Barnes and Noble Case April 2008

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

Barnes & Noble, Inc.: Maintaining

A Competitive Edge In An

Ever-changing Industry

Wendy Hall, Lynchburg College, USA

Atul Gupta, Lynchburg College, USA

More Clicks at the Bricks: How retail stores are scrambling to catch up with the shoppers empowered by the Web.

The Internet hasn’t destroyed brick-and-mortar retailing, as many once feared. But has it ever changed consumer

behavior.

Headline and text from Business Week Magazine (December 17, 2007)

Barnes and Noble 4Q down, but forecast up.

Both Barnes and Noble and Borders have lost market share from aggressive discounting from online retailer

Amazon.com and discounters like Target Corp. and Wal-Mart stores Inc.

Headline and text from Associated Press on-line (March 20, 2008)

ABSTRACT

On Christmas Eve in 2007, Barnes & Noble’s Chief Executive Officer, Steve Riggio, sat in his

Manhattan apartment overlooking the busy streets of NYC and was hoping that the last minute

shoppers were making their Christmas purchases at the B&N Union Square flagship store.

However, he could not help but worry about the increasing competition in the retail industry,

specifically, the book industry. Riggio wondered if shoppers would even be in the stores or would

they have already done their shopping on-line? If they had done their shopping on-line, would

they have used Barnesandnoble.com or Amazon.com? In the midst of a struggling economy,

would shoppers choose to shop at discount stores such as Costco or Target? These were just a

few of the questions that Riggio was asking himself at the end of a very tough year. Riggio

considered where Barnes & Noble would be in 5, 10, or even 20 years. Unfortunately, with the

increasing competition, technological advances, and changes in book industry trends, Riggio

knew that the answers were not only complex; they were yet to be determined.

Keywords: Competitive Strategy, Value Management, Performance Management

BACKGROUND

arnes & Noble, Inc. (B&N) trades on the New York Stock Exchange under the symbol “BKS” and is

considered the world’s largest bookseller.

B&N currently owns B. Dalton bookstores, located mainly in

large indoor shopping malls, as well as Sterling Publishing. In addition, B&N owns 74% interest in

Calendar Club, L.L.C.

B&N also sells a large amount of books and music over the internet at www.bn.com.

Barnes & Noble Press Release attached to their 2007 SEC Form 8-K, March 3, 2008

Barnes & Noble’s SEC 10-K 2007 Annual Report, April 2008

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

Currently, B&N has 798 stores in operation, 85 of which operate under the B. Dalton name.

B&N plans to open 35

to 40 new stores in fiscal year 2008.

In contrast, B&N plans to gradually close underperforming B. Dalton stores.

Specifically, 882 B. Dalton stores have closed since 1982, 13 of which were closed in fiscal year 2007.

Barnes & Noble opened the “Original” Barnes & Noble store in New York City in 1917 and the first

“Superstore” in 1992.

B&N stores are very large in size ranging from 10,000 square feet to 60,000 square feet,

with most being on average of 25,000 square feet.

Many Barnes & Noble stores include an in-store café that offers

sandwiches, desserts, and Starbucks coffee products. Barnes & Noble is very much focused on community and

allows each store to establish their own community events calendar, which includes events such as story time, fund

raisers, book readings, book signings, and more.

Barnes & Noble’s sales consist mainly of adult trade, magazines, children’s books, mass market paperback,

gifts, music, and movies. On March 3, 2008, B&N opened Barnes & Noble Studio (www.bn.com/studio), an on-line

multimedia site intended to lure readers, publishers, and writers.

Mike Skagerlind, Vice President of Digital Media

for B&N, said, “Our programming celebrates the diversity and creativity that surround the world of books, authors

and readers in a way that is useful, entertaining, and accessible. Barnes & Noble Studio will do for the book what

the cooking show did for the recipe.”

On March 24, 2008, B&N launched a new how-to website called

“Quamut.com” (www.quamut.com).

Quamut.com is published by Barnes & Noble, Inc. and offers how-to

information on more than 1,000 topics.

Dan Weiss, publisher and managing director for Quamut.com said in a

press release on March 24

, “Quamut.com positions Barnes & Noble as a leader in digital how-to publishing.”

BOOK INDUSTRY TRENDS

Barnes & Noble is not the only company affected by changes in the book industry. Significant changes in

the book industry, including the increase in audiobooks, the internet, piracy of books, music, movies, and the newly

invented “e-reader”, which allows consumers to read books electronically on a reading device about the size of a

blackberry, are having companies within the book industry all along the supply chain taking a closer look.

The

Book Industry Study Group (www.bisg.org), which is considered an authoritative association within the industry,

has been researching and providing the industry with a comprehensive collection of data on the trends in the book

industry for over thirty years.

In September of 2007, the BISG released its latest “Book Industry Trends 2007”

book which includes data from 2005 through 2011. The BISG projects that total consumer expenditure will increase

only by 2.9% by the year 2010, down from 2007, which was projected at a 3.9% increase from 2006 (see Exhibit 1).

The BISG gathers data from numerous sources, including the U.S. Census, 10-Ks/Annual Reports, Wall Street

reports, U.S. Department of Education, Retail Data, Publishers, and more.

