Strategic Analysis

Team 3: Bittner, Cole, Corr, Cox, Le, & Obergfell

Winter 2012 TTh 1:45pm Professor Levenhagen BUSN 162 – Capstone

Barnes & Noble, Inc.

Team 3

Executive Summary
Barnes & Noble faces the challenge of competing in a declining industry. The core of Barnes & Noble is its brick-and-mortar retail stores. This channel is declining within the retail bookselling industry due to the increasing popularity of online purchasing and new digital technologies. Online retailers offer a wider selection and lower prices while digital technology, in the form of eBooks, has begun to replace the need for physical books. These changes offer greater convenience, thus shifting consumer preferences. Consumers now find in-store purchasing less attractive, causing traditional Barnes & Noble brick-andmortar stores to become increasingly obsolete. As a complacent firm, Barnes & Noble has high organizational health but low external performance. The successful acquisitions of B&N College and Fictionwise in addition to the development of award-winning digital technology all show Barnes & Noble’s ability to achieve its goals. However, significant investments in new technologies have resulted in poor external performance. While overall sales revenue is increasing for the firm, profits are negative. Comparable in-store sales have declined but are offset by growing online and college textbook revenues. As previously mentioned, Barnes & Noble operates in the retail bookselling industry. This industry is unfavorable for incumbents. Most significant in this overall ½ star industry is the high rivalry, caused by low growth and increased competition. Additionally, the high availability of substitutes and demand for convenience gives buyers significant power. The retail bookselling industry appeals to a wide range of customers. This forces Barnes & Noble to constantly compete to retain current and gain new customers. The most frequent purchasers are those above 55 years old, with incomes over $75k. However, technological developments are causing a noticeable shift in purchasing behaviors among younger generations. Customers value convenience and are extremely price sensitive due to low product differentiation. Therefore, a broad line product selection and superior customer service are necessary to create a brand with strong recognition and loyalty. Amazon, Borders, Books-A-Million, and Follett Higher Education Group are Barnes & Noble’s main competitors. Each of these competitors is trying to reach a similar customer base with a slightly different approach. Business lines, distribution channels, product offerings, and reach are the most critical areas of overlap. Low cost operations, broad product line, internal efficiencies, adaptability, and technological innovation are among the key factors of success. Barnes & Noble is not a first mover, nor highly recognizable in the new technologies of this industry. As a result, Barnes & Noble finds itself in a position where it has to catch up to competitors within the new digital channel or opt out entirely. Although the new technology shows signs of growth, it has forced Barnes & Noble to investment heavily and negatively affected the firm’s bottom line. Currently, Barnes & Noble is considering the possible sale of the NOOK business or partnering with publishers, retailers, or technology providers in order to effectively compete. Meanwhile, the firm also struggles to maintain its stronghold in the traditional brick-and-mortar model while trying to optimize its multi-channel strategy.

Barnes & Noble, Inc.

Team 3

Table of Contents
1. Company Overview .................................................................................................................................. 1 2. Performance Analysis ............................................................................................................................... 1 2.1 External Performance ......................................................................................................................... 1 2.2 Organizational Health ......................................................................................................................... 3 2.3 Performance Grid ............................................................................................................................... 4 3. Retail Bookselling Industry ...................................................................................................................... 4 3.1 Industry Structure ............................................................................................................................... 4 3.2 Retail Book Selling Industry Analysis ............................................................................................... 5 3.3 Industry Life Cycle ........................................................................................................................... 10 3.4 Industry Customer Segmentation ..................................................................................................... 11 4. Competitor Analysis ............................................................................................................................... 12 4.1 Competitor Strategies ....................................................................................................................... 14 Amazon .......................................................................................................................................... 14 Borders Group, Inc......................................................................................................................... 15 Books-A-Million (BAM) ............................................................................................................... 16 Follett Higher Education Group (FHEG)....................................................................................... 16 4.2 Key Factors of Success ..................................................................................................................... 17 5. Barnes & Noble Strategy ........................................................................................................................ 17 5.1 Organizational Goals ........................................................................................................................ 17 5.2 Business Strategy Overview ............................................................................................................. 18 5.3 Business Products and Services ........................................................................................................ 19 5.4 Market Breakdown ........................................................................................................................... 20 5.5 Customer Segmentation .................................................................................................................... 20 5.6 Competitive Premise......................................................................................................................... 21 5.7 Value Chain ...................................................................................................................................... 22 6. Gap Analysis ........................................................................................................................................... 23 6.1 Challenges ........................................................................................................................................ 24

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Table of Illustrations
Exhibit 1: Barnes & Noble Sales Revenue by Segment ............................................................................ 2 Exhibit 2: Key Financial Ratios ................................................................................................................. 2 Exhibit 3: Performance Grid ....................................................................................................................... 4 Exhibit 4: Porter’s Five Force Analysis ..................................................................................................... 5 Exhibit 5: Publisher Distribution Chart ..................................................................................................... 7 Exhibit 6: Publishers Sales Growth 2008-2010 …………...…………………………………………….. 8 Exhibit 7: Technology Life Cycle ............................................................................................................ 10 Exhibit 8: Competitor Product and Reach Overlap ................................................................................. 13 Exhibit 9: Competitor Business Segment Overlap .................................................................................. 13 Exhibit 10: Geographic Breakdown and Store Location Comparison ..................................................... 20 Exhibit 11: Value Chain .......................................................................................................................... 21

Barnes & Noble, Inc.

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1. Company Overview
Barnes & Noble is the #1 retail bookseller in the U.S., operating over 1,300 bookstores, including 705 superstores as well as 636 B&N College bookstores. Due to the dynamic changes in the retail bookselling industry, Barnes & Noble has repositioned itself from a traditional brick-and-mortar retailer to a multichannel distributor. As technology has shifted, Barnes & Noble has adopted technologies to keep up with competitors and customer preferences. These advances have proven to be a challenge.

2. Performance Analysis
The following performance analysis will describe the successes and failures of Barnes & Noble’s attempt to avoid becoming obsolete in a changing industry.

2.1 External Performance
(+) Significant Market Share As of early 2010, Barnes & Noble captured 15% share of the physical book market ahead of Amazon, Borders and Books-a-Million, who had market shares of 13%, 10% and 2%, respectively. 1 2 As of 2011, Barnes & Noble has increased its share to approximately 19%, partly due to Borders filing for bankruptcy and liquidating operations.3 In the highly fragmented college textbook retail market, B&N College has the second largest market share, behind Follett Higher Education Group (FHEG).4 Barnes & Noble does not have the same successful market share in the digital book market. Amazon controls roughly 60-70% of the digital market, Barnes & Noble follows with 25% share.5 (+) Increasing Sales Revenue Since 2006, Barnes & Noble has steadily increased its overall sales revenue, largely due to growth with BN.com and its acquisition of B&N College Bookstores. Overall sales revenue has a compound annual growth rate (CAGR) of 6.36%. Traditional brick-and-mortar retail sales have decreased by 1.48% on a compound annual rate. Online sales through BN.com have a 14.46% CAGR,6 although still only accounting for 12.3% of total sales revenue (see Exhibit 1 on the following page for a complete sales breakdown). During the same period, Books-a-Million had relatively no change in revenue.7 Borders saw a -9.3% CAGR with its sales revenue. Amazon had a 40% CAGR for its North American Media Revenue.8 Lastly, FHEG has an estimated five-year CAGR of 0.62%.9

1

Bartlett, Nancy and Bradley, Stephen P. “Book Publishing in 2010,” HBS No. 9-711-419 (Boston: Harvard Business School Publishing, 2012). 2 Market share is in terms of unit sales. 3 Barnes & Noble Annual Report. 2011. Barnes & Noble, Inc. Available online from, http://www.barnesandnobleinc.com, accessed 5 February 2012. 4 FHEG Annual Report. 2011. Follett Higher Education Group. Available online from http://www.fheg.follett.com/, accessed 10 February 2012. 5 Ibid. 6 These figures include sales attributed to the NOOK. 7 CAGR calculated using figures from respective annual reports. 8 Amazon media revenue includes books, music and DVD sales in North America. 9 Gotaas, Mary. Book Stores in the U.S. Rep. no. 45121. IBIS World, Nov. 2011. Web. 12 Feb. 2012.

