What's Barnes & Noble's survival plan?

Former CEO cuts his holding to 20% but says, 'the story in't written yet.'

By MSN Money producer Apr 18, 2014 2:11PM

A man reads a book at a Barnes & Noble store in New York. © Stephen Yang/Bloomberg via Getty Images
By Jeffrey A. Trachtenberg, The Wall Street Journal The Wall Street Journal


In mid-January, Daniel Fidler worked his final day at what was Barnes & Noble's (BKS) store in Chestnut Hill, Mass., putting in a few extra weeks stripping out books and bookcases after the store closed at the end of the year. "I was depressed but I kept a smile on my face because I didn't want to think about what would happen," said the 24-year-old, who is still looking for a new job. "We had a party at a restaurant, and everybody who left came back, but it was bittersweet."

 

Barnes & Noble is making its last stand in towns just like Chestnut Hill. Its 663 stores still stretch across all 50 states, but there are 63 fewer than five years ago. Stores in Georgetown and the heart of Greenwich Village have closed. Gone, too, is the rambling college store in Manhattan's Flatiron district that was the sole Barnes & Noble retail property when Leonard Riggio bought that business in 1971.

 

A franchise built on cappuccino, children's story time, and tables stacked with the latest from Stephen King, Neil Gaiman and Doris Kearns Goodwin is retrenching. A shrinking market for print books, competition from Amazon.com (AMZN) and the costs of investing in its own e-reader and tablets had led to three straight years of losses.

 

On Thursday, Barnes & Noble Chairman Leonard Riggio disclosed that he had sold nearly a quarter of his stake, his second stock sale in five months, reducing his interest to 20% from 30 percent last year. Less than two weeks ago, John Malone's Liberty Media (LMCA) sold most of its big investment in Barnes & Noble.

 

Speaking of the consumer stores business that accounts for most of Barnes & Noble's revenue, Riggio said in a recent interview, "This is not a growth company." He is already looking ahead to what he describes as a "really, really critical" Christmas shopping season "in terms of casting a die for the future."

 

Barnes & Noble shares dropped 12 percent on Thursday on news of Riggio's sale, which he said he made for estate-planning purposes. Maxim Group analyst John Tinker, who has been bullish on Barnes & Noble in recent months, described the sale as "obviously negative."

 

The 73-year-old Riggio remains bullish on the company. In the extended interview a few weeks ago, he said, "In my mind, the story isn't yet written as to where this is all going. There's promise to it." He reiterated that sentiment on Thursday.

 

But the tide of history may be flowing against the retailer. In recent years the rise of e-commerce has killed some well-known brick-and-mortar stores, including Circuit City and Borders Group Inc.

 

Forrester Research analyst James McQuivey said he is hard-pressed to name any traditional companies selling physical media that have shown revenue growth since consumers warmed to digital books, movies, and music.

 

"If Barnes & Noble is in its current form by the end of 2015, I'll be very surprised," he said.

 

Some publishers say they are concerned about Barnes & Noble's future and are looking for additional revenue sources. Several are already contributing titles to emerging subscription companies such as Oyster, and Scribd Inc., which charge a monthly fee for an all-you-can-read Netflix-like experience.

 

Barnes & Noble has widened its offerings to include educational toys, games and other nonbook categories, which carry higher profit margins. Revenue for that category jumped 12 percent in the recent Christmas quarter. At the same time, the retailer has cut back on its book inventory: Its stores, depending on size, carried about 21,000 to 170,000 titles in 2013, down from 60,000 to 200,000 titles in 2004, according to SEC filings.

 

"There's just not enough books (in the stores)," said one book industry executive who asked not to be identified. "They've got to get back to basics."

 

Riggio, though, said that Barnes & Noble needed to reinvent itself. "I yearn for the days when we could just sell books because that's where I started," he said. Ultimately, he said, reality set in, and Barnes & Noble had to widen its offerings.

