Barnes & Noble (NYSE:BKS) is the largest bookseller in terms of sales revenue in the United States.The company operates 1357 stores and an online retailer Barnes & Noble.com. Of the 1357 stores, 720 are Barnes & Noble book and music superstores and 637 are Barnes & Noble College Bookstores. Its core business model relies on building local bookstores with comprehensive selection, attractive discounts and membership discount programs, and a community-gathering-place environment (e.g., the inclusion of a Starbucks cafe in each Barnes & Noble store).
Barnes & Noble has been suffering from diminishing margins as sales in the company's retail store struggle -- company-wide operating margin fell from 2.8% to 1.3% in FY2010. Declining operating margins were mainly caused by higher discounts offered to compete with lower-priced online booksellers, one of the main negative pressures the print industry is facing right now due to a number of negative industry trends. 
To mitigate the company's slower retail book sales, Barnes & Noble has put a large amount of resources into the developing eBook market. As the demand for portable and low-cost books increases, the market for eBooks and eReaders will grow as well. Barnes & Noble's Nook offers wireless connectivity and access to millions of books. The company does face intense competition in the relatively young market, primarily from Amazon's Kindle 3, which has many of the same features as the Nook. The two companies have been engaged in price wars over the eReaders, something that is risky for Barnes & Noble. The two competitors also face competition from non-exclusive eReadres such as Apple's iPad.
Barnes & Noble is the largest national general trade book publisher and retailer in terms of sales revenue. In 2010, the company's share of the consumer book market was approximately 16%.
Although the company does not give specific breakdowns of its business segments, it sells products in these general categories:
Barnes & Noble run four main business operations:
Barnes & Noble offers discount pricing to compete with online discount retailers such as Amazon.com (AMZN) and EBay (EBAY) and large discount retailers such as Wal-Mart (WMT) and Costco Wholesale (COST). For hardcover bestsellers, the comopany offers discounts at 30% off suggested retail prices, and 20% discount off of select Children's books and computer reference books. The Barnes & Noble membership, for an annual fee of $25, offers greater discounts on all bestsellers and other merchandise for sale in Barnes & Noble stores.
In September, 2009, Barnes & Noble finished the acquisition of Barnes & Noble College Booksellers ("College"), finally reuniting the Barnes & Noble brand. College is a leading contract operator of college bookstores in the United States, operating more than 600 college bookstores and serving nearly 4 million students and a quarter of a million faculty members. Acquiring College gives the company a predictable and growing revenue stream because the company makes money by selling textbooks, course related materials, emblematic apparel and gifts, trade books, school and dorm supplies, and convenience and café items. Barnes & Noble acquired College for $514 million, which was previously owned by the company's Chairman Leonard Riggio.
On September 30, 2009, the company announced a change to its fiscal year calendar as a result of the Barnes & Noble College Booksellers acquisition. The Company’s 2010 fiscal year now encompasses the period from May 3, 2009 to May 1, 2010.
At the beginning of August 2010, the company announced that it was putting itself up for sale. The board enlisted Lazard as its financial adviser and Morris, Nichols, Arsht & Tunnell as its legal adviser. At the end of September 2010, the company's chairman Leonard Riggio was engaged with a proxy fight with billionaire and holder of 20% of BKS stock Ron Burkle. Burkle engaged in this fight to replace three of Barnes & Noble's board members, including Riggio. However, BKS shareholders voted to keep Riggio on board. Despite all of the controversy and drama surrounding Barnes & Noble's potential sale, no person or group has stood from the pack. Some have even noted of the possibility of a merger with brick and mortar rival Borders Group (BGP). Regardless of whoever buys the company, the future ahead for Barnes & Noble is going to be a tough battle with other eReader providers such as Amazon.com (AMZN) and Apple (AAPL).
The electronic book (eBook) revolution has arrived. Electronic readers (eReaders) offer portability and storage, language attributes, low cost for book purchases, access to millions of free books, and a smaller carbon footprint compared to print books among other benefits. As a result, eBook demand has skyrocketed, with revenue in the industry reaching $398 million in 2009 and expected sales to be $2.5 billion by 2013. According to the Association of American Publishers, in the first half of 2010 e-books made up 8.5% of trade book sales, compared to just 2.9% in 2009.
The eBook revolution has spurred companies like Barnes & Noble and Amazon to develop their own eReaders. The two top eReaders in the market by sales are Barnes & Noble's Nook and Amazon's Kindle 3 with 1 million and 5 million unit sales since their respective launches.