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Barnes & Noble, Inc. Exhibit 1: Barnes & Noble Sales Revenue by Segment

Team 3

Sources: Created by Team 3 using data from Barnes & Noble Annual Reports 2011 and 2005

(-) Sharp Decline in Profits After decades of consistent growth, Barnes & Noble is stumbling. Over a five-year period from 20052010, operating income had a CAGR of -21.52%. Even poorer is the -24.23% CAGR for net income for the same period. 2010 was the last year in which the company was profitable.10 11 Borders’ last profitable year was 2006. Books-a-Million, showing a 6.2% CAGR for net income, is still profitable today.12 Lastly, FHEG is assumed not to be profitable.13 See Exhibit 2 below for a summary of competitor’s performance. Exhibit 2: Key Financial Ratios
FY 2011 Financial Performance Sales Gross Margin Operating Income Net Income CAGR Revenue CAGR Op. Inc CAGR Net Income 6,998,565,000 25.69% -0.93% -1.06% 6.36% -21.52% -24.23% 2,252,800,000 16.60% -13.16% -13.27% -9.30% N/A N/A 494,963,000 29.92% 2.90% 1.81% -0.35% 3.57% -5.22% 1,805,200 N/A N/A N/A 0.62% N/A N/A 26,705,000 N/A N/A N/A 40.00% N/A N/A B&N Borders BAM FHEG Amazon

Five-Year Period Growth

Source: Created by Team 3 using data from B&N, Borders, BAM annual reports, and IBIS World.

Chart Overview: The chart compares the financial performance of Barnes & Noble’s most direct competitors within the industry. It shows that Amazon is increasingly capturing market share at the expense of traditional bookstore chains. While Barnes & Noble and Borders lead bookstore sales, BAM leads in profitability.

10 11

CAGR calculated using figures from respective annual reports. CAGR is calculated using figures from 2006-2010 because reported figures for 2011 are negative. CAGR cannot be calculated using negative variables. 12 CAGR calculated using figures from respective annual reports. 13 We assume FHEG is losing money. Because it is a private company, there is very limited financial data available. While it shows a slight increase in annual sales revenue growth, FHEG has made significant investments in technology, a new national distribution center and a new textbook rental program.

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(-) Decreasing Stockholders’ Equity Over the last five years, Barnes & Noble’s stockholders’ equity had decreased, represented by a -6.7% CAGR. This compares unfavorably to both Amazon and Books-a-Million, who reported 78.2% and -4.2% CAGR, respectively. Borders had a -35.7% CAGR.14 (-) Falling Stock Prices Barnes & Noble, listed as BKS on the NYSE, has seen a -18.6% CAGR from 2006-2011.15

2.2 Organizational Health
(+) Development of Award Winning Technology Barnes & Noble introduced its proprietary eReader device, the NOOK, in 2009. In 2010, newly appointed CEO, William Lynch, helped drive the development of additional NOOK versions. Lynch, who was previously the President of BN.com, had a wealth of knowledge and experience in e-commerce. Led by the e-content business, BN.com comparable sales increased 64.7% in 2011. This shows that the Barnes & Noble management is able to effectively respond to changes in the market.16 (+) Successful Acquisition of B&N College In 2009, Barnes & Noble purchased Barnes & Noble College Booksellers, Inc. for $514 million. B&N College has grown to account for 25% of overall company revenue, and is the most profitable business segment. The acquisition added 600 bookstores to its portfolio and access to over 4 million students across campuses nationwide. Furthermore, B&N College expanded the firm’s digital channel to include textbooks and various course materials through its proprietary digital technology, the NOOKStudy.17 (+/-) Ability to Achieve Management’s Goals A long-term goal since the mid-2000s has been to grow BN.com sales and increase its online presence. However, online sales in 2011, which also included the eBook, accounted for a mere 12.3% of overall sales. This is only 4% higher than 2005 online sales, which amounted to 8% of total annual sales for Barnes & Noble.18 As of 2009, one of management’s main goals has been to gain a significant portion of the eBook market. In less than three years, Barnes & Noble was able to grow its eBook business and currently has 27% of the market.19 (-) Decreasing Comparable Store Sales From 2008-2011, comparable store sales have decreased at Barnes & Noble retail stores at an average annual rate of 3.2%.20 (-) Declining Return on Invested Capital (ROIC) In 2011, Barnes & Noble posted a 3.2% decrease in ROIC, its lowest level in over a decade. This is well below the specialty retail industry average of 12.8%. The decline was driven by a significant investment in digital technology.21

14 15

Ibid. These historical rates taken from Yahoo! Finance. 16 Barnes & Noble Annual Report, 2011. 17 Ibid. 18 Ibid. 19 Ibid. 20 Borders Group, Inc., January 29, 2011 Form 10-K (filed April 29, 2011). Available online from http://www.annualreports.com, accessed 6 February 2012. 21 Standard & Poor's Stock Report: Barnes & Noble Inc. Rep. Charles Schwab Investments. Accessed 6 Feb. 2012.

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2.3 Performance Grid
Exhibit 3: Performance Grid

3. Retail Book Selling Industry
This section will define the overall industry structure, beginning with retail segments and business models. Following is an industry analysis as well as an analysis of the technology life cycles, in order to uncover the attractiveness of the industry. This section concludes with a look at the customer segmentation.

3.1 Industry Structure
The retail book selling industry encompasses the sale of both physical and digital books. The industry is broken up into three retail segments: general, college and specialty. In addition, the industry is broken up into three district business models based on delivery technologies: brick-and-mortar, online, and digital. Retail Segments General
General bookstores primarily sell trade books.22 These stores carry a broad range of titles, with bestsellers making up a significant portion of revenue as well as driving store traffic. General stores vary in size from 1,500 square foot independent stores to 60,000 square foot super store chains.23

College
College bookstores specialize in textbook retail. These stores differ from general retail stores in that they focus solely on the college market. Many universities own and operate their own private campus bookstores.24

Specialty
Specialty stores carry a specific genre of books including religious, childrens, and professional. Most independent stores are smaller in size and cater to a local set of customers.

22

Per the Association of American Publishers, trade books are books for the general public. Trade books include Adult and Juvenile books in both paperback as well as hardcover format, covering genres including Fiction, Non-Fiction and Religion. 23 Industry Profile: Bookstores. 2012. Hoovers Online. Available from Santa Clara University Library Database, http://0subscriber.hoovers.com.sculib.scu.edu, accessed 20 February 2012. 24 Rosen, Judith. 2011. College Bookstores in Dynamic Times. Publishers Weekly, 7 October. Available online from http://www.publishersweekly.com, accessed 9 March 2012.

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Delivery Technologies Traditional
Historically, the industry consisted of independent brick-and-mortar stores. Starting in the 1990s, superstores began to take hold of the market. This format encouraged destination shopping, browsing, and hosting of public events. Cafés and lounging areas were also implemented in an effort to create a sense of community and a comforting atmosphere.

Online
The mid-1990s saw the birth of online retailing. Amazon was the first major, successful online retail firm, and continues to dominate the online market. Major chains followed in later years with their own online retail sites giving way to the “brick-and-click” model. Online retailing accounts for approximately 27% of all physical book sales.25

Digital
EBooks are books stored in digital format and purchased electronically. Amazon revolutionized the market with the introduction of the Kindle in 2007. In 2009, eReaders reached mass-market levels, with 2.2 million units sold in 2009.26 The popularity of eReaders continues to grow and eBooks account for 6.8% of trade market share in 2010.27

3.2 Retail Bookselling Industry Analysis
Exhibit 4: Porter’s Five Force Analysis

Low Barriers to Entry (X)
(-) Fragmented Industry This industry is highly fragmented, as there are nearly 10,000 bookstore establishments, of which, 43% are small independent stores. College bookstores represented 22% of the establishments in 2007.28

25

2010-11 U.S. Book Consumer Demographics & Buying Behaviors Annual Review. Rep. New Providence: R.R. Bowker, LLC, 2011. Print. 26 Tablets and eReaders in the US. April 2011. Mintel International Group. Available from Santa Clara University Library Database, http://0-academic.mintel.com, accessed 15 Feb 2012. 27 BookStats Publishing Formats Highlights. 2012. The Association of American Publishers. Available online from http://www.publishers.org, accessed 12 February 2012. 28 U.S. Census Bureau 2007.

