Amazon.com (NASDAQ:AMZN) wants to go to the head of the class. No doubt because Barnes & Noble (NYSE:BKS) has been so successful at it, the Internet retailer decided it was also time to graduate to the next level of e-commerce and head to college. Amazon recently announced partnerships with three large U.S. universities to co-brand their college bookstores under the name of the school and Amazon.
Not only will the retail locations sell textbooks, but they'll also feature cafes, branded school apparel, and the necessities of dorm room life everywhere: ramen noodles and mac and cheese.
A real page turner
Building on a pilot program it initiated a year ago with the University of California, Davis,, Amazon is launching dedicated websites at Purdue University in Indiana and the University of Massachusetts Amherst where Amazon Student Prime members will be offered unlimited, free, next-day delivery to an on-campus facility staffed by university students. Faculty, staff, and alumni are also eligible to use the new Amazon@ facility.
As part of being allowed on campus, Amazon will pay the schools between 0.5% and 2.5% for any purchases made through its college website, The Wall Street Journal reported. Amazon will reportedly pay at least $1.45 million to Amherst over three years and $1.7 million to Purdue over four years. It will open a second location on the Purdue campus this spring.
The program works as follows: Students place an order through their school's Amazon site and upon checkout choose their school's Amazon shipping facility; for example, Amazon@Purdue. When their order arrives, the students will receive an email or text notification that will create a bar code when they click on the link. They can scan that bar code at the pickup facility to obtain their order from a self-service locker or at the pickup desk.
What it means for investors
Anyone with kids in college knows textbook sales are big business. College bookstores rake in some $10 billion annually. Privately held Follett is the leading industry operator, with approximately 900 locations nationally. Barnes & Noble is not too far behind; it has 700 stores serving 5 million students in 42 states and Washington, D.C., and in fiscal 2014 these locations generated some $1.7 billion in sales. However, Barnes & Noble says 55% of all college bookstores in the U.S. are managed by the universities themselves, presenting Amazon and the other operators a chance to grow their business substantially.
Amazon announced plans to add even more colleges to the curriculum in the near future. Although the agreements with the universities aren't exclusive -- Follett, for example, operates on the Amherst campus -- Amazon could steal business from its rivals. Barnes & Noble has 46 college contracts that are due to expire this year, the largest number of expirations until 2018, when 52 will expire. Its contracts usually have terms of five to 10 years.
In its fiscal second quarter ended on Nov. 1, Barnes & Noble reported that college division sales rose 1.9% to $751 million, which included the fall back-to-school rush period, with comps 0.4% higher. So far this fiscal year, it has signed new contracts with annual sales worth $74 million, of which 33 have annual sales totaling $60 million. That compares favorably to the 21 stores it opened last year that had annual sales of $42 million.
Follett, naturally, says it welcomes the competition, particularly if it results in lower costs to students (without saying why it doesn't cut costs for them already), yet this is an area where Amazon can excel and grow.
A prime opportunity for growth
Students are already shopping at the e-commerce retailer through its Amazon Student program, which is just like Amazon Prime, but at a discounted $49 annual rate. College students get free two-day shipping on millions of items, unlimited movie streaming and music downloads, and access to the Kindle Owners' Lending Library. The new program should make the e-commerce site even more attractive to students.
Amazon reported that its Prime program enjoyed a 50% increase in membership last year to an estimated 40 million people. Prime members spend $1,300 a year on Amazon, roughly three times the amount non-Prime members do. Cementing its relationship with students while they're in school ought to build a loyal customer base after they graduate.
Barnes & Noble has survived Amazon.com's onslaught against its business, but it is considering spinning out its Nook e-reader division, possibly with the college business included. The college books segment could also be spun off by itself, though no decision has been made .
Amazon has a long way to go before it can be considered a contender in the college bookstore scene. But as the company turns its attention to campus life, this could become a new battleground that makes for a new era of higher learning.