Because both companies sell book titles for $9.99, the sale of eReaders is the primary competitive business and has resulted in price wars between the two companies. In the summer of 2010, Barnes & Noble reduced the price of its Wi-Fi Only and 3G + Wi-Fi Nook devices by $50 to $149 and $199 respectively. In retaliation, Amazon reduced the price of the Kindle 3 by $60 to $189. It is extremely risky for Barnes & Noble to engage in price wars with online retailers like Amazon because Barnes & Noble only generates its revenue from one source, selling books, whereas Amazon sells all kinds of items and its revenue isn't depended on the sale of its eReaders. If Barnes & Noble decreases the price of its eReaders to the point where margins are too low, the company will see negative impacts on its bottom line.
Barnes & Noble already holds 25% of the digital market and offers over a million books on its Nook. The company expects to increase its market share by having $1 billion in digital sales by 2013.
The Nook and Kindle 3 aren't the only eReaders on the market -- the two devices face competition from Apple's iPad. Although the iPad isn't just an eReader, it does have its own ebook store called iBooks, which is very similar to what Barnes & Noble and Amazon have. The iBooks store sells books from publishers like Penguin, HarperCollins, Simon & Schuster, Macmillan, and Hachette. iBooks prices are slightly higher than those of its competitors (selling at $15 per book), but the price is expected to fall once more iPads are distributed. In addition, Apple is using ePub, meaning that e-books from other stores might work on the iPad. The iPad plays a role in the Nook vs. Kindle 3 face-off by stealing market share from both competitors. Amazon has taken a step at decreasing the effect of the iPad by launching the Kindle app, which allows users to read Kindle books on the iPad. Consumers can sync the iPad to their Kindle for free.
Borders Group (BGP) also entered by eReader market with the Kobo. The company's newest version of the Kobo has upgraded hardware, a new processor that speeds page turns, as well as built-in wireless connection. However it still only has black and white coloring and a relatively simple design, making it the cheapest eReader on the market priced at $139. The company hopes that its low price will attract marketshare away from the more expensive devices.
Much of the slowdown in the sales revenue of the print retailers may be attributed to the increasing popularity and convenience of online retailers, especially Amazon.com. In fact, Barnes & Nobles expects the physical book market to decrease from $21 billion to $19 billion by 2013. Many online retailers are also a part of the CD and DVD retail segment, where Barnes & Noble has limited its exposure so as not to suffer from lagging sales of CDs due to digital media devices mp3s), another edge for online retailers. To compete in the e-commerce sphere, Barnes & Noble established its own online retailing [website]. The company's online site has generated the most growth as online sales in Q2, Q3, and Q4 2010 increased by 9.4%, 32%, and 51% respectively. During the same periods, sales at retail stores fell 2%, 4.7%, and 3% respectively. Barnes and Noble says that in the 12 months since the company launched the Barnes and Noble eBookstore, the company's share of the digital market already exceeds its share of the retail book market. The company doesn't expect that growth of the online segment will halter, estimating that online sales will grow by to $1 billion by 2013.
Bestsellers account for between 3% and 5% of total sales at Barnes & Noble, and that percentage has been on the rise, especially with the release of books like the Harry Potter series. For example, the Barnes & Noble's sales were up 17.9% after the release of Harry Potter and the Deathly Hallows, the seventh book (and possibly final book) of the popular series. The popularity of bestsellers is important, because the release of a popular title drives traffic to bookstores. Due to widespread availability of popular titles from both online retailers like Amazon.com and mass merchants like Wal-Mart, Barnes & Noble must discount bestsellers up to 40% off the publishers’ suggested retail price in order to be competitively priced to consumers. Because of the popularity of bestsellers, particularly around the holiday season, Barnes & Noble can produce strong same store sales numbers, but the heavy discounts negatively impact profit margins .
The retail book market is slow to change and is at this point closed off from new superstore entrants. Barnes & Nobles looks to use its strong position as the leading U.S. bookseller to capitalize on its contracts with Starbucks for in-store cafes to maintain and grow its market share. Barnes & Nobles competes on two fronts, with other physical retailers and with internet booksellers.
Barnes & Noble competes with other companies who share its model of having massive book superstores with thousands of titles.
Amazon.com is the largest online competition for Barnes & Noble. Formerly partnered with Borders, Amazon offers the convenience of never having to leave your home to buy a book. Additionally, without some of the overhead inherent for B&M stores, Amazon.com can offer low prices or free shipping, leading to further price competition. Amazon also competes with Barnes & Noble's Nook in the eReader market with the Kindle 3.
Wal-Mart and Target are the main retail megastores, which sell everything from books to clothes to groceries. Despite not being a core sales segment of their business, these larger stores have had an impact on the sale of books by making best sellers more widely available. This puts pressure on traditional book retailers like Barnes & Noble to cut prices on bestsellers to retain store traffic, leading to diminished margins.