A Visit To barnesandnoble.com

By Yi-Hsin Chang (TMF Puck)

(Nov 9, 1999) -- In September, I took a look at barnesandnoble.com (Nasdaq: BNBN) as an Internet IPO gone wrong. Despite reaching a high of nearly $27 a share, the online purveyor of books, music, and more is now trading above $18, its initial offering price back in May. Still, I found a lot that was right about barnesandnoble.com, including its well-known brand name, and its strong backing from Barnes & Noble (NYSE: BKS) -- the nation's largest bookstore chain -- and Bertelsmann -- the world's third-largest media company, which owns such businesses as Random House and BMG Music.

To better understand barnesandnoble.com, I visited the company's headquarters in New York City on Oct. 22 and talked to CEO Jonathan Bulkeley. The company's offices are located on the 11th floor of an old office building on Ninth Avenue. The reception area is rather understated, with high lavender ceilings and pale green walls decorated by paintings of book covers -- Charlotte's Web and Of Mice and Men, among others -- and two giant posters promoting barnesandnoble.com's unique out-of-print book service.

I had first chatted with Jonathan Bulkeley by phone in January for a StockTalk interview not long after he was named CEO. Meeting him in person reaffirmed my view that he was a very charismatic, dedicated, and passionate leader. It was obvious that he's on a mission to make barnesandnoble.com the leading bookseller -- one customer at a time. During our meeting, he mentioned that his assistant had just that week hand-delivered a CD to a customer. In the StockTalk interview, he had told me a similar story about how he managed to convince a complete stranger in a restaurant to check out the barnesandnoble.com website.

When I asked Bulkeley about the company's stock price performance, he pointed out that when he last checked, 45 out of the most recent 62 Internet IPOs were trading below their offering prices. In that sense, barnesandnoble.com was outperforming its peers. He also noted that barnesandnoble.com's initial public offering was the largest-ever Internet IPO, raising $486 million. While other Internet companies have to do follow-on offerings and debt placements, barnesandnoble.com can draw from the large sum it raised in its IPO.

Ultimately, investors have concerns about how Barnes & Noble and barnesandnoble.com will execute their strategy, Bulkeley said. So far barnesandnoble.com has been the most successful website launched by a traditional, brick-and-mortar retailer. It's the only one to make the list of top 30 websites. Still, investors are waiting to see results, though according to Bulkeley, the tide is turning as investors realize the significance of marketing costs as a percentage of sales. For barnesandnoble.com, which can leverage off Barnes & Noble and Bertelsmann, marketing costs are minimal compared with stand-alone websites.

In terms of increasing efforts to cross-promote with Barnes & Noble, the bookstore chain will soon be giving out 9 million shopping bags nationwide promoting barnesandnoble.com. Inside each bag will be a coupon for purchasing online. Conversely, barnesandnoble.com has used its database to target customers by sending coupons to those with zip codes near newly opening Barnes & Noble stores or stores holding events such as book signings. Far from cannibalizing Barnes & Noble stores, barnesandnoble.com "market[s] customers back and forth" and "serve[s] customers however they want to shop," Bulkeley said. The idea is to get customers to shop online and in the stores.

Interestingly, according to Bulkeley, the number one reason people shop at a website is that it has an offline presence and therefore is trusted by customers. Bulkeley argues that the early adopters of the Internet were largely male and not representative of shoppers in general. In fact, women buy 63% of all books. That suggests that barnesandnoble.com stands to capture a greater portion of the market as the Internet becomes more widely accepted.

While barnesandnoble.com remains primarily focused on selling books online (its out-of-print book service is unmatched), the company now describes a wider array of offerings having to do with information, education, and entertainment -- "stuff for your brain," as Bulkeley likes to say. That doesn't mean it won't partner with other online retailers to sell other products, such as golf clubs. The company just added prints and posters to its product line, as well as electronic greeting cards that can be personalized and enhanced with animation and music. Still, barnesandnoble.com has no intention of expanding into every which business a la rival Amazon.com (Nasdaq: AMZN). The company also plans to further utilize its customer database to better target customers and to customize its offerings.

Internationally, barnesandnoble.com is in a "perfect position," Bulkeley said. The company cross-links with bol.com, the non-English online bookstores run by Bertelsmann. BOL operates in Germany (Bertelsmann's home turf), France, the U.K., the Netherlands, Spain, and Switzerland. The idea is that BOL concentrates on local books in those countries and directs customers to bn.com for books published in the U.S. Thus far, roughly 8% of barnesandnoble.com sales come from overseas -- some 210 countries -- and that's largely without the help of BOL, which launched in June.

barnesandnoble.com just reported a 215% increase in third-quarter sales, to $49.1 million from $15.6 million a year ago, before it went public. The net loss totaled $21.9 million, or $0.15 per share, compared with a loss of $18.6 million, or $0.16 a share last year, and topped analysts' mean estimate of a $0.23 loss. During the quarter, it saw 581,000 first-time customers and raised its total customer number to 2.9 million. It now has 228,000 affiliate websites that link to bn.com.

There was an interesting note in the company's earnings release. It announced three additions to its board of directors, most notably Bob Pittman, president and chief operating officer of America Online (NYSE: AOL). barnesandnoble.com is already AOL's exclusive book-selling partner, but this solidifies an existing link with a very important online player that should prove to be very beneficial to barnesandnoble.com. Not surprisingly, Jonathan Bulkeley headed the U.K. arm of the AOL-Bertelsmann joint venture in Europe prior to his appointment as CEO of barnesandnoble.com, so the relationship with AOL is especially strong.

Having not seen the actual suit at the time of our meeting despite it being reported in that day's papers, Bulkeley dismissed the recent lawsuit Amazon filed against barnesandnoble.com for allegedly copying its patented "1-Click" shopping feature, which allows customers to shop without having to re-enter their billing or shipping information every time they buy. "I'm flattered," Bulkeley said. "Looks like they're worried. It's a desperate attempt on their part." He explained that several other sites offer similar features to make online shopping more user-friendly, and yet Amazon has chosen only to sue barnesandnoble.com. He called the lawsuit "anti-Internet."

When asked about the upcoming holiday shopping season, Bulkeley declined to give revenue projections, saying only that "we will get more than our fair share." Ultimately, barnesandnoble.com's year-round strategy is simple: reduce the costs of acquiring new customers, increase order size, and reduce the overall cost structure.

I found my talk with Bulkeley heartening. For whatever reason that the market has undervalued barnesandnoble.com stock, the company is moving ahead with a clear vision and a strong leader at the helm.

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