A time series forecasting tool is used by

the BISG to project industry trends. The “Auto Regressive Integrated Moving Averages” model or the “ARIMA”

uses historical data to look for patterns and project future trends.

ibid

www.barnesandnoble.com/aboutus.html Accessed on April 17, 2008

Barnes & Noble’s SEC 10-K 2007 Annual Report, April 2008

ibid

http://www.barnesandnobleinc.com/press_releases/2008_march_4_bn_studio.html , Accessed on April 17, 2008

ibid

http://biz.yahoo.com/bw/080324/20080324005133.html?.v=1 . Accessed on March 25, 2008

ibid

Greco and Wharton webcast “The State of the Book Industry”, found at the Library of Congress website

http://www.loc.gov/today/cyberlc/feature_wdesc.php?rec=4110 6/28/2007

http://www.loc.gov/loc/lcib/0709/booktrends.html . Accessed on April 17, 2008

http://www.bisg.org/conferences/BEA07_TRENDS2007.ppt . Accessed on April 27, 2008

ibid

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

Exhibit 1: Summary of Data from the BISG showing Growth Projections through 2010

Professors Albert Greco and Robert Wharton of Fordham University, lead researches for the BISG,

discussed their predictions for the book industry during a lecture at the Library of Congress in June of 2007.

Professor Wharton stated, “Overall, the industry is growing but only at a rate slightly greater than inflation.

Publishers are profitable and sales are increasing, but the bar is being raised higher and higher for profit margins”.

The major categories in the book industry are Adult Trade, Juvenile Trade, Mass Market Paperback, Religious,

Professional Publishing, College Textbooks, and Elhi (Elementary and High School) and College. Religious books

appear to be the most successful sector and predicted to increase to $3.07B by the year 2010, which is a 50%

increase from 2006.

Wharton and Greco attribute this increase in Religious books to “the significant number of

publishers active in this field, the rise of mega churches, increased church attendance and expanded offerings on this

topic at large secular bookstore chains”.

Greco and Wharton also predict the Juvenile sector to be strong based on

the huge success of the final installment of the Harry Potter series. Another big title such as Harry Potter could

drive sales in the Juvenile sector to $6.8B by 2010.

Another significant finding in the College Textbooks sector is

that there is an increase in the demand for used books and electronic access to textbooks.

One disturbing trend is the increasing amount of piracy of books, music, and movies. In 2006, the United

States Trade Representative (USTR) released their annual Special 301 Report that detailed the increase of piracy

worldwide.

The Association of American Publishers (AAP) estimates that more than $600 million is lost each

year due to piracy.

Who is Reading Books?

According to the BISG’s latest report, the total amount of time spent using media has increased, but the

hours spent actually reading books is decreasing.

The book industry has to compete with each person’s time, and

books are not a priority. Exhibit 2 shows the total estimated time and money spent by consumers on media from the

year 2000 to 2010, as reported by the U.S. Census Bureau and used as the basis for the BISG’s findings. Consumer

books, magazines, and newspaper categories are all experiencing a decline, while electronic media, including

television, is seeing an increase.

ibid

http://www.loc.gov/loc/lcib/0709/booktrends.html . Accessed on April 17, 2008

http://www.loc.gov/today/cyberlc/feature_wdesc.php?rec=3891 . Accessed on April 17, 2008

http://www.loc.gov/loc/lcib/0709/booktrends.html . Accessed on April 17, 2008

http://www.loc.gov/today/cyberlc/feature_wdesc.php?rec=3891 . Accessed on April 17, 2008

ibid

http://www.publishers.org/main/PressCenter/Archicves/2006_April/April_03.htm , Accessed on April 17, 2008

ibid

Greco and Wharton webcast “The State of the Book Industry”, found at the Library of Congress website

http://www.loc.gov/today/cyberlc/feature_wdesc.php?rec=4110 6/28/2007

ALL BOOKS

2005 2006 2007 2008 2009 2010

Publishers' Net Dollar Sales

Millions USD$ 34,628.90 35,686.10 37,085.20 38,298.00 39,595.90 40,732.50

% change 3.2% 3.9% 3.3% 3.4% 2.9%

Publishers' Units

Millions 3,085.80 3,102.70 3,148.10 3,180.00 3,205.70 3,223.20

% Change 0.5% 1.5% 1.0% 0.8% 0.5%

Domestic Consumer Expenditures

Millions USD$ 51,919.80 53,615.50 55,695.80 57,455.10 59,332.80 61,053.70

% change 3.3% 3.9% 3.2% 3.3% 2.9%

ESTIMATES

PROJECTIONS

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

Exhibit 2: U.S. Census Data on Total Media Usage and Consumer Spending to 2010

In 1992, 60.9% of adults were reading, which dropped to 56.6% in 2002.

In addition, it appears that

females are reading more than males.

Exhibit 3 provides a breakdown of the number of male and female adults

reading from 1992 to 2002. Although this data is for the years 1992 to 2002, this trend is likely to continue into the

future.

Another interesting trend to note is that adults between the years of 45 and 54 read the most, on average,

followed by those between 55 and 64 years old.

Young adults between 18 and 24 read the least, but it is suggested

that the increase in technological advances and the competition for time from the internet and television is to

blame.