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(-) Low Capital Requirements Within this industry, capital requirements to open an individual store are low. Independent bookstores occupy less than 5,000 square feet and mall-based bookstores occupy less than 1,500 square feet. One of the largest expenses for bookstores is employee compensation. Independent bookstores average seven employees. While the capital requirements for a physical bookstore are low, the cost of starting an online retail operation can be higher due to the required IT infrastructure and cost of shipping. (+) Brand The brand of a bookstore relies heavily upon the environment and atmosphere of the retailer. The store format, layout, design, aesthetics and appearance all contribute to the store brand. While not critical for opening a new store, the vast majority of companies that have seen long-term success all have a strong brand.

High Buyer Power (X)
(-) Customers have many options readily available to them Due to technological advancements customers have a number of options when it comes to accessing and purchasing books. Customers can access books in stores, online, as well as though eReaders, tablets, and smartphones. (-)Well informed customers Customers have the ability to cross reference prices from various online retailers. A survey conducted in 2010, by Mintel, reported that 50% of respondents purchased at least one book from Amazon, and 20% from eBay in that year.29 This shows that customers are using online retailers to find lower prices. Furthermore, customers strongly value convenience and use it as a main determining factor in making purchases. (+/-) College Textbook Segment The average cost for a college textbook increased 186% between 1986 and 2004. Students on average spend $850 per year on textbooks.30 Due to high prices, students are extremely price sensitive, and search for lower cost alternatives, including textbook rental programs and purchasing used textbooks. However, because textbooks are specific to classes and are selected at the discretion of the professor, students do not have the option to choose from a number of titles.

Moderate Bargaining Power of Suppliers (1/2 X)
There are two types of suppliers within the retail bookselling industry: publishers and wholesalers.31 College textbook publishers are separated into their own category due to the structural and organizational differences. While publisher’s net sales to brick-and-mortar stores have declined 2.75% from 2008-2010, sales to online retailers have increased by 55.2% during the same period.32 Exhibit 5, on the following page, is a chart showing the current distribution of publishers’ sales by segment. Wholesalers offer customers, primarily small independent bookstores and online retailers, a wide array of titles from a variety of different publishers.

29

Book Retailing - US. March 2010. Mintel International Group. Available from Santa Clara University Library Database, http://0academic.mintel.com, accessed 15 Feb 2012. 30 Ibid. 31 BookStats Publishing Categories Highlights. 2012. The Association of American Publishers. Available online from http://www.publishers.org, accessed 12 February 2012. 32 BookStats Distribution Channels Highlights. 2012. The Association of American Publishers. Available online from http://www.publishers.org, accessed 12 February 2012.

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Barnes & Noble, Inc. Exhibit 5: Publisher Distribution Chart
2010 Publisher Distribution Wholesalers & Jobbers 29.0% Brick-and-Mortar Retail 34.5%
33

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Institutional 26.4%

Online Retail 10.1%

Source: Compiled and created by Team 3 using data provided by the Association of American Publishers.

General Publishers (-) Concentration Ratio The book publishing industry is highly concentrated, with the top publishers accounting for 60% of the market. In terms of sales, the top six publishers are: Random House, HarperCollins, Penguin Group, Simon & Schuster, Hachette Book Group, and MacMillian. The concentration ratio is in favor of the publishers, as there is one publisher for roughly every three book retailers.34 (-) Hit Driven Industry The publishing industry is a “hit-driven” industry with one out of five books achieving commercial success, and just one out of ten trade books reaching profitability.35 With demand difficult to predict, this is unfavorable for incumbents. (+) Return unsold inventory Favorable to incumbents is the ability to return unsold books back to publishers. Retailers return on average 30% of all publishers’ shipments each year and received full credit, which is unusual for retail industries. New releases account for 60% of publisher sales but only represent 20% of publisher profit, due to the high return rate and high marketing costs.36 (+/-) Volume Discounts Volume is important to publishers, who offer large discounts to large purchasers. Discounts average 4455% off the list price to retailers. Discounts from publishers to wholesalers were slightly larger. 37 This is favorable to large chains yet unfavorable to small independent booksellers. (+) Promotional Assistance Publishers provide ample marketing and promotional funds for new releases, which is favorable to incumbents. Promotions such as in-store recommendations, end-caps, and marketing events were estimated around 2-3% for retailers.38 College Textbook Publishers (-) High concentration, brand, & switching costs College textbooks are the most profitable segment within the book publishing industry. 39 In addition, the textbook segment has seen the most growth in the last three years. See Exhibit 6 on the following page for publishers’ sales growth by category. The book publishing industry for college textbooks varies
33 34

Institutional include sales to libraries, schools, and professional businesses. Bartlett and Bradley, 2010. 35 Ibid. 36 Ibid. 37 Ghemawat, Pankaj. “Leadership Online (A): Barnes & Noble vs. Amazon.com,” HBS No. 9-798-063 (Boston: Harvard Business School Publishing, 2004). 38 Ibid. 39 Uyterhoeven, Hugo E.R..“Harcourt Brace Jovanovich, Inc.,” HBS No. 392-045 (Boston: Harvard Business School Publishing, Rev. 1993)

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significantly due to the tighter regulation and smaller print runs. The segment is highly concentrated with a few major publishers dominating the industry. They include Houghton Mifflin Harcourt Publishing, McGraw Hill, Pearson Education Inc., Scholastic Corp., and John Wiley & Sons Inc.40 Brand is extremely important as top textbook publishers have great credibility and are well respected in the academic field. Additionally, college textbook publishers have significant bargaining power due to the concentration ratio, lack of substitutes, and high switching costs for retailers. Volume is not as important to college textbook publishers, whose prints runs are smaller and prices are much higher. Exhibit 6: Publishers Sales Growth by Category 2008-2010

Source: Created by Team 3 using information Association of American Publishers

Wholesalers (-) Concentration Ratio The field is dominated by two wholesalers: Ingram Book Company and Baker & Taylor. These distributors account for the majority of wholesaler sales in the U.S., with 50% of total sales attributed to Ingram Book Company alone.41 (+) Shipping and Delivery Wholesalers are able to deliver titles to bookstores quicker than publishers, and often ship the inventory free of charge.42 (-) Lower Sales Discounts Wholesalers are not able to offer as deep of discounts to customers as publishers.

High Rivalry (X)
(-) Declining Growth Brick-and-mortar store growth has been declining at a compound annual growth rate of -1.5% since 2006.43 In 2007 there were 9,955 bookstore establishments in the U.S., down 8% from 2002.44 45
40 41

Bartlett and Bradley, 2010. Industry Profile: Publishing. 2012. Hoovers Online. Available from Santa Clara University Library Database, http://0subscriber.hoovers.com.sculib.scu.edu, accessed 20 February 2012. 42 Hoovers Online: Industry Profile: Bookstores, 2012.

