis. 

The relationship could be very reminiscent of a Green Mountain Coffee/Starbucks agreement regarding the cobranding of exclusive K-cup (coffee pods) flavors:

  1. Green Mountain Coffee sells a K-cup: Green Mountain buys the coffee from Starbucks, packages it into a specialized Starbucks K-cups, sells them in the retail channel, and pays Starbucks a portion of that sale.  Barnes & Noble buys localized content from independent publishers, preloads it into certain Nook models on a localized basis, and sells them in its local brick-and-mortar outlet.  Considering Barnes & Noble’s significant influence over the independent publisher (as opposed to the relatively equal weight, if not more influence on the side of Starbucks in the cobranding of K-cups), Barnes & Noble most likely would not need to buy the content and pay a portion of the Nook's sale price.
  2. Starbucks sells a K-cup: Starbucks buys and roasts the coffee, and delivers the coffee to Green Mountain Coffee, which packages it into K-cups.  Starbucks sells the product in its retail channel and pays Green Mountain for its packaging costs and manufacturing fees.  Local independent publishers harbor local writing talents and pay for and collect their content.  Barnes & Noble ships Nook e-readers to the local publishers, which preload the material onto the Nooks and sell them in their own retail space (they are, after all, small booksellers).  The bookseller/publisher pays Barnes & Noble the unit cost on the Nook, which should be adequate considering Barnes & Noble can dramatically increase its reach with the Nook product and will reap future sales of e-books to those individual consumers. 

Although hypothetical, the case study shows that there are several ways that Barnes & Noble can drastically increase the capabilities of its Nook brand.

With a huge reliance still put on its actual brick-and-mortar outlets, and with almost a quarter of its leases expiring after 2017, Barnes & Noble obviously still needs to focus on incrementally improving its legacy business of physical book sales.  However, investors should demand that the retailer does much more with its Nook e-reader than simply pushing them out to millions worldwide.  With the growing base of Nook owners, it is now the perfect time to not only continue reaping subsequent sales of e-books but to really build customer captivity to the Barnes &  Noble brand name. 


Motley Fool newsletter services recommend Amazon.com, eBay and Staples. The Motley Fool owns shares of Amazon.com, Best Buy and Staples. gibbstom13 has no positions in the stocks mentioned above. 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.

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