 

This time last year, Riggio was contemplating buying Barnes & Noble's consumer stores from the public company, leaving behind the college stores and its Nook digital business. After months of thought, he abandoned the idea, partly because there was a gap between the publicly perceived value of the book stores and the reality of the company's market value. He was also sensitive to suggestions he was looking to buy the stores cheaply.

 

Still, he said that operating the stores privately would have been best environment for a company "that's never going to have a soaring market cap."

 

Barnes & Noble's struggles are an unwelcome coda to Riggio's 50-year career as a bookseller. His understanding of where and how consumers want to buy books prompted him to purchase a chain of mall stores in the 1980s, only to reverse course and bet Barnes & Noble's future on costly superstores, trouncing independent bookstores in the process.

 

"He had a genius for selling books," said Jane Friedman, chief executive of digital publisher Open Road Integrated Media Inc., who first met Riggio in the mid-1960s when he owned the Student Book Exchange bookshop in Manhattan. "That's what distinguished him. His life was books. He believed in the word."

 

He gave up the CEO post in 2002. Although he has remained closely involved, he leaves running of the company to Michael Huseby, the former cable-TV executive recently appointed as CEO.

 

"I'm the chairman, I'm a board member, but it's not like I'm pulling strings here," said Riggio, looking thinner after recent bouts of knee surgery. "It's more like I'm coaching. … I don't have the time for it and the CEO's job here is an all-in job."

 

He also acknowledged that strategizing is tougher nowadays. There was a time, he recalls, when "I could say that I could see around corners with ease. Then you reach a point as you get older and as things get more complex, you don't see as clearly around the corners. You've got to have people who do that for you. "

 

Over the past decade or so, a series of missteps -- e.g. failing to invest aggressively in online bookselling when Amazon was first expanding -- left Barnes & Noble vulnerable to a new rival offering more convenience, a bigger selection and cheaper prices.

 

Barnes & Noble was also caught dozing by digital books and devices. It wasn't until 2009, two years after Amazon introduced its Kindle e-reader and digital bookstore, that Barnes & Noble launched its own e-book store, followed by a Nook e-reader. Heavy losses on the Nook has forced the company to retreat. Although it expects to introduce a new tablet later this year, it will likely be in partnership with an outside manufacturer, reducing costs and risk.

 

Huseby's strategy has been to fine-tune the still-profitable consumer bookstores and light a digital spark at its college bookstores. Revenue at the Nook business and both its consumer and college store businesses fell during the all-important holiday quarter for the second consecutive year.

 

There are some bright spots on the horizon. The growth of digital reading leveled off in 2013, and Barnes & Noble's consumer stores generated better-than-expected Christmas results. Excluding Nook digital products, sales at stores open at least one year, a key economic indicator, declined only 0.5 percent in the quarter ended Jan. 25, a sign of stabilization.

 

The company also has a strong balance sheet. It ended the latest fiscal quarter with $490 million in cash, up from $214 million a year earlier. It must repay a $127.5 million note owed to Riggio later this year, but the company doesn't have any borrowings under its credit facility.

 

These days, Riggio said, he tends to focus on the parts of the company that "may seem small to other people." What he still enjoys, he said, is getting "involved in copy, in little details of graphic language. I'm not a meddler. People will come and say, 'Len, what do you think of this or that?' I'm a creative soul. I like doing that. I like creating."

 

