Strategic Positioning Report: Barnes and Noble Zoë …zal29/eportfolio/INFO678.pdf · Strategic...

Strategic Positioning Report: Barnes and Noble Zoë Lang

INFO 678

Competitive Intelligence

Professor Zach

Fall 2012

Executive Summary

Barnes and Noble faces a daunting challenge to remain in business. Although its brick-and-

mortar locations continue to stay profitable, their margins are slim, and Barnes and Noble cannot

depend on this segment for growth—this is the company’s ‘cash cow.’ Its college bookstores

provide more stability since Barnes and Noble has a significant presence on campuses; indeed,

this segment is the company’s ‘star’ right now, although it still faces challenges from

competitors such as Follett. Recently, Barnes and Noble has sought to adapt to the shift toward

digital materials that is taking place in this sector by creating a ebookstore and developing its

own hardware, the NOOK, to access it. However, in doing so, it has pitted itself against several

giant rivals, including Amazon, Apple, and Google—the NOOK remains Barnes and Noble’s

‘question mark,’ since it has underperformed compared to its competitors. Furthermore, these

companies can outspend Barnes and Noble in research and development, while other

competitors, such as Amazon, Walmart and Target, can undercut Barnes and Noble on price

points for hard-copy books. As a result, Barnes and Noble needs to cultivate its customers and

develop new products to differentiate the company from its competitors.

This report recommends that Barnes and Noble concentrate more on its ‘star’ by cultivating a

stronger relationship with its college students and developing its products so that they meet the

needs of this population in the future. By modifying its NOOK Study platform so that it is a

viable option for distance education and mobile access, Barnes and Noble will position itself as a

leading provider of educational materials for the next generation of college students.

Additionally, Barnes and Noble already has the resources to create a new product that is not

currently offered by its competitors: a comprehensive curriculum for students who are

homeschooled. By integrating materials from its Sparknotes holdings onto the NOOK Study

platform and offering solutions to problems that home educators face, Barnes and Noble can

create a new product for the increasing population of homeschooled students. Perhaps most

importantly, both of these customer bases offer the potential to be more than simply short-term

clientele; instead, Barnes and Noble could strengthen its ties with these groups to ensure that

they become lifelong customers.

Barnes and Noble: Key Facts

Barnes and Noble is a major retailer of books based in the United States. Its head office is

located at 76 9th

Street, New York, NY, 10011. There are three different segments through

which Barnes and Noble serves its customers: through brick-and-mortar stores; through its

college bookstores; and online.

Barnes and Noble operates a total of 1 341 stores (Annual Report, 2011). Of these, 53% (705)

are book ‘superstores,’ which sell books, CDs, DVDs, and often feature a café—although the

cafés are the result of partnerships with various businesses (such as Starbucks, Cheesecake

Factory, and other food services), this portion of the store is still run by Barnes and Noble. The

remaining 47% (636) of the brick-and-mortar locations are college bookstores. The flagship

location for the college division, called ‘the world’s largest bookstore,’ is located at Fifth Avenue

and 18th

Street in New York, NY. The primary consumer site is www.barnesandnoble.com,

where customers can purchase books (both hard copy and electronic), NOOKs (the company’s

eReader/tablet), and peripheral goods such as DVDs and CDs. A second website,

www.barnesandnobleinc.com, provides corporate information. Barnes and Noble is a public

company that is listed on the New York Stock Exchange, with the symbol BKS.

Barnes and Noble has a history of acquiring companies that strengthen its core ventures—chief

among these was the 1986 acquisition of the bookstore chain B. Dalton, which expanded Barnes

and Noble’s reach throughout the United States. Another key asset is Sterling Publishing, which

Barnes and Noble acquired in 2003, and provides a means of creating new content for its stores

rather than depending solely on materials from publishing companies. Barnes and Noble also

owns Sparknotes (acquired in 2001), which creates educational materials such as book

summaries and test preparation. Perhaps the most lucrative acquisition was the college

bookstores, which had been a separate division from 1993 until their reacquisition in 2011; these

assets generated 15% of Barnes and Noble’s growth in 2011. Recently, Barnes and Noble has

also formed two key alliances: Liberty Media, which owns a diverse collection of assets such as

QVC and Starz, bought 17% of the company in 2011; and Microsoft invested $300M in a NOOK

subsidiary (Hoovers: Barnes and Noble, 2012).

In the past, Barnes and Noble had the following mission statement:

Our mission is to operate the best specialty retail business in America, regardless of the

product we sell. Because the product we sell is books, our aspirations must be consistent

with the promise and the ideals of the volumes which line our shelves. To say that our

mission exists independent of the product we sell is to demean the importance and the

distinction of being booksellers.

As booksellers we are determined to be the very best in our business, regardless of the

size, pedigree or inclinations of our competitors. We will continue to bring our industry

nuances of style and approaches to bookselling which are consistent with our evolving

aspirations.

Above all, we expect to be a credit to the communities we serve, a valuable resource to

our customers, and a place where our dedicated booksellers can grow and prosper.

Toward this end we will not only listen to our customers and booksellers but embrace the

idea that the Company is at their service. (Best et al., 2010)

However, this information is no longer available on the company’s website and no replacement

has been posted. Therefore, the current mission statement is difficult to determine. Barnes and

Noble is seeking to transition to a ‘multi-channel model’ (Form 10-K, 2012) that has greater

balance between its segments, but it has not yet accomplished this goal. Currently, Barnes and

Noble’s main asset is its bookstores, which account for 63% of its business, followed by college

bookstores (25%) and lastly its NOOK division (12%) (Annual Report, 2011). Perhaps this lack

of a mission statement reflects a larger ambiguity that the company currently faces: how to

complete this transition to a multi-channel mode so that it can compete against its many rivals.

SWOT Analysis for Barnes and Noble:

Strengths: leads sector in brick-and-mortar bookstores; strong presence on college campuses

Weaknesses: too dependent on hard copy book sales; NOOK is an expensive gamble

Opportunities: more demand for ebooks; college enrollment projected to increase

Threats: technological developments by competitors; bookstores generally in decline

Competitors

Barnes and Noble is officially classified as a bookstore engaged primarily in the sale of new

books (NAICS: 451211). More accurately, though, Barnes and Noble operates in four separate

yet related sectors, and therefore must compete against a number of very different companies

that range beyond its immediate classification. It is challenging to construct a typical model

(such as Porter’s Five Forces) to summarize the industry because the landscape currently

comprises very different competition depending on the delivery method; instead, this model

considers each sector and its primary competitors separately:

1) Bookstores: Barnes and Noble’s brick-and-mortar locations lead this sector (with 40% of the

market share); the next chain is Books-A-Million, which controls only 2.5% of the market with

approximately 280 stores (Hoovers: Books-A-Million, 2012). Bookstores are thought to be a

declining industry; the 2011 bankruptcy of Barnes and Noble’s leading competitor, Borders,

provides tangible evidence that bookstores are in trouble (Waterman, 2012). Beyond its

immediate rivals, Barnes and Noble must compete with retail superstores such as Walmart and

Target. These companies can offer books below cost to attract customers to their stores with the

expectation that they will make additional purchases (Trachtenberg & Bustillo, 2009).

2) College bookstores: Barnes and Noble has the second-largest market share in this sector, after

Follett, which operates approximately 800 campus bookstores to Barnes and Noble’s 636

(Hoovers: Follet, 2012). As noted in the 2011 annual report, the college bookstores are relatively