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(-) Concentrated & Balanced The four largest brick-and-mortar firms capture 71% of the market in terms of sales, while the top eight firms controls 77%. In comparison, the 4,000+ independent bookstores collectively control just 12.8%.46 With the bankruptcy and liquidation of many firms, including bookstore giant Borders, the industry continues to become increasingly concentrated. Over the last decade, 1,500 small independent stores have closed their doors.47 (-) Increased online and mass merchant competition Online sales have increasingly captured market share from traditional book-and-mortar booksellers. Sales of books through online and mail order retailers increased 50% to $8.3 billion between 2004 and 2009. 48 The online leader, Amazon, had 13% of the print unit sales market in 2010.49 Additionally, mass merchants such as Target and Wal-Mart have been grabbing market share and increasing competition. These retailers sell a narrow selection of bestsellers at highly discounted prices. Mass merchants use bestsellers as a loss leader in order to lure customers into their stores. (-) Price wars Price wars in this industry began in the mid 1990s when online retailers started to offer the same books as brick-and-mortar stores, but at notably lower prices. An example of this is when Amazon entered into a price war with Wal-Mart in 2009, after Wal-Mart discounted select books by up to 74%.50 Most recently, price wars have erupted in the eReader and digital content market. Amazon started off by offering digital copies of the books at prices much lower than the price of physical books. In response, Barnes & Noble began to offer titles for less than $9, which is nearly half the average price for a bestselling title.51

High Potential for Substitutes (X)
(-) Other Leisure Activities Any form of leisure activity is a potential substitute for visiting a bookstore and reading in general. Many people spend more time watching TV shows and movies, going out to dinner, attending sporting events and spending time outside. (-) EBooks, smart phones, tablets Competing with books are smart phones and tablets. Many consumers use these devices to access books online. These substitutions are relatively new, becoming increasingly significant over the past five years. An estimated 10.3 million tablets (mostly comprising of iPads) sold in 2010 alone.52 (-) Availability of Free & Used Books Books sold by retailers are also available through other outlets, including used booksellers, public libraries and online retailers such as Amazon, eBay, and half.com, who have a wide selection of used books available.

43

Miller, Richard K. and Washington, Kelli. "Chapter 7: Book Stores." Retail Business Market Research Handbook. 87-90. Richard K. Miller & Associates, 2011. Business Source Complete. Web. 9 Mar. 2012. 44 U.S. Census Bureau 2007. 45 2007 is the most recent data available from the U.S. Census Bureau. 46 U.S. Census Bureau 2007. 47 Ibid. 48 Mintel International Group: Book Retailing- US, March 2010. 49 Bartlett, Nancy and Bradley, Stephen P. “Book Publishing in 2010,” HBS No. 9-711-419 (Boston: Harvard Business School Publishing, 2012). 50 Rich, Motoko. "Price Wars Over Books Worry Industry." The New York Times 17 Oct. 2009, New York ed., C1 sec. Print 51 Mintel International Group: Book Retailing- US, 2010. 52 Mintel International Group: Tablets and eReaders US, April 2011.

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(-) College In the college segment, other ways for obtaining textbooks have appeared in response to traditionally high prices. These typically include rental programs, used books and e-textbooks. Another substitute is the illegal copying and distributing of textbook content.

Conclusion: The retail bookselling industry, with an overall ½ star, is an unfavorable industry. Most significant is the high rivalry, caused by low growth and increased competition from online retailers. Additionally, buyers have high bargaining power. They tend to be price sensitive, well informed, and demand convenience. Furthermore, there is a high propensity for substitutions, led by the availability of used books, book rental programs, and the ability to download book content digitally onto eReaders, smartphones and tablets.

3.3 Industry Life Cycle
Exhibit 7: Industry (Technology) Life Cycle

Chart Overview: The retail bookselling industry has seen a lot of change over the years, and is currently in the middle of its second major shift. There are three different delivery system technologies in the retail bookselling industry (as noted in Section 3.1, Delivery Technologies).

Source: Created by Team 3.

Traditional Traditional brick-and-mortar stores are in the declining stage of the industry life cycle. This is due to an overall -1.5% annual growth rate from 2005-2010.53 Additionally, the market is oversaturated in terms of the number of stores in the U.S. The number of bookselling establishments has decreased annually by 3.2% over the past five years.54 Consolidation is high as a large number of small independent companies have been forced out of the industry. Online The second technology, the online delivery system, is in its growth stage, past the inflection point. Ecommerce is one of the fastest growing industries in the U.S. From 2002-2009, e-commerce sales increased at an annual average growth rate of 18.1%, compared to total retail sales, which grew at a mere

53 54

Miller and Washington, 2011. U.S. Census Bureau 2007. NAICS 45121: Book stores and news dealers.

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2.2% over the same time period.55 Books are one of the most popular e-commerce categories, and represent a significant amount of e-commerce sales. Online book retailers have been grabbing market share from the brick-and-mortar channel, and now account for around 27% of all book sales.56 Digital Lastly, the digital delivery system is in the embryonic stage. EBooks in 2008 represented less than 1% of total trade market share and has grown to 6.4% in 2010.57 This new technology is not only impacting the retail bookselling industry, but is also affecting the publishing industry as well.

3.4 Industry Customer Segmentation
Customer Profile The typical customer is a 55-year-old woman with an income over $75K.58 It is estimated that 58% of trade books are read by women and 65% are purchased by women.59 The majority of nonfiction and fiction books are targeted at women, who lead men in reading and purchasing books by a ratio of 3:1.60 More than half (55.7%) of all revenue earned in 2011 was from consumers 55 years or older.61 As people age, they are more likely to read and purchase a book because they have more disposable income, as well as increased leisure time. Consumers with incomes of $75K and above are the most frequent purchasers.62 It is important to note that all consumers, regardless of income, are price sensitive. Younger adults between 18-34 years old purchase more frequently online at 20%, compared to adults who are 35-64 at 15% and seniors at 10%. The introduction of digital technology in this industry has had an impact on certain age groups. The 35-44 and 45-54 age groups both showed a slight decrease in their physical book purchases since the introduction of the eReader. These age groups are more likely than others to purchase eReaders because they are tech-savvy.63 Needs and Wants  Convenience: Convenience comes from geographic location, store layout, and methods of distribution. Customers are not likely to travel far for their purchases.    Broad line: Customers want multiple options. Each customer has their own interests and needs when it comes to buying books, gifts, and other related products. Low prices: Customers are well informed and have many options. See Section 3.2 Buyer Power for further explanation. Service: Customer service makes the biggest impact in areas such as personalized recommendations, knowledgeable staff, and ease of product returns.

55

E-Stats Report. 2009 E-Commerce Report. U.S. Census Bureau. Available online from www.census.gov/estats, accessed 9 February 2012. 56 2010-11 U.S. Book Consumer Demographics & Buying Behaviors Annual Review. Rep. New Providence: R.R. Bowker, LLC, 2011. Print. 57 BookStats Publishing Formats Highlights, 2012. 58 Kaczanowska, Agata. 2012. Book Publishing in the US. IBISWorld USA. Available from Santa Clara University Library Database, http://www.ibisworld.com, accessed 10 February 2012. 59 Ibid. 60 Ibid. 61 Gotaas, Mary. 2011. “Book Stores in the US Industry Report.” IBISWorld USA. Available from Santa Clara University Library Database, http://www.ibisworld.com. 62 Mintel International Group: Book Retailing –US, 2010. 63 Gotaas, 2011.

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Pleasant in-store environment: Customers desire a comfortable, relaxing atmosphere where they can browse titles, enjoy reading books, and savor a cup of coffee.

Purchasing Behavior  Online Preference: In the age of new media, most specifically the Internet, online consumer activity has increased dramatically for all different types of products and services.  Paperbacks vs. Hardbacks: Around 82% of adults who have purchased books in the last 12 months bought a paperback. For frequent book buyers, paperbacks are more popular because they are less expensive than hardbacks.64 Popular Genres and Bestsellers: Across all ages, general fiction and mystery are the most popular genres accounting for 30% and 27% of sales, respectively.65 As people age, interest in humor, sci-fi, and romance decreases while interest in other genres such as religious books increase. Consumers also favor bestsellers; 26% of all adults and 31% of 18-24 year olds.66 Gifting: Products sold in bookstores are ideal and easy to gift, thus luring customers into stores. Gifting is most significant during the seasonal months surrounding Christmas and other various holidays throughout the year. About 42% of customers purchase books as a gift in the past year with 57% of them having an income of $150K and higher.67

Conclusion: Consumers preferences have been shifting to online purchasing. In this industry, convenience, broad line, and low prices are what customers look for. Customers are reading more, but are still price sensitive due to the many options and outlets that are provided to them.

4. Competitor Analysis
The competitor analysis includes analysis and discussion of Barnes & Noble’s main competitors and their strategies. While Amazon remains Barnes & Noble’s toughest competitor, others include Borders, Booksa-Million and Follet Higher Education Group. Key competitors were determined by performing a competitor product line and reach overlap. Barnes & Noble offers a broad product line of books, as well as other consumer goods, such as music and gifts. It also has high reach due to its nationwide operations and multiple business segments (see Exhibit 8 on following page). Thus, it became important to take a closer look at competitor’s business segments which include distribution channels and markets (See Exhibits 9 on following page).