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57Comments
Apr 18, 2014 3:14PM
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It'll be a very sad day for us all if we lose Barnes and Nobles.  I read a lot and much prefer the paperback version of a book than reading on my Kindle.  I must admit I don'y buy as many books as I use to...but I still go into my local Barnes and Nobles to have a coffee and browse.  I also buy gift cards for other people and encourage them to shop there too.  We should have a national reading day or get schools to do field trips to book stores!!!  ;o)
Apr 18, 2014 4:30PM
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I went to B+N just last night to buy my daughter the Divergent gift pack. On the B+N web site it was $31 and change. In store it was $55. I tried to get them to price match there own site, they wouldnt do it! So I went to Target, they price matched Amazon, they had it for $31 even. Utterly, utterly ridiculous a big company like Barnes & Noble wont price match there own web site. 
Apr 18, 2014 4:34PM
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I worked for Barnes and Noble for 16 years in their BDalton division. Every store I ran( I was store manger for three stores) we were profitable and healthy. More personalized service than the super stores. Their mistake was to invest solely in the big impersonal stores. I still go to B&N to buy my books but nobody ever approaches me anymore. Nobody ever asks me what I,m looking for or interested in. So sad.
Apr 18, 2014 4:13PM
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paper media is not completely dead--there are a few of us who like to pick up a book, magazine or newspaper and physically hold it. There is a certain  kinesthetic learning process that goes on that helps one to 'digest' information. It is 'almost' like a scientist holding a using his/her hands while conducting an experiment.
Apr 18, 2014 4:40PM
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I had the opportunity to observe firsthand why Barnes and Nobles is imploding and it's not the market change but management. They seem to think that paying minimum wage to part time employees without a clue or love of books is the way to attract people to buy there. Survival in this market comes from providing something an Amazon, Walmart or digital format can't provide; actual people who read and understand literature. Walk in and ask any of the employees about a Hemingway or Steinbeck and they will ask you “is this a new release”! No idea of anything about literature.

We are seeing the return of Vinyl records and I believe that we will see a resurgence of people reading books. Nothing compares to the feel of a book as you read it.

Barnes and Nobles, get a clue. Hire Full Time personnel who know about books and offer service not seasonal trinkets and the buyers will return. As long as you try and compete with the online big box stores and digital on their own ground, you will lose!


Apr 18, 2014 5:05PM
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Maybe I'm a minority, a dying breed. I like Barnes and Noble as well as used book stores. I like the way the books smell. I like the area in the store where the employees post what they are reading and why they think it's worthwhile. I buy both electronic and good old bound books. Even when I buy electronic I like going in the store and looking at the book. I will be sad if it goes the way of the dinosaur.
Apr 18, 2014 3:01PM
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Unfortunately the Internet & electronic devices will probably wipe out most book stores in the very near future.  Part of the blame goes on the book publishing or magazines themselves as  I  can't tell you how many times a magazine article has stated "For more on this article or additional pictures go WWW.........Com".  Once people have to start going to the Internet what is the point in buying the book or magazine at a Book Store?
Apr 18, 2014 5:24PM
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Don't know what ya got till it's gone.
Apr 18, 2014 5:06PM
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I am a huge fan of Barnes & Noble and while nothing will ever beat holding a book in your hand...I welcomed and got right on board with their Nook which I love despite the higher prices for books than Amazon. I even upgraded to the latest Nook that came out a couple of years ago. I go often to read in the store with my Nook or a hard copy often ending up buying one or the other or both sometimes. I enjoy a coffee while there.

Here's my issues with B&N:

Pricing books online cheaper than the store is just silly and damaging to their business, frustrate people and they will just move on. (I have gotten one book at the same price as the store that was deeply discounted with free shipping...surprised me pleasantly)

The café is not as useful or enjoyable as it used to be...people talking on their cellphones, loud conversations that disrupt reading or studying...maybe separate areas of the store for chatters. Also if you leave you're taking your chances on getting your table back when you return

The book stock is visibly and greatly reduced in selections and availability when you're shopping for one you want.

Very understaffed...almost always one checkout open and a line

Never anyone at the Nook counter anymore...if you have a question you're on your own

Dirty bathrooms that smell...very yucky...especially if you're planning on being there a while to read or study and you have a coffee or water


Having said that there are so many more things that are right with B&N than wrong in the end and I hope they fix what's not working and keep the core of the B&N experience. I have grandchildren who love to go to B&N and shop for books and all kinds of things. Tap into your customers opinions about what they want in a book store experience, smartest thing B&N could do, go to the people who have supported you over the years! I've had the discount card longer than I can remember and still find it to be a good value! Here's one customer hoping B&N won't be going away anytime soon!