Finally, the U.S. Census reports that those adults making an annual income of more than $75K per year

read more than those making less; in other words, the more you make, the more likely you are to read.

http://www.census.gov/compendia/statab/tables/08s1098.pdf . Accessed on April 17, 2008

Greco and Wharton webcast “The State of the Book Industry”, found at the Library of Congress website

http://www.loc.gov/today/cyberlc/feature_wdesc.php?rec=4110 6/28/2007

ibid

http://www.census.gov/compendia/statab/tables/08s1100.pdf . Accessed on April 17, 2008

Greco and Wharton webcast “The State of the Book Industry”, found at the Library of Congress website

http://www.loc.gov/today/cyberlc/feature_wdesc.php?rec=4110 6/28/2007

http://www.census.gov/compendia/statab/cats/information_communications.html , Accessed on April 17, 2008

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

Exhibit 3: Reading Patterns of Males vs. Females

1992

2002

Males

47.4%

37.6%

Females

60.3%

55.1%

The Internet Phenomenon

According to the U.S. Census Bureau the adjusted Q42007 estimates for e-commerce retail sales were

reported at $36.2 billion (note: total retails sales for Q407 were $1,037.7B).

The total e-commerce estimated sales

for 2007 were $136.4 billion, which represents an increase of 19% from 2006.

The National Retail Federation

reports that on-line retails sales have gradually increased year after year. Additionally, in January 2008, a Nielsen

Global On-line Survey found that 41% of items purchased on-line were books, the most popular product purchased

over the Internet (second-most popular in US behind shoes, clothes, and accessories).

Print on Demand

Print on Demand or POD is a new technology emerging in the Publishing industry where books can

literally be printed on demand based on demand. However, this technology is fairly new and therefore more costly

than traditional printing. For example, the cost to print a typical Hardback bestseller is approximately $3.50 per

copy using traditional printing versus $5 - $8 per copy for Print on Demand.

Nonetheless, the BISG predicts that

POD will be “the Library of the future”.

This technology is beneficial to publishers because they can decrease the

amount of returns from the wholesalers and it is beneficial to the retailers because it allows a more efficient use of

shelf space. But POD is particularly beneficial to on-line retailers like Amazon.com where they do not have shelf

space to worry about. In fact, Amazon.com has included a POD subsidiary, BookSurge, in their corporate portfolio

to cut down on costs of printing.

A STRUGGLING ECONOMY

In early 2007, Wall Street and the media began rumblings that the U.S. Economy was in trouble and

questioned whether or not a recession was inevitable.

The U.S. had not experienced a recession since the

aftermath of September 11, 2001 terrorist attacks and the failing dot.com industry.

Experts attributed the troubled

economy mostly to the deteriorating housing market and the increase and subsequent defaulting subprime

mortgages.

In an effort to fix the failing economy, President Bush announced on Friday January 18, 2008 his

proposal for a $145M economic stimulus package designed to get consumers to spend more money

. By Monday

January 21, 2008, Wall Street and foreign markets all over the world experienced the worst decline in five years,

roughly 850 points in the Dow.

This hit in the market had a ripple effect on the economy including billions of

dollars of losses by the major U.S. banks, including Citigroup and Merrill Lynch

. Statistics show that consumers

Table created by Wendy hall with information obtained from Greco and Wharton webcast “The State of the Book Industry”,

found at the Library of Congress website http://www.loc.gov/today/cyberlc/feature_wdesc.php?rec=4110 6/28/2007

http://www.census.gov/mrts/www/data/pdf/07Q4.pdf , Accessed on April 27, 2008

ibid

http://www.bookbusinessmag.com/story/story.bsp?sid=91856&var=story , Accessed on April 17, 2008

Greco and Wharton webcast “The State of the Book Industry”, found at the Library of Congress website

http://www.loc.gov/today/cyberlc/feature_wdesc.php?rec=4110 6/28/2007

Greco and Wharton webcast “The State of the Book Industry”, found at the Library of Congress website

http://www.loc.gov/today/cyberlc/feature_wdesc.php?rec=4110 6/28/2007

http://www.usatoday.com/money/economy/2006-12-26-econ-cover-usat_x.htm . Accessed on April 27, 2008

http://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_economy/index.html?scp=1-

spot&sq=united+states+economy&st=nyt , Accessed on April 27, 2008

ibid

http://www.washingtonpost.com/wp-dyn/content/article/2008/01/18/AR2008011800429. Accessed on April 27, 2008

http://www.nydailynews.com/money/2008/01/22/2008-01-22_its_a_black_monday_as_stock_markets_tank.html , Accessed on

April 27, 2008

http://www.pbs.org/newshour/extra/ . Accessed on April 27, 2008

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

are spending less due to other factors such as increasing gas prices, increasing GDP (Gross Domestic Product),

increased unemployment, and a general fear of the unknown

. The National Retail Federation predicts retail sales

to increase only 3.5% in 2008, which is considered “the weakest pace of growth in six years.”

As of April 2008,

many organizations began to publish their Annual Reports and First Quarter Results, which in many cases stated

slow growth for the future and less than desirable results for the periods being reported.

Barnes & Noble, Inc. was

among one of these companies warning the investment community in a March 3, 2008 Press Release that

“recessionary pressures in this uncertain economic environment will make 2008 an especially challenging retail

year”.

