Once upon a time, the book superstore elicited two major responses. One: I'm in heaven; here are more books I've ever seen in one place, ever! Two: This is hell on independent bookstores; it's a sad time indeed.
Today, everything's come full circle. Borders failed, and even though one huge rival was wiped off the map, Barnes & Noble (NYSE: BKS ) is showing serious signs of losing to its aggressive competition.
Some investors may be studying Barnes & Noble as a value play, but they'd better think twice. Not only is the bookstore chain in big trouble, but if it fades from the scene, maybe in the long run, nobody would even really care.
This is a story of more than a decade of disruptive change. It illustrates the economic theme of creative destruction, as painful as that may be.
Amazon.com's (NASDAQ: AMZN ) arrival on the scene was a major harbinger of the change to come. Recall that back in the old days, the idea that books and music would sell over the Internet was by no means a foregone conclusion. E-commerce was in its infancy. The tech bubble wiped out many early dot-com companies, even some that were good ideas but ahead of their time.
We now know that Amazon not only survived, but it's ingratiated itself into the fabric of many consumers' lives. It's so much more than an online book and superstore; its model started weakening bookselling chains Borders and Barnes & Noble long ago. Amazon's ability to track down just about anything and send it straight to your door was the next evolutionary step that spelled the beginning of the end.
Don't buy into this cliffhanger
Today, Barnes & Noble is losing traction, big time. The bookstore chain's most recent quarter revealed a staggering loss, a plunge in sales, and a prediction for falling same-store sales in fiscal 2013. Its quarterly net loss was a whopping $118.6 million, or $2.31 per share. Sales dropped 7% to $1.28 billion, and same-store sales plunged by 8.8%.
In more negative news, the retailer is retreating from the tablet business in a time when technology really matters. For ages, its Nook was holding its own against Amazon's Kindle e-reader and tablet lines. Now, Nook sales are falling while Kindle sales are growing. In its most recent quarter, Barnes & Noble's digital sales also dropped by 9%. It will still sell its basic Nook e-reader, but its decision to get out of the tablet business admits to defeat compared to Amazon's Kindle Fire and tablets from Apple and Microsoft.
Those factors are bad enough. However, there's an even more ominous theory circulating, as reported by The Wall Street Journal: that Barnes & Noble has been slowly putting more emphasis on selling odds and ends than actual books. Browse any Barnes & Noble and you'll see toys, games, journals, and an array of things that don't really relate to the act of reading. Rumor on the street is that publishers are having a harder time getting to Barnes & Noble's shelves, and the retailer is increasingly peddling high-margin merchandise that's more gift shop than book shop.
Although Barnes & Noble denies the allegations, the Journal's chats with those in the industry have revealed indications of some reduced orders of books and less varied assortments.
I predicted Borders' doom, and I'm afraid Barnes & Noble is on the same road. The fiscal year ended May 1, 2010, was the last time Barnes & Noble generated an annual profit. Revenue growth has decelerated over the past several years, and as of the year ended April 27, the company's total revenue fell by 4.1%.
Barnes & Noble has one positive attribute that Borders lacked: It's not overly indebted. That's the only bright spot I can see in this chapter of the company's story.
The danger of being the middleman
Last but not least, should we even care if Barnes & Noble eventually goes away? Amazon.com has an insanely great selection of books, both well-known and obscure, and has brought us the incredible ease of digital downloads. Discounters such as Wal-Mart, Target, and Costco all carry major best-sellers, easily dropped in carts during routine shopping.
On the other side of the spectrum, small is beautiful after all the pain indie bookstores experienced for years. The independents seem to be having a renaissance. Getting up-close and personal and slightly changing the small bookstore experience may make for the best competition in a brick-and-mortar landscape that has been dulled by retail chains.
I have a few anecdotal observations. I recently ran across an awesome bookstore/coffee shop called Borderlands Books dedicated only to sci-fi, fantasy, mystery, and horror in San Francisco. It offers new, used, first editions, and anything a fan of these genres might want to track down. Among its many descriptions of itself on its website: "We stay open late and wish we could stay open later. If you come in five minutes before closing time we won't close until you're ready to leave."
Alternative bookstore Atomic Books in Baltimore has hung in there for decades, with the tag line "Literary Finds for Mutated Minds." Although it shut down briefly in 2000, it reopened in 2001 under new management. One of its most interesting and coolest factors along with its do-it-yourself ethos and focus on obscure items: It accepts fan mail for John Waters. By the way, they also say: "Please do not call or email us for any information regarding John Waters. We won't tell you anything." (Good to know.) In April, the owners announced that the store is expanding and opening a related bar.
D.C.'s Politics & Prose is a local favorite in my neighborhood, with a politically progressive selection of books, a loyal customer base, and plenty of high-profile readings. When its retiring longtime owners put it up for sale in 2010, a shocking truth emerged in a world where most would assume indies suffer horribly. The operation was actually profitable, and not only that, when buyers emerged, the brand was described as "rich in goodwill." Investors know how important that is.
I can't speak for the profitability of all independent bookstores, and small business is generally an incredibly rough ride and not for the faint-heared. However, I do believe the future of brick-and-mortar bookstores is probably for a close connection to genre audiences of all kinds, as well as innovation with factors like hybrid models. The independents may end up having the last laugh as they not only survive, but thrive.
No happy ending for Barnes & Noble
Barnes & Noble is in the unenviable position of being stuck in the generic middle between discounters, the ease of e-books, and the renaissance of the independent bookstore that are obviously giving readers reasons to support their stores, as well as incredible differentiation and focus on specific types of customers.
Investors would most likely be better off buying Amazon than Barnes & Noble. Amazon's got a notoriously high valuation, but it's also got its hands in many areas; it's no one-trick pony, and it's prepared for the long haul. Barnes & Noble's core business is wearing out. Pay more for quality, and leave the doomed "value stocks" out of the portfolio. There may be happy endings for Amazon investors and great independent bookstores, but Barnes & Noble will likely end up shelved under tragedy.
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