Apr 18, 2014 9:05PM
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I miss the old days:

A writer would write a book.
An editor would edit the book.
An artist would design the cover art.
A printer would print the pages.
A binder would bind those pages together.
A warehouse worker would load the book onto a truck.
A driver would deliver the book to a local bookstore.
A clerk would unload the book and stock it on the shelf.
The owner of the bookstore would sell the book.

Now:  A writer writes a book, uploads it into cyberspace and the reader downloads it onto a gadget that was made in China.  Oh how the mighty have fallen, and quite rapidly.
Apr 18, 2014 5:21PM
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I use to be a huge Barnes and Nobles. I use to enjoy going to their stores because I could set in comfortable seat, read, have a drink or some food, and relax. Almost every visit, I would buy a book or magazine.  Eventually, they started removing the chairs and I had to set on the floor.  As  a loyal customer, I took this as a sign of greed and dislike for me as a customer.  My visits and purchases decreased - I can get the same impersonal experience at Amazon.  Now I only go to Barnes and Nobles when I either have nothing else to do or desire to look at books.  I think it is very poor how they treated their customers.  Having a good experience was a big differentiator and the reason I kept going back. 
Apr 18, 2014 2:22PM
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"written work" will always be around.  how to see and consume this written work must be a tricky thing to figure out.....

 

but if/when a CEO drops his share to 20%, it sure does make one wonder.  especially if it's "estate planning" and he still leaves 20% on the table.  is their a SEC rule that forced him from selling everything? 

Apr 18, 2014 6:48PM
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Hopefully public libraries will survive...
Apr 18, 2014 6:08PM
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There are lots of people like me who want to read physical books and enjoy perusing books at a store.   This market wil be satisfied by some retailer.   The constant scare tactics that passes as news is beyond old.   There are going to by physical books and brick and mortar stores as long as there will be a humanity.  Even the e-book readers are trying to look like books with their white backgrounds that they are pushing now.   Why settle for an imitation book when you can hold the real thing in your hands?   Why settle for a virtual library when you can have a real library of books printed on paper?   I am sick of the computer nerds trying to jam their creepy lives down my throat and make me into one of these people that have no real face to face social skills.
Apr 18, 2014 7:11PM
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I would rather read a book than they harsh screen of a tablet.  I can only stay on-line for about 30 minutes twice a day, or my eyes hurt.
Apr 18, 2014 8:53PM
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I love the store.  You walk into a B&N and you feel like you are part of something so special.  You walk into a store of knowledge.  Sometimes I do not find what I need and other times I do. I order online because in the beginning they did not make the store big enough.   They sell out so quickly but I love the store especially at Xmas!  I buy used books when I can through B&N but frequently I pay full price because I want to read it now!  Do your best to stay in business. Get creative.  Add more household items in your stores.  Get the celebrities involved.  Get the bookworms of Hollywood to put their names on products!  all the other stores are doing it!  Hit up the British for inspiration...they are the founders of all great English lit!  Please do not go out of business just because of the internet.  I always dreamed of working in a B&N but our town is too small and the nearest is 45 miles away! 
Apr 18, 2014 9:39PM
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Like most brick & mortar businesses that suffer from internet competition, B&N was far too late in adapting to the market and technology. 

Ultimately, the problem is within the company. 
Apr 19, 2014 11:12AM
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Nope, the reason B&N and others are going out of business is: Because of people like SHARON.!!
Apr 18, 2014 5:12PM
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Lol, good the B and N in Pueblo, Colorado have nothing but arrogant people, the managers will screw you over in a minute.  If you haveever done business with B and N as business to business they will beat you down on the price, then take forever to pay you.

So Barnes and Noble, you get what you deserve.

Apr 18, 2014 6:14PM
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The ultimate question is, what are people buying when they purchase a book?  Books can be beautiful pieces of art in and of themselves, but the rise of the cheap paperback illustrated that what most people are after is the contents, not the medium.  Many years ago the book market got a big tailwind from paperbacks.  That wind is going away and being replaced with e-books.  It's not the end of books as we know them; there will always be a place for the solid substance of a bound book.  It is the end of the era of cheap paperback books.  So long old friends, my Grandchildren will know you not.
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