COMPETITION

The book industry is extremely competitive. Barnes & Noble’s sources of competition include other

traditional bookstores (Borders, Books-A-Million), other on-line retailers (Amazon.com, Borders, Books-A-

Million), independent booksellers, new technology (downloadable mp3 audiobooks and new e-readers, etc.), and

other supply chains (Target, Wal-Mart, Costco, etc.). The American Booksellers Association reports that while 200

to 300 independent booksellers are closing each year, 115 new and independent bookstores opened in 2007, showing

consistent growth since 2005.

In addition, alternate suppliers of books are on the rise.

Specifically, Target,

Wal-Mart, Costco, Sam’s Club, drugstores, and grocery stores are stocking bestsellers at deep discounts.

Barnes & Noble’s annual 2007 store sales were reported at $4,648 million, while Borders’ annual 2007

store sales were reported at $3,774 million. Books-A-Million’s total Net Revenue for FY07 was $535,128,

(including $26.9M for on-line sales), which represents an increase from FY06 net revenues of $520M.

On-line sales for Barnes & Noble were reported at $476 million in 2007, while Amazon.com’s 2007

revenues were reported at $14,835 million. Barnes & Noble considers Amazon.com to be their biggest competitor.

Borders Group has an agreement with Amazon.com to operate their websites.

Under this agreement, Amazon.com

is responsible for setting prices, terms and conditions, and order processing, as well as recording the sale on their

books. Therefore, Borders has not recorded internet sales in their most recent 2007 annual report. This agreement is

up for renewal on a monthly basis and the company’s strategic plan is to finalize their own proprietary website

(http://beta.bordersstores.com), at which time the agreement with Amazon.com would be cancelled.

Exhibit 4

summarizes in-store and on-line sales for Barnes & Noble (B&N), Borders, Books-a-Million (BAM), and

Amazon.com.

Exhibit 4: Summary of Revenues for Barnes & Noble and their Major Competitors

B&N

Amazon.com

Borders

BAM

In-Store Sales*

$4,648M

n/a

$3,211M**

$528.6M

On-line Sales

$476M

$14,835M

***

$26.9M

*In-stores sales excludes B&N’s subsidiary B. Dalton Books and Borders’ subsidiary Waldenbooks

**Borders Group Sales include domestic and international sales

***Borders Group uses Amazon.com for internet sales and therefore did not report internet revenues in their 2007 Annual

Report.

http://cnnmoney.printthis.clickability.com/pt/cpt?action=cpt&title=Retail+sales+cool+in+... Accessed on April 27, 2008

ibid

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=afyTNDrETJcU , Accessed on April 27, 2008

Barnes & Noble Press Release attached to their 2007 SEC Form 8-K, March 3, 2008

http://www.wired.com/print/techbiz/media/new/2006/10/71924 , Accessed on May 1, 2008

http://www.bookbusinessmag.com/story/story.bsp?sid=91856&var=story , Accessed on April 17, 2008

Greco and Wharton webcast “The State of the Book Industry”, found at the Library of Congress website

http://www.loc.gov/today/cyberlc/feature_wdesc.php?rec=4110 6/28/2007

ibid

Barnes & Noble’s SEC 10-K 2007 Annual Report, April 2008

Borders Group, Inc.’s SEC 10-K 2007 Annual Report, April 2008

ibid

Chart created by Wendy Hall with information obtained from 2007 Annual Reports/10-Ks for B&N, Borders Group, Books-A-

Million, and Amazon.com, April 2008

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

Borders Group, Inc.

Borders is considered the second leading bookseller behind Barnes & Noble.

Unlike Barnes & Noble,

Borders does business internationally with superstores in Singapore, New Zealand, Australia, and Puerto Rico.

Similar to B&N, Borders owns the Waldenbooks subsidiary, located mainly in large indoor shopping malls, but also

includes locations in airports and outlet malls. Borders also owns 97% of Paperchase, a leading stationary store

retailing in the United Kingdom. Borders operates a total of 1,143 stores including 509 domestic superstores, 32

international superstores, 490 Waldenbooks stores, and 112 Paperchase stores. Borders superstores are similar in

design to Barnes & Noble superstores in that they are very large in size, averaging 24,700 square feet, and also

include an in-store café featuring Seattle’s Best coffee, a subsidiary of Starbucks.

In an effort to upgrade its

superstores, Borders opened its first “Concept” store in February 2008.

The concept store allows customers to do a

wide variety of multimedia activities, including creating their own custom CD, making photo books, downloading

music, books, and movies, and more.

Borders believes that the Concept store is important for long-term success

especially in the current competitive environment and plans to open 14 additional concept stores during fiscal year

2008.

When Borders’ President and Chief Executive, George L. Jones took over in 2006, the company was in

debt.

With increasing reports that consumer spending will decrease along with the fact that Borders was short on

cash, a deal was made on April 9, 2008 with Pershing Square Capital to free up some much needed cash

.64

Borders

carries a large inventory of music and movies and relies on sales of these products to meet their fiscal goals

.65

According to their 2007 Annual Report, Borders has suffered a loss for the past 3 years and predicts that trend to

continue due to competition with other brick-and-mortar booksellers, internet retailers, and from companies that

offer the downloading of media

.66

On March 20, 2008, the same day as Barnes & Noble’s Earnings Call, Borders

announced plans to start a “Strategic Alternative Review Process”

that would include the sale of the company. JP

Morgan and Merrill Lynch have been hired to provide financial consultation during this review. Barnes & Noble

Chief Financial Officer, Joseph Lombardi stated on their March 20, 2008 Earnings call that “they had not yet been

approached by Borders, but that they would definitely take a good look and put it under review.”