64 65

Mintel International Group: Book Retailing- US, 2010. Mintel International Group: Book Retailing- US, 2010. 66 Ibid. 67 Ibid.

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Barnes & Noble, Inc. Exhibit 8: Competitor Product and Reach Overlap
Table Key: Light green indicates major competitor, stripes indicate minor competitor. Product Line Narrow X X X X X X X X
68

Team 3

Broad B&N Amazon BAM Borders FHEG Wal-Mart Independent Bookstores Apple

High X X

Reach Medium

Low

X X X X X X
Sources: Annual Reports and Corporate Websites

Exhibit 9: Competitor Business Segment Overlap
Table Key: Light green indicates major competitor, stripes indicate minor competitor.

B&N Amazon Borders BAM FHEG Wal-Mart Independent Bookstores Apple

Brick-andmortar X X X X X

Online X X X X X X

College X X

Digital X X X X

X

X
Sources: Annual Reports and Corporate Websites

Looking at the tables above, it is apparent that Amazon, BAM, Borders, and FHEG are Barnes & Noble’s most direct competitors (shown in light green). Amazon is the biggest threat, competing in every business segment besides brick-and-mortar, and has a similar broad product line. BAM and Borders compete with Barnes & Noble most notably in the brick-and-mortar and online channels. FHEG is a wholesaler, supplying textbooks and related services to educational institutes, making it a direct competitor in the college market. Minor competitors are shown in stripes. Wal-Mart sells a narrow selection of books which include bargain books and bestsellers both in-stores and online. However, these products only account for about 2-5% of Barnes & Noble sales, making WalMart an overall minor competitor.69 Independent bookstores offer a limited selection of books and are not overall strong competitors. Apple competes with Barnes & Noble with its iTunes music system, but only in the digital channel, making it a minor competitor. Apple’s iPad is eReader-capable, making it a substitute product to the digital eBook channel.

68 69

Apple’s product line of music and books is only offered digitally, thus making it a minor competitor within the broad line category. B&N Annual Report, 2011.

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4.1 Competitor Strategies
Amazon Since its inception in 1995, Amazon has become more than just the world’s largest bookseller.70 Amazon has dominated online retailing with its customer centric business model and first mover advantage. It has achieved nirvana with a low cost operations strategy through highly efficient operations, IT, and strong relations with suppliers. Amazon competes directly with Barnes & Noble in all consumer segments, product offerings, markets (college), and every distribution channel besides brick-and-mortar. Amazon has low-cost operations with its “sell all, carry few” business model. Just 2,000 out of the million-plus book titles that they offer are stocked a single warehouse in Seattle, Washington.71 The rest of the book titles are from two other arrangements: drop-shipping fulfillment and on-demand fulfillment. Under drop-shipping fulfillment, customer orders go directly to the wholesalers and publishers, who then ship the products to consumers. Amazon’s largest wholesaler supplier is Ingram, which supplies 60% of its books. Under on-demand fulfillment, packages of books are shipped from the publisher or wholesaler to Amazon, where they were broken down and repacked to be then shipped out to the customers. In 2006, Amazon introduced the “Fulfillment by Amazon” where independent sellers could get access to Amazon’s warehouse to fill orders.72 This allowed third-party sellers to get shipping discounts whenever Amazon offered one as well as avoid the hassle of packing and shipping the products to the customers.73 Amazon has invested heavily in IT to provide customer convenience. It created “One-Click” shopping, “Gift Clicks,” instant recommendations, and auctions. Amazon created multiple in-house applications that make sure everything from making the order to receiving the product goes smoothly such as validating and tracking customer orders.74 Amazon also has two personalized services, Editors and Eyes. These services send out personalized email updates to customers informing them when authors, subjects, or recommendations become available.75 Lastly, Amazon created a division, Amazon Enterprise Solutions, which is solely responsible for developing software that makes Amazon’s e-commerce technology available to others retailers such as Target and Borders.76 Amazon has also displayed both horizontal and vertical integration within the retail book selling industry. The company recently became a book publisher with five imprints, including AmazonEncore and Montake.77 The company has also purchased and acquired multiple eReader content and title providers, such as Audible, and e-reader suppliers, such as TouchCo.78 In 2007, Amazon introduced the Kindle, one of the first eReaders widely available to consumers. 79 Amazon is a first mover; both in the online and digital technologies. Beginning as solely an online book retailer, Amazon leveraged its low cost business model, technological innovation, and scope to transform into the largest online retailer, dominating every category. Overall, Amazon’s brand stands for convenience, value and selection.

70

Wharton-University of Pennsylvania, “Online Book Retailing: Operational Strategies” (PDF file). Downloaded online from http://cachon-terwiesch.net, accessed 19 February 2012. 71 Ibid. 72 Ibid. 73 Ibid. 74 Wharton-University of Pennsylvania, “Online Book Retailing: Operational Strategies” (PDF file) 75 Ghemawat, 2004. 76 Amazon Quick Report. 2011. Hoovers Online. Available from Santa Clara University Library Database, http://0subscriber.hoovers.com.sculib.scu.edu/H/home/index.html, accessed 22 January 2012. 77 Hoovers Online: Amazon Quick Report, 2011. 78 Ibid. 79 McIntyre, Douglas A. 2011. The Myth of Barnes & Noble's Success. 24/7 Wall St., 31 August. Available online from http://247wallst.com, accessed 10 February 2012.

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Borders Group, Inc. Founded in 1971, Borders was once the second largest bookstore in the U.S.80 The company filed for Chapter 11 bankruptcy and closed all operations by the end of fiscal year 2011. At its peak, the company had 639 retail bookstores in the U.S. and three in Puerto Rico.81 Borders previously had operations in the United Kingdom and Ireland as well. The company’s strategy was to offer the most extensive selection of books and other related products. Each superstore had an average of 140,000 titles and was heavily stocked with music and movies.82 Borders also had four specialty bookstores under various names, most notably the Waldenbooks chain.83 All five chains ran separately with different systems for ordering books, monitoring inventory, and restocking shelves.84 In 2008, the company introduced a new retail format into its superstores coining the term, “concept store,” which featured kiosks where customers could download books and music digitally.85 Borders purchased large amounts of real estate and continued its expansion of brick-and-mortar stores, despite indicators showing this distribution channel was weakening.86 It is estimated that when Borders filed bankruptcy, running its retail stores cost the company $2 million a week.87 In addition, Borders invested in international markets, diverting the company’s attention and resources towards unprofitable markets. In 2001, Borders introduced a new category management system which categorized books and limited the number of titles per genre sold.88 The system resulted in fewer options being available to customers, and a misallocation of human resources. The company also developed a proprietary system, Common Systems, which failed to increase efficiency.89 Borders originally outsourced its online business to Amazon.90 It did not launch its own website until 2008. Sticking to its outsourcing and laggard IT strategy, Border’s launched an eReader partnership with Kobo in 2010.91 Unable to invest capital into the technology since Borders had been unprofitable for nearly three years, this attempt was marked with failure.92 Acquisitions were also cost-absorbent and not thought out. For instance, in 2004, the company bought Paperchase, a stationery company, which was in a declining industry.93 In terms of human resource management, from 1999 on, Borders was led by six different CEOs.94 Many had little to no experience within the bookselling industry.95

80

Austen, Ben. 2011. The End of Borders and the Future of Books. Business Week, 10 November. Available online from http://www.businessweek.com, accessed 23 January 2012. 81 US Book Stores Industry - Major Companies. November 2011. IBISWorld USA. Available from Santa Clara University Library Database, http://0-clients.ibisworld.com.sculib.scu.edu/launch.aspx?show=1, accessed 22 January 2012. 82 Austen, 2011. 83 IBISWorld USA: US Book Stores Industry - Major Companies, 2012. 84 Austen, 2011. 85 Ibid. 86 Evans, Mark. 2011. Borders Books: Why is Barnes & Noble performing well as a business while Borders has filed for bankruptcy? Quora, 17 February. Available online from http://www.quora.com, accessed 23 January 2012. 87 2011. The 8 Reasons Borders went Bye-Bye. Business Insurance Quotes. Available online from http://www.businessinsurance.org, accessed 23 January 2012. 88 The 8 Reasons Borders went Bye-Bye, 2011. 89 Evans, 2011. 90 Ibid. 91 The 8 Reasons Borders went Bye-Bye, 2011. 92 Ibid. 93 Austen, 2011. 94 Ibid. 95 The 8 Reasons Borders went Bye-Bye, 2011.

