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Barnes & Noble (BKS)Stock (Media & Entertainment Industry, Retail Industry, Specialty Retail Industry)
From 2002 through 2006, Barnes & Noble achieved steady revenue growth, but the company has recently suffered from diminishing margins, with its company-wide operating margin falling from 4.8% in 2006 (in the most recent recording period, the first quarter of fiscal 2008 the retailer posted a net loss of $2.2 million, largely due to a one-time $8.3 million tax-related charge), despite aggressive closings of its under performing B. Dalton stores, due to a number of negative industry trends. The firm's sales declined 1.6% in the second quarter of FY08, as comparable store sales fell 4.7% (1.5% excluding sales of the final Harry Potter book in Q2FY07).[2] Younger generations of Americans are increasingly adopting digital media such as MP3s, online video, and video games, which have both direct impacts on the sales of traditional media such as CDs and DVDs, and indirect effects as well (more distractions means less time for reading books). Compounding this digital effect is the onslaught from e-commerce companies such as Amazon.com (AMZN) and retail superstores such as Wal-Mart and Target which have the ability to significantly undercut brick and mortar retailers' prices on books, CDs, DVDs and other offerings. Though BKS has a website, 88% of their sales come from their B&M locations, and this pricing pressure from both online booksellers and retail giants has squeezed margins .[3]
[edit] Business Financials Over the past five years, Barnes & Noble has seen steady revenue growth from $4.3 billion in 2003 to over $5.4 billion in 2007. However, operating margins have not fared as well, despite the company's aggressive closing of its mall-based B. Dalton stores--down to 83 as of May 2008 from 195 in 2003-- and underperforming superstores. [4] This has led to the vast majority of sales coming from the superstore segment: 86% for the 2007 fiscal year.[5] Online sales through BarnesandNoble.com have been stagnant; from 2004 to 2007 online sales have grown a total of 13.5%,[6] and online sales only accounted for about 8% of total revenues in 2007[7]. Competition from online booksellers, retail giants, and other book and music superstores has led to intense price competition and diminishing margins, especially on bestsellers. BKS has tried to combat this by increasing the discounts to rewards members to 40% on bestsellers and 20% on adult hardcovers, but the increase in sales has not compensated for the loss in margin.[8]
[edit] Trends and Forces[edit] Dependence on BestsellersBestsellers account for between 3% and 5% of annual sales at Barnes & Noble[10], and that percentage has been on the rise, especially with the release of books like the Harry Potter 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. Because of the popularity of bestsellers, particularly around the holiday season, Barnes & Noble can produce strong same store sales numbers, but bestsellers have a negative effect on margin. [edit] Member Programs Drive Incremental PurchasesBarnes & Noble offers a discount card to its paid members ($25/year) for which customers receive 10% off on all items through both the online and retail stores as well as 40% of bestsellers and 20% off all adult hardcovers, up from 30% and 10%, respectively starting in October 2006.[11] The increased discount has upped sales, but not enough to compensate for the loss in margin.[12] By pioneering the program, Barnes & Noble has created substantial brand loyalty and also gave itself a boost in yearly sales as membership in the program has led to an increase in incremental sales. It's estimated that 10% of sales come from the paid members, not including the annual fee. In February 2006, Borders started their own reward program, which is free but offers a lesser discount. [edit] Digital Media AdoptionYounger generations of Americans are less interested in reading books than their older counterparts, having grown up in an era with more entertainment options. The advent of new digital distractions such as mp3s, online video and video games has led to decreased interest in more traditional forms of entertainment such as CDs and books, a negative long term trend for Barnes & Noble. [edit] Expanding Online CompetitionMuch of the slowdown in sales at bookstores around the country, not just at Barnes & Noble, may be attributed to the increasing popularity and convenience of online retailers, especially Amazon.com. 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 (over mp3s), another edge for online retailers. Also, while growth in both segments is slowing down, online book sales are still growing significantly faster than B&M sales. Sales from Barnes & Noble's online store, BarnesandNoble.com, accounted for only 8.2% of its total sales in 2006 and grew less than 4% in total over the last 3 years. [edit] Potential Acquisition of Borders Group (BGP)One way to fight back against growing online competition would be to acquire the second largest bookselling retail chain in the U.S., Borders. Borders Group (BGP) announced in March that the company was for sale due to potential liquidity issues within the corporation. On May 21, 2008 it became apparent that Barnes & Noble is considering a bid to acquire Borders, which controls about 10% to 12% of the retail book market (compared to B&N's 20% to 22% share). The acquisition would help boost sales and profits while allowing Barnes & Noble to consolidate expenses and cut down on sales cannibalization. [edit] CompetitionThe 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. BKS competes on two fronts, with other physical retailers and with internet booksellers.[13]
[edit] Traditional Book RetailersBarnes & Noble competes with other companies who share its model of having massive book superstores with thousands of titles.
[edit] Online BooksellersAmazon.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. [edit] Retail MegastoresWal-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 on bestsellers.
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