With e-

commerce and technology hard upon the heals of traditional booksellers, Borders cannot afford to not compete in

this market; however, attempts to do just that failed in 2001 and led to the agreement with Amazon.com to sell

Borders’ products for them.

Borders advised in their 2007 Annual Report that they were uncertain if they would

make another attempt at retailing over the internet.

Books-A-Million

Books-A-Million (BAM) started as a corner newsstand in 1917 and currently operates 208 stores in the

United States, mainly the Southeastern part of the U.S. Of these stores, 184 are superstores while the remaining

stores are traditional stores.

BAM also retails through their website at www.booksamillion.com.

In the fiscal

http://www.brandweek.com/bw/news/recent_display.jsp?vnu_content_id=1003728986 , Accessed on March 25, 2008

Borders Group, Inc.’s SEC 10-K 2007 Annual Report, April 2008

ibid

http://www.businessweek.com/print/investor/content/mar2008/pi20080320_725958.htm

http://www.businessweek.com/print/investor/content/mar2008/pi20080320_725958.htm and Borders Group, Inc.’s SEC 10-K

2007 Annual Report, April 2008

Borders Group, Inc.’s SEC 10-K 2007 Annual Report, April 2008

ibid

Barnes & Noble FY07 Earnings Conference Call, held on March 20, 2008 at 10:00 a.m. EST. The call can be accessed free of

charge as of April 28, 2008 from the company’s corporate website: www.barnesandnobleinc.com

Borders Group, Inc.’s SEC 10-K 2007 Annual Report, April 2008

ibid

Books-A-Million’s SEC 10-K 2008 Annual Report, April 2008

ibid

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

year 2008 (February 2007 to February 2008), BAM opened nine stores, closed seven, relocated three, and converted

one traditional store to a superstore format.

BAM is focused on markets of high growth, particularly in the

Southeast.

BAM reported great results in bargain books and gifts, which includes toys and games, and reported in

their most recent 2008 Annual Report, “Our investment in new fixtures in the gift departments paid off and we

continue to adjust our store model to exploit the growth areas of our business.”

Books-A-Million’s fiscal year ended February 2, 2008. Although Books-A-Million’s net income decreased

by 12.5% from FY07 to FY08 they experienced an increase in revenues by 5.1%.

BAM attributes this decline in

net income to the fact that FY07 included one more week than FY08 and in FY07, a one-time sales income of

$2.3M was recorded for gift card breakages from the previous year.

Books-A-Million’s corporate portfolio

includes, Bookland, “traditional” sized bookstores; Joe Muggs Newsstand, selling coffee and eats alongside a wide

variety of magazines, newspapers, and periodicals; American Wholesale Book Company, a wholesale and

distribution services; and Book$mart, Inc., which distributes bargain books throughout the country.

Booksamillion.com was established in 1998 and through acquisitions of American Internet Services and NetCentral,

BAM considers themselves “a value leader in book e-tailing”.

Books-A-Million does not carry an extensive

inventory in music and movies (although they do sell seasonal music). Many of the Books-A-Million stores include

an exclusive section called “Testaments Shoppe” that provides reference material and new writings for the Christian

market.

Amazon.com

Amazon.com was founded in 1994 by Jeffrey P. Bezos, current CEO, as an on-line bookstore, but

expanded its product line and is now considered the world’s largest on-line retailer.

Amazon offers millions of

products in more than just the books category. Specifically, Amazon.com offers products either through their own

subsidiaries or through third party arrangements with other merchandisers in the following categories:

 Books*

 Electronics & Computers

 Toys, Kids, & Baby

 Sports & Outdoors

 Movies, Music & Games*

 Home & Garden

 Apparel, Shoes, & Jewelry

 Tools, Auto, & Industrial

 Digital Downloads

 Grocery

 Health & Beauty

*Barnes & Noble competes with Amazon.com for these products

Amazon does not separate the financial data, (revenues, profits, etc.), for their Books or Movies, Music &

Games categories in their annual 10-K, so it is difficult to compare against their big competitors such as Barnes &

Noble, Borders, or Books-A-Million. However, Amazon did reveal in their first quarter results that the sales of

books and movies increased 28% or $2.54 billion, while their top sellers were Electronics, Toys, Baby, Consumable

ibid

http://www.booksamillioninc.com/profile/profile_main.html , accessed on April 29, 2008

ibid

http://www.booksamillioninc.com/profile/index.html , Accessed on April 29, 2008

Amazon.com Inc.’s SEC 10-K 2007 Annual Report, filed February 2008

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

items, Apparel, Shoes, and Jewelry increasing 56% or $1.48 billion making up 36% of total sales.

While the

consensus within the media and the retail industry is that consumers are spending less due to the weak economy,

Morningstar analyst Joseph Beaulieu told Bloomberg radio in a recent interview, “If the customer is curbing their

spending, they’re still continuing to spend heavily with Amazon.”

In addition to selling their own products, Amazon.com operates websites for other companies, such as

Target, Sears Canada and UK, Timex, and many more.