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Books-A-Million (BAM) Founded in 1917, Books-A-Million (BAM) currently operates 221 retail bookstores.96 BAM’s strategy focuses on high growth markets, primarily located in the southeastern part of the U.S. The firm’s niche marketing, paired with its low-cost operations, makes it a cost focused firm. BAM is the third largest bookstore chain in the U.S. BAM offers two formats of retail stores: superstores and traditional stores. 75% of all BAM stores are superstores, and average 15,000 square feet.97 Each superstore offers an extensive selection of books, bargain books, and magazines with a small selection of music and movies only sold seasonally.98 These stores also cater specifically to its large Christian market by offering a special religious section. Additionally, many stores have Joe Mugg’s Cafés. Traditional bookstores average 3,500 to 4,500 square feet and have a full selection of books, but limited additional departments.99 Customers receive discounts of 10% when they join the BAM loyalty program. At $15 a year, this is the cheapest program among major bookstore chains.100 BAM achieves low cost operations by leveraging its two wholly-owned subsidiaries, American Wholesale Book Company (AWBC) and Book$mart, Inc., which are both located in Florence, Alabama.101 AWBC is a wholesaler and distributes across the Southeast. It also offers Internet fulfillment services for book products sold by various e-commerce companies. Book$mart is a full service bargain book distributor serving clients nationwide. Both of these businesses provide BAM with additional cost savings, convenient distribution, and effective economies of scale. In 1998, BAM launched its own e-commerce website, booksamillion.com.102 The company has its own division known as American Internet Services that provides e-commerce solutions to a variety of business clients. In 1999, BAM acquired NetCentral, an Internet development and services company to help internal technological operations and logistics.103 In 2011, the company entered into the digital channel by partnering with Barnes & Noble to sell the NOOK range of eReaders in their stores.104

Follett Higher Education Group (FHEG) Follett Higher Education Group (FHEG) is the leading operator of college and university bookstores in the U.S., thus making it the largest, most direct competitor to B&N College. The president, Tom Christopher, went to Follett after several years at Barnes & Noble.105 FHEG is a subsidiary of educational material wholesaler Follett Corporation. FHEG supplies textbooks and course materials to more than 800 stores in the U.S. and Canada. Additionally, FHEG provides over 1,600 stores with books and related services such as POS/management systems, buybacks, and consulting.106 FHEG also owns and operates several e-commerce websites (efollett.com, Follettbooks.com, and Cafescribe).

96 97

Corporate Profile. 2011. Books-A-Million. Available online from http://www.booksamillioninc.com, accessed 10 February 2012. Ibid. 98 Hall W., & Gupta, A. 2007. Barnes & Noble, Inc.: Maintaining A Competitive Edge In An Ever-changing Industry. Business Week Magazine, 17 December. Available online from http://www.allbusiness.com, accessed 22 January 2012. 99 BAM Corporate Profile, 2011. 100 Hall and Gupta, 2010. 101 BAM Corporate Profile, 2011. 102 Ibid. 103 Ibid. 104 Barnes & Noble Announces its NOOK™ Products to Be the Exclusive eReading Devices Sold at Books-A-Million. 2010. Barnes & Noble, Inc, 26 October. Available online from http://barnesandnobleinc.com/press_releases/, accessed 4 March 2012. 105 Randall, David. 2010. The Future of College Bookstores. Forbes, 19 August. Available online from http://www.forbes.com, accessed 26 February 2012. 106 IBISWorld USA, 2012.

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FHEG has low-cost operations. FHEG does not own any retail stores, choosing to supply and operate them. FHEG utilizes a “click-and-mortar” strategy to best reach and serve its target market of K-12 institutions, universities, students, and faculty. The strategy places an emphasis on being accessible and using technology to meet consumer demands. The company is future-oriented and displays a willingness to adapt its business model to new, evolving technologies and distribution channels within the textbook industry. In 2010, the company updated and re-designed its e-commerce website. A proprietary system, CafeScribe, was introduced as a digital textbook platform. It saves customers 40-60% and comes with value-added features such as note taking, sharing, and collaboration.107 CafeScribe is fully integrated with Follett Corporation’s IT and financial systems.108 Also in 2010, the company announced its new Rent-A-Text program as a cost-saving alternative to purchasing textbooks.109 The program has expanded into its Canadian stores with the implementation of CourseTracks. FHEG also offers an Affiliate Rental program to 300 independent college stores, which includes a Virtual Bookstore, branded and customized with e-commerce solutions.110 It was the nation’s first textbook wholesaler to offer an e-commerce textbook rental solution. The company has transitioned its core business from a used textbook buyback model to a textbook rental model. This firm’s strategy includes heavy investments into efficient inventory management and strong IT infrastructure. FHEG has recently invested in a new, state-of-the-art facility to meet demands of their current and growing customer base.111 The new facility is nearly 1.5 times larger with a processing capacity of 16 million units annually and ability to fulfill over 40,000 orders daily. 112 It also features the Kiva robotics system to improve inventory management, increase efficiency, and reduce manpower.

4.2 Key Factors of Success
      Low Cost Operations Accessibility and convenience for customers Efficient Inventory Management Broad Product Assortment Strong IT Infrastructure Strong Online Presence       Appealing In-Store Environment High Quality Customer Service Brand recognition Strong Supplier Relations Human Resources Management Adaptability

5. Barnes & Noble Strategy
This analysis of Barnes & Noble’s strategy includes an overview of the firm’s main goals, business lines and products, customer segmentation, competitive premise, and concluded with its value chain.

5.1 Organizational Goals
  
107 108 109

Leverage Barnes & Noble brand across all business segments Grow share of the consumer book market Consolidate the fragmented college bookstore market

FHEG Annual Report, 2011. Ibid. Randall, 2010. 110 FHEG Annual Report, 2011. 111 Ibid. 112 Ibid.

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Barnes & Noble, Inc.    Grow share of the eBook market Continue to grow and develop BN.com Maintain strong partnerships and alliances

Team 3

5.2 Business Strategy Overview
Barnes & Noble’s business strategy centers on broad product offerings, low-cost operations, customer service, strong alliances and partnerships, adaptability, and multi-channel distribution. The traditional business strategy has been to offer a wide selection of books through conveniently located retail across the U.S. 113 See Section 5.4 for Barnes & Noble Market Breakdown. Barnes & Noble utilizes a low cost operations strategy with a focus on inventory management and IT infrastructure. At the center of this is the proprietary inventory management database system, BookMaster, which works across both the online and retail segments.114 115 Barnes & Noble has slowly begun to close down underperforming superstores. Since 2009, management has closed down 40 superstores while opening just 15 in the same period.116 The company does not have any plans to continue building new stores in the near future.117 Rather, retail stores are being optimized to leverage brand and promote product offerings of both the online and digital channels, such as incorporating NOOK boutiques in stores. Additionally, Barnes & Noble shut down its distribution center in Memphis, Tennessee in 2007, consolidating operations into two locations in New Jersey and Nevada.118 Barnes & Noble provides superior customer service through knowledgeable staff, unique in-store experience, membership program, and new product offerings. The company has added to its childrens toy & hobbies sections, decreased its music and movies (DVD and blu-Ray) section, and increased its overall NOOK offerings.119 120 Barnes & Noble has also expanded offerings in B&N College to include dorm related materials, school apparel, and other school-related items. Strong strategic partnerships, alliances, and acquisitions shape Barnes & Noble’s long-term strategy. This includes the aforementioned B&N College acquisition, as well as alliances created with various universities through the college division. Strong relationships with publishers include: Alibris, Flat World Knowledge, MBS, Pearson Education, and Cengage Learning. Barnes & Noble has spent significant time and capital developing its digital channel to include multiple NOOK devices and accessories, as well as updating its online channel to include an eBookstore and digital newsstand.121 Furthermore, Barnes & Noble has changed from a brick-and-mortar retailer to a multi-channel distributor. Barnes & Noble now occupies every distribution channel within the retail bookselling industry: brick-and-mortar, online, and digital.