Consumers can access Amazon.com to buy almost

anything either through Amazon or by accessing the third party’s site through the Amazon.com site. Amazon offers

free shipping for qualified orders over $25. Amazon’s business model is to offer millions of products that are in-

stock, at very competitive prices.

When consumers shop for books on-line, there are a few differences and similarities between the Barnes &

Noble site and the Amazon site. For example, both sites allow consumers to shop by category, such as

Books/Children’s Books/Baby to Preschool. Both sites then offer further options for drilling down to subcategories.

Amazon.com created the idea to allow consumers a sneak peak into the book, called “Search Inside™” , which is

done through an arrangement with the publisher with strict rules for protecting copyright information. Barnes &

Noble now offers a similar service called “See Inside”, which is powered by Zinio, though it is not available for as

many titles as available on Amazon.com. Another similarity between the B&N and Amazon sites are the

suggestions and review features. Both companies offer customer reviews, suggestions for other types of books

related to the ones being viewed, as well as data on what other customers have bought similar to the product being

viewed. Exhibit 5 shows screen views of both Barnes & Noble and Amazon websites at the individual product

selection level, comparing pricing and features available for the consumer by each company. On April 30, 2008, the

price for Eric Carle’s The Hungry Caterpillar was $17.59 ($15.83 for members) on www.bn.com and $14.95 on

www.amazon.com (no membership required).

Amazon reported shipping revenues, which included membership sales from Amazon Prime and

Fulfillment, of $192M, an increase of 27% from last fiscal year. Fulfillment is a service provided by Amazon where

they will pick, pack and ship orders for other merchandisers.

Sellers own their inventory at all times and shipping

is available at a discounted rate or at the rates offered under the Amazon Prime membership program (details on

memberships are provided later in this case).

Amazon invests a significant amount of money into technology.

Specifically, Amazon invested a net amount of $715M in technology, including internal software systems and new

product lines.

Competing with Technology

An increase in advanced technology has affected the way booksellers do business. Print media is in danger

of being replaced by digital media and booksellers are looking for ways to compete. Professor Wharton with

Fordham University and leading contributor to the BISG says, “The electronic distribution of content has become

the 600-pound gorilla in the room.”

Exhibit 5 below shows the timeline of events affecting B&N and their main

competitors.

Physical books and magazines have been replaced by audiobooks in CD and mp3 format as well as the

newly invented e-books and e-magazines that can be downloaded and viewed on a personal electronic reading

device. In 2006, annual sales of audio books were estimated at $1 billion. On November 19, 2007, Amazon.com

released “Amazon Kindle” a portable, personal electronic reading device for $399, and it sold out in five and a half

http://www.bloomberg.com/apps/news?pid=20601103&sid=a5zT.caCZcqM , Accessed on April 28, 2008

ibid

http://en.wikipedia.org/wiki/Amazon.com , Accessed on April 29, 2008

http://biz.yahoo.com/bw/080423/20080423006176.html?.v=1&printer=1 , Accessed on April 28, 2008

http://www.amazonservices.com/fulfillment , Accessed on April 30, 2008

ibid

http://biz.yahoo.com/bw/080423/20080423006176.html?.v=1&printer=1 , Accessed on April 28, 2008

Amazon.com’s SEC 10-K 2007 Annual Report, April 2008

http://www.loc.gov/loc/lcib/0709/booktrends.html . Accessed on April 17, 2008

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

hours.

Jeff Bezos, founder and CEO told the press, "The Kindle is outpacing our expectations, which is something

that we are very grateful for. We are super excited by the very strong demand."

Amazon is not the only company

marketing an e-reader. To date, there are eight companies that market their version of the e-book reading device,

including Sony.

Exhibit 5: Timeline of Events for the Big 4 Booksellers and Technological Inventions

Similar to the e-book reader is the Zinio reader technology. Zinio reader is not a portable reading device,

but rather a service (software package) that can be downloaded to your computer or portable reading device, like the

Sony Reader, for a fee. Zinio offers textbooks, magazines, and classic book titles on their web at www.zinio.com.

Magazines such as Business Week, Cosmopolitan, Readers Digest, Playboy and more have all signed up to have

their magazines converted to digital format with Zinio in an effort to reach their market.

Text messaging via cell phones has become very popular, and companies like Amazon and ShopText are

creating ways for consumers to buy product via text messaging. On April 2, 2008, Amazon.com launched their

http://en.wikipedia.org/wiki/Amazon_Kindle , Accessed on May 1, 2008

Holahan, Catherine, Business Week Online; 2/1/2008, p18-18, 1p. Accessed on May 1, 2008 through the LC library database

http://wiki.mobileread.com/wiki/E-book_Reader_Matrix , Accessed on May 1, 2008

Graphic was created by Wendy Hall with information obtained on April 18, 2008 from company websites

www.barnesandnoble.com, www.amazon.com, www.borders.com, and http://en.wickipedia.org

Kerwin, Ann Marie, Advertising Age; 11/14/2005, Vol. 76 Issue 46, p32-32, 1/5p. Accessed on May 1, 2008 through the LC

library database.

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

TextBuyIt service so that its customers could text their orders over their cell phones.

ShopText launched its text

buying service in 2005 offering a variety of products such as clothes, jewelry, perfume, CDs, movie tickets, and

more, then in 2007 began to offer books with free shipping.

Mark Kaplan, ShopText founder and Chief Marketing

Officer has said that ShopText would like to partner with bookstores and publishers but as of June 2007 had not

made any such partnerships.

A ShopText customer said, “This is a system that deserves to succeed, and it

probably will, considering what big, pampered kids I and my fellow boomers have become.”

MEMBERSHIP

Barnes & Noble, Borders, Books-A-Million, and Amazon.com all mention the importance of their

respective membership programs. Barnes & Noble’s Chief Operating Officer Mitchell Klipper, stated in the March

2008 Investor Conference Call that one of the highlights of 2007 for B&N was a record growth in new memberships

and membership renewals, in fact, the figures surpassed what was forecasted by B&N.

100

Barnes & Noble offers an

annual membership that costs $25. Membership entitles customers to 40% off list price of current hardback B&N

Bestsellers, 20% off list price of all B&N identified adult hardbacks, and 10% off almost everything else, including

café purchases.

101

Amazon Prime is a membership that costs $79 annually and provides free 2-day and discounted express

shipping. Membership benefits only apply to qualified purchases defined as Amazon.com products and not third

party merchandisers selling product through the Amazon.com web portal. There is no minimum purchase to get the

shipping discount and members can share their membership benefits with up to four different people living at the

same address. (Note: Amazon.com offers free shipping to all of its customers, regardless if they are members, for

qualified orders over $25.)

In 2006, Borders offered customers their Borders Reward loyalty program which was free of charge and

did not require an annual fee. A percentage of each customer’s purchase was put into their membership account and

offered as coupons off of Holiday purchases that year. In 2007, Borders changed the benefits of the Borders

Rewards membership program by offering customers the opportunity to accrue “Borders Bucks”, which accrues in

$5 increments for each $150 purchase, but expires if the customer doesn’t use within 30 days of qualifying.

Purchases made in the in-store Seattle’s Best café can be used towards the $150 accrual needed. Purchases made

on-line, as of April 2008, do not count towards the accrual needed to get Borders Bucks. As a Borders Rewards

member, you can also enroll free of charge into their “Borders Rewards Perks” program that offers members

discounts on a number of products and services including Target, Lands End, Ann Taylor, Orbitz, and more.

Borders also offers Borders Rewards members a membership program called “Borders Rewards Perks Plus” which

offers even more discounts and access to special events and periodic savings; however, the cost for the Perks Plus

membership is $29.95 per year. As of March 2008, Borders had 25 Million members and claim that number

increases each week by an average of 140,000.

102

Borders’ Public Relations Representative, Anne Roman, says that

“The loyalty program is a cornerstone of our marketing and branding efforts because it is a key communications

avenue for us with heavy book buyers and those who love Borders.”

103

Books-A-Million also offers an annual membership called the Millionaire’s Club. For an annual fee of

$15, members enjoy 10% off all purchases, including purchases from the in-store coffee café Joe Muggs as well as

on-line at www.booksamillion.com.

http://www.publishersweekly.com/article/CA6547222.html?q=textbuyit , Accessed on May 1, 2008

http://www.publishersweekly.com/index.asp?layout=articlePrint&articleID=CA6465344 , Accessed on May 1, 2008

ibid

100

Barnes & Noble FY07 Earnings Conference Call, held on March 20, 2008 at 10:00 a.m. EST. The call can be accessed free of

charge as of April 28, 2008 from the company’s corporate website: www.barnesandnobleinc.com

101

www.barnesandnoble.com Accessed on April 28, 2008

102

http://www.brandweek.com/bw/news/recent_display.jsp?vnu_content_id=1003728986 , Accessed on March 25, 2008

103

ibid

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

Exhibit 6 below provides a brief summary of each company’s membership program.

Exhibit 6: Summary of Membership Programs for B&N, BAM, Borders, and Amazon.com

B&N

Borders

BAM

Amazon.com

Cost

$25

-Free for Borders

Rewards

-$29.95 for Perks Plus*

$15

$79

Major Benefit

% Discount off

Credit $$s accrued after

$150 spent in 12 mo

period, to be used on

future purchases

% Discount off

Free 2-day or

Discounted express

shipping on qualified

purchases**

-No minimum

purchase required***

Duration

Annual

% Discount

-40% off LIST for B&N

Bestselling Hardbacks

-20% off LIST for other

B&N Adult Hardbacks

-10% off B&N price of

almost everything else

No additional discount

10% off All

Purchases

No additional discount

May be used

On-line

Yes

Applies to Café?

Yes

n/a

Rewards Credit

Card Offer?

Yes

Other Benefits?

Periodic and Random

Coupons

Perks and Perks Plus*,

which offer special

discounts on name brand

products and services

Members can share

their membership with

up to 4 accounts in

same household

*Borders Rewards Perks Plus is available for an annual fee of $29.95 for Borders Rewards members only.

**Qualified purchases are defined as product sold by Amazon.com or their affiliates. Product sold by other companies through

Amazon.com’s website do not qualify.

***Non-members must purchase $25 in qualified purchases before eligible for free standard shipping

THE “THIRD PLACE”

Wikipedia.com defines the Third Place as “a term used in the concept of community building to refer to

social surroundings separate from the two usual social environments of home and the workplace.”