113

Minzesheimer, Bob. 2011. Is there hope for small bookstores in a digital age? USA TODAY, 10 February. Available online from http://www.usatoday.com, accessed 9 March 2012. 114 Business Procedures for Supplying Books to Barnes & Noble. 2009. Barnes & Noble Booksellers Inc. 1-12. 115 Barnes & Noble has been able to increase its inventory turns from 2.15 to 2.80 from 2002-2009 (Milliot, 2009). 116 IBIS WorldUSA: Industry Life Cycle, 2011. 117 B&N Annual Report, 2011. 118 Paz-Frankel, Einat. 2007. Barnes & Noble shutting down distribution center. Memphis Business Journal, 4 March. Available online from http://www.bizjournals.com, accessed 10 March 2012. 119 Barnes & Noble testing interactive play spaces. 2010. Chain Store Age, 11 November. Available online from http://www.chainstoreage.com, accessed 10 March 2012. 120 Milliot, Jim. 2009. Barnes & Noble Touts Three-Prong Approach. Publisher’s Weekly, 02 November. Available online from http://www.publishersweekly.com, accessed 10 March 2012. 121 B&N Annual Report, 2011.

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5.3 Products & Services
Product Offerings Overview
       Trade books (including out-of-print titles) Textbooks (new, used, and rental) Newspapers and magazines Digital newspapers and magazines eBooks NOOK offerings and NOOK Study™ Computer products and software       Starbucks Café Educational toys & games Emblematic apparel and gifts Music and movies School and dormitory supplies Membership program

Retail Stores Each store features an extensive book selection of 20,000 to 200,000 titles, many of which are tailored to reflect local interest. All stores are divided into departments including various trade book categories, childrens, educational toys and games, DVDs/BluRay, gifts, music, and magazines. 122 Many stores feature a NOOK Boutique and a Starbucks Café. NOOK customers receive free Wi-Fi in Barnes & Noble stores and have access to free programs, additional content, and promotions. Individual stores create their own community-based calendar, including events like childrens storytelling hours, author appearances, poetry readings and book discussion groups. In addition to this calendar, Barnes & Noble hosts community service events, focusing on literacy, arts, and K-12 education.123 BN.com The website offers the largest in-stock selection of in-print book titles, with one million titles available for immediate delivery and more than 30 million available from its nationwide network of associated book dealers.124 Aside from books, online categories include DVDs, toys & games, electronics, stationary, gifts, and multiple NOOK eReaders. College B&N College sells textbooks, course-related materials, school supplies, apparel, gifts, and café items on college and universities campuses.125 B&N College stores have a textbook rental program and have expanded electronic textbook offerings with its proprietary digital platform, NOOKStudy.126 Digital (eReaders and eBooks) NOOK Simple TouchTM, NOOK ColorTM, NOOK TabletTM 8GB and 16GB. Prices ranging from $99 to $249.127 All devices and related accessories are sold across all B&N channels, as well as large retail chains BAM, Best Buy, and Target. NOOKs are only sold and shipped within the U.S. market.128

122 123

B&N Annual Report, 2011. Hall, 2010. 124 Our Main Businesses. 2012. Barnes & Noble, Inc. Available online from http://barnesandnobleinc.com, accessed 22 January 2012. 125 Ibid. 126 Ibid. 127 NOOK. 2012. Barnes & Noble. Available online from http://barnesandnoble.com, accessed 4 March 2012. 128 Nawotka, Edward. 2011. No Surprise: US Is 75% of Global E-Reader Market, Apple & Amazon Dominate, Says IDC Study." Publishing Perspective, 18 January. Available online from http://publishingperspectives.com, accessed 4 March 2012.

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5.4 Market Breakdown
Exhibit 10: Geographic Breakdown and Store Location Comparison

Source: Created by Team 3 using figures from B&N Annual Report 2011.

Barnes & Noble has an almost exclusively American customer base outside of limited international online sales at BN.com.129 Exhibit 10 above shows the number of Barnes & Noble retail locations and B&N College Bookstores throughout the U.S. Texas and New York both have the highest number of Barnes & Noble retail locations as well as B&N College Bookstores. Overall, both segments have the highest number of stores in coastal states, and the number of B&N College bookstores is generally proportional to the number of Barnes & Noble retail locations in each state.

5.5 Customers Segmentation
Barnes & Noble has three main customer segments based on delivery technology: Retail stores, online, and NOOK, which are broken down and described below. Retail Stores The customer base for Barnes & Noble retail stores consists of mainly upper-middle class, college graduates.130 This general customer base can be further split into three categories: book lovers, casual shoppers, and families.131  Book lovers: list reading as one of their top hobbies; they enjoy spending time at bookstores, coming frequently and spending hours browsing. They plan to go to Barnes & Noble as a destination for entertainment and activity, rather than simply purchasing a book. They utilize the value-add products and services, such as the membership program and community events. Casual Shoppers: enjoy reading but tend to shop only when stores are conveniently located. They make sporadic shopping trips and purchases.

129 130

International sales figures from this are not given but implied to be immaterial. Popper, Margaret. 1999. Why Barnes & Noble’s Strategy Is Too Sensible for Net Investors. Business Week, 17 November. Available online from, http://www.businessweek.com, accessed 9 March 2012. 131 Based on blogs about Barnes & Noble retail stores, three categories of retail store customers are assumed: book lovers, casual shoppers, and families.

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Barnes & Noble, Inc. 

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Families: Families with children, enjoy going to Barnes & Noble because it has sections for each member of the family. Children enjoy the experience at Barnes & Noble because the stores become a makeshift playroom and activity center.

Online The gender breakdown for online consumers is 56% female and 44% male. The average time spent on the website is about 9.8 minutes.132 BN.com customers enjoy personalized recommendations, book reviews, promotions, author biographies, and advanced search engine capabilities. Online customers also enjoy the inter-activity that the website provides, such as social networking opportunities and the ability to easily send gifts. NOOK About 75% of NOOK owners are women.133 They prefer the ease of use, plain layout, built-in reading tools, and value-added features offered by the NOOK. These customers also value portability, weight, and size. The NOOK also specializes in magazine subscriptions, which attracts women readers.134 Consumers purchase the NOOK over other eReaders because of the immediate in-store support offered. Additionally, customers also value the extra hardware features in the NOOK such as more memory, better battery life, and excellent display.135

5.6 Competitive Premise
          Wide product assortment Convenient locations (national scale) Appealing in-store display Quality customer service Inviting in-store atmosphere Human Resources Management Efficient multi-channel distribution Multi-channel marketing Leveraged brand recognition Online presence         Seamless website navigation Online direct-to-home service Strong IT infrastructure Adaptability to changing markets Strong relationships with suppliers and publishers Strategic partnerships and acquisitions Low cost operations Technological innovation

5.7 Value Chain
Exhibit 11: Value Chain

132 133

“Our Customers,” 2012. Ludwig, Sean. 2011. Nearly 75 percent of Nook Color owners are women. Venture Beat, 11 October. Available online from http://venturebeat.com, accessed 25 February 2012. 134 Peters, 2011. 135 Greenfield, Jeremy. 2012. Seven Advantages Barnes & Noble Has in the Bookseller Wars. Digital Book World, 3 Jan. Available online from http://digitalbookworld.com, accessed 25 February 2012.