104

According to

USA Today, “an estimated 30 million Americans” work outside of the home and office and that number is

increasing by 10% each year.

105

Companies such as Starbucks have said that they consider themselves to be

American’s third place and to support them; they announced on April 25, 2008 their plans to roll out AT&T Wi-Fi

services nationwide.

106

107

Kerri Sissney, a loyal Barnes & Noble customer who visits the Lynchburg, VA B&N

store on a weekly basis admits, “I’m addicted to the Chai Lattes at the café, and while I’m here I like to browse the

latest in children’s books; I usually can’t get out of here for less than $30 dollars a pop!” If Borders’ new concept

store is a success, third placers could start to consider Borders a new location, since the store would have lounging

chairs, a café and the ability to download music, books, movies, and more.

BARNES & NOBLE 2007 HIGHLIGHTS

On March 20, 2008, Barnes & Noble, Inc. reported their 2007 earnings results on an Earnings Call to

investors. During the conference call, Chief Financial Officer, Joseph Lombardi summarized the key statistics, such

104

http://en.wikipedia.org/wiki/Third_Place . Accessed on April 27, 2008

105

http://www.usatoday.com/life/2006-10-04-third-space_x.htm . Accessed on April 27, 2008

106

http://media.corporate-ir.net/media_files/irol/99/99518/2007AR.pdf, Accessed on April 27, 2008

107

http://www.starbucks.com/aboutus/pressdesc.asp?id=863 , Accessed on April 29, 2008

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

as number of stores, EPS, and dividend increases. Chief Operating Officer, Mitchell Klipper summarized the 2007

highlights, which include:

108

 A decrease in Gross Margin because of an intentional and strategic decision to decrease the overall price of

books to their customers

 Recognition that price is not the only reason customers make purchases, but where they make them is

important, especially on-line

 Disappointment in Holiday sales

 Decrease in music business

 Record comparable store sales, specifically an increase of 1.8% (comp sales are defined as revenues for a

store that has been in operation for at least 12 months and compares current revenues against historical

data for the current year)

 31 new stores, indicating growth

 Record internet sales, increase by 13.4% or the highest in 5 years, attributable to a # of factors including:

trust, price, selection, speed of delivery, and customer inquiry response

 Finalized their 2007 Distribution Network Optimization Strategy. Closed the Memphis, TN site, so that

now 2 remaining locations provide the most efficient method, new record for inventory turnover

 Record new membership and renewal, in fact, more than forecasted

CONCLUSION

Barnes & Noble Outlook for 2008 and Beyond

Barnes & Noble has an ambitious yet cautious outlook for 2008 and beyond. B&N is concerned about the

economy and how it will affect consumers buying behavior as well as how it will affect B&N’s ability to grow their

business. Nonetheless, Barnes & Noble plans to open 35 to 40 new stores in fiscal year 2008, which is in line with

their expansion strategy of increasing and improving their real estate portfolio.

109

Additionally, Barnes & Noble will

consider growing their Barnes & Noble College Booksellers division by opening a chain of University Superstores

located on the campuses of major colleges and universities. B&N is hoping for another best seller similar to the

Harry Potter series to boost sales, but is confident that in the absence of one, sales for 2008 will increase from 2007.

One of Barnes & Noble’s primary focus for the future is to increase the membership program and continue to

manage expenses so that they can continue to offer lower everyday prices to all of their customers.

In addition to investments in their brick-and-mortar business, Barnes & Noble will not ignore investments

in their internet business. B&N recognizes that the book industry is becoming increasingly technical and consumers

are looking for more selection, faster searching, and ease of use when shopping over the internet; therefore, B&N

plans to invest more money into improving and enhancing their website infrastructure and features. In addition,

Barnes & Noble plans to grow their B&N Studio segment on their website to offer more features and selections for

their internet customers who love books.

After the 2007 Christmas Holiday season was over, CEO Steve Riggio was still uncertain about the future

of Barnes & Noble yet he had to remind himself that even in tough economic times and in an increased competitive

atmosphere, Barnes & Noble managed to achieve better than expected results in FY07. But, what will Barnes &

Noble’s strategic plan for 2008, 2013 or 2030 be to continue their success and maintain a competitive edge? Will

B&N have to think outside of the “brick-and-mortar” box and into the “click-and-mortar” space? Riggio was certain

of one thing, the competition was fierce and the industry was changing, and Barnes & Noble would have to be bold

to stay ahead of the game.

108

The bullets listed are from the Barnes & Noble FY07 Earnings Conference Call, held on March 20, 2008 at 10:00 a.m. EST.

The call can be accessed free of charge as of April 28, 2008 from the company’s corporate website: www.barnesandnobleinc.com

109

ibid

Journal of Business Case Studies – July/August 2010 Volume 6, Number 4

AUTHOR INFORMATION

Wendy Hall has an MBA degree from Lynchburg College and works for a local communications company. Her

research interests include Strategic Management, Quality Management, Supply Chain Management and

Performance Measurement.

Atul Gupta is a faculty member at Lynchburg College. Recipient of the 2003 James A. Huston Award for

Excellence in Scholarship, he has more than 60 peer-reviewed journal publications and conference presentations.

His research interests include Strategic Management, Quality Management, Supply Chain Management, Health Care

Administration and Technology Measurement

NOTES