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Infrastructure The core of Barnes & Noble’s infrastructure is BookMaster, a proprietary inventory management system that allows all employees to have real time information on inventory. BookMaster is used in all three Barnes & Noble segments: brick-and-mortar, college, and online. It streamlines operations as well as aids inbound and outbound logistics. Human Resources Management As of April 2011, Barnes & Noble has approximately 35,000 employees. All employees are covered under the Barnes & Noble retirement plan.136 In terms of training, Barnes & Noble focuses on customer service and inventory knowledge to maximize the in-store experience for customers.137 Knowledge Development In 2010, Barnes & Noble invested around $140 million to upgrade its digital capabilities and concentrate on growth and software development (NOOK).138 139 Extraordinary Procurement In 2009, Barnes & Noble acquired B&N College Booksellers. In the same year, Barnes & Noble also bought Fictionwise, a leader in the eBook market. As a result, Barnes & Noble was able to launch the world's largest eBookstore in July 2009. Lastly, Barnes & Noble enhanced its online experience by acquiring Tikatok, an online platform where parents and children can write and publish their own stories to hardcover and paperback books.140 Operations Barnes & Noble has different operational approaches in its different business lines. All channels rely on on BookMaster, a merchandising-replenishing system that keeps high stock positions and productivity at store level through efficiencies in receiving, cashing, and returns processing.141 Barnes & Noble retail strores has a variety of services and products besides books: Starbucks Cafés, toys & games, gifts, music, childrens section, and events (author appearances & children activities).142 B&N College is divided into two segments: 603 traditional bookstores and 33 academic superstores. B&N College superstores provide additional features such as cafés, course textbooks, supplies, apparel and gifts. College bookstores operate under multi-year management service agreements where the school contracts with B&N College to operate its school bookstore. In return, B&N College provides the school with regular payments that represent a percentage of store sales and sometimes a minimum fixed guarantee.143 BN.com features an eBookstore and digital newsstand. The eBookstore is accessible from a wide range of digital platforms such as eReaders, tablets, and smartphones. The site itself contains innovative features that ensure a seamless experience for customers. 144

136 137

B&N Annual Report, 2011. Hall, R. (2007). For the Love of the Game: Out-Loving the Competition. APA Marketing APA 39(3), 16-17. 138 Milliot, J. (2010). Barnes & Noble Sees Bright Future. Publishers Weekly 257(26), 3-4. 139 Fontevecchia, A. (2011). Barnes & Noble's NOOK Bet Paying Off: Digital Sales Quadruple. Forbes.Com, 3. 140 B&N Annual Report, 2010. 141 Online Book Retailing: Operational Strategies. Wharton-University of Pennsylvania. 1-11. 142 B&N Annual Report, 2011. 143 B&N Annual Report, 2011. 144 B&N Annual Report, 2011.

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Inbound/Outbound Logistics BookMaster not only contributes to efficient in store operations, but is also significant in terms of logistics, by providing real-time inventory availability in stores, warehouses, and distribution centers. Using this system, Barnes & Noble can effectively control its inbound and outbound logistics to ensure a full selection of inventory to satisfy customers. Barnes & Noble also uses the Barnes & Noble Vendor Portal, a web-based electronic application to purchase orders and invoices. This application is part of Barnes & Noble's Electronic Data Interchange (EDI), an electronic interaction that is preferred by the company. In general, Barnes & Noble promotes electronic trading partnerships with suppliers because this results in fewer errors in placing and fulfilling orders, faster reordering to replenish sales, and lower costs for all trading partners.145 Vendors not yet capable of EDI receive orders from Barnes & Noble by email attachments. Regardless of the method used by vendors, Barnes & Noble is strict in terms of the Expected Arrival Date, since inventory availability is critically important. Books that do not arrive on time risk being refused, and vendors are subject to an additional handling charge.146 Marketing & Sales Barnes & Noble uses a multi-channel marketing strategy through its retail stores and online channels. Advertisements are placed throughout stores, introducing new product arrivals and NOOK offerings.147 BN.com serves as the center of its marketing strategy by emphasizing direct-to-home delivery. Additionally, it also serves as a broadcast channel and medium for brand promotion. Moreover, Barnes & Noble aims to attract customers through its membership program, which gives greater discounts, exclusive offers and promotions for a $25 annual fee148. Service Barnes & Noble ensures complete customer satisfaction by offering full in-store or online refunds within fourteen days of shipment receipt. Its website has detailed information on return procedures, as well as additional customer service through live chat, email, or phone. Customers are also given the option to bring the merchandise that is bought online to a nearby Barnes & Noble store for return or exchange149. Conclusion: Barnes & Noble creates value for its customers through its universal infrastructure, extraordinary procurements including acquisitions and strategic alliances, efficient logistics, and differentiated and standardized operations in all channels.

6. Gap Analysis
Amazon, with its online, low cost customer-centric model, has proven to be the winner in the retail bookselling industry. A gap analysis will follow, showcasing three major success factors in which Amazon outperforms Barnes & Noble.

145 146

(2009). Business Procedures for Supplying Books to Barnes & Noble. Barnes & Noble Booksellers Inc. 1-12. (2009). Business Procedures for Supplying Books to Barnes & Noble. Barnes & Noble Booksellers Inc. 1-12. 147 Graham, E. B. (n.d.). Will Barnes & Noble's New Retail Strategy Help Save the Day? | Fast Company. FastCompany.com - Where ideas and people meet | Fast Company. Retrieved March 12, 2012, from http://www.fastcompany.com/ 148 B&N Annual Report, 2011. 149 Return and Refunds Policies. 2012. Barnes & Noble, Inc. Available online from http://barnesandnoble.com, accessed 12 February 2012.

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Barnes & Noble, Inc.

Team 3

Strong Online Presence While a multi-channel retailer, Barnes & Noble lacks the strong online presence enjoyed by online “pureplay” retailers, most notably Amazon. Barnes & Noble has yet to achieve its goal of leveraging its brand of being the largest book retailer into its online segment. With consumer preferences shifting towards online purchasing, Barnes & Noble continues to lose sales and customers to competitors in the competitive and growing online arena. Customer Convenience Amazon provides convenience to its customers through “One-Click” and one-stop shopping. Not only does Amazon offer a wide selection in books, but in every category imaginable. Additionally, personalized recommendations, expedited and free shipping, and a simple return process all contribute to Amazons customer centric model. Barnes & Noble has focused on convenience within its retail stores; however, many consumers do not find traveling to physical store locations convenient. In response, Barnes & Noble has added additional product offerings in-store and online, as well as entering into the digital market. Amazon’s brand stands for convenience, selection, and service, while Barnes & Noble is predominantly known for only being a bookstore. In this sense, Barnes & Noble has lost ground to Amazon in this key area. Low Cost Operations While attempting to achieve low cost operations with a standardized IT infrastructure and logistics, Barnes & Noble has significant expenses in other areas, most notably its superstores, which are expensive to maintain. Leases account for a significant portion of operational costs, in addition to other standard operational expenses such as inventory management, staff training, utilities, and in-store merchandising. With store sales declining, Barnes & Noble’s superstores are proving to be unsustainable. Amazon’s online only model, as well as its “sell all, carry few” strategy proves to be more efficient, and enables it to offer low prices for customers.

6.1 Challenges
Barnes & Noble faces many challenges, most of which stem from competing in a declining industry. As consumers increasingly value convenience and search for low prices, the brick-and-mortar format is losing ground to newer technologies. While Barnes & Noble has developed an online presence and incorporated convenience and low cost operations into its operating model, it has yet to maximize these aspects. This is a significant challenge for Barnes & Noble as its competitors have been able to succeed in these areas. Barnes & Noble is not a first mover, nor highly recognizable in the new technologies of the industry. Because of this, Barnes & Noble finds itself in a position where it has to catch up to the technological leaders, most notably Amazon. Barnes & Noble also struggles to maintain its stronghold in the traditional brick-and-mortar market while trying to stay current and competitive in its multi-channel strategy. Although late to the game, Barnes & Noble’s recent investments in the NOOK eReader have won critical praise, capturing 27% share of the digital book market. While showing signs of growth, the large investments have seriously impacted the company’s bottom line, prompting management to consider strategic alternatives. Barnes & Noble is currently considering the possible sale of the NOOK business or partnering with publishers, retailers, or technology providers in order to effectively compete. This challenge will either place Barnes & Noble up against its biggest rival, Amazon, or take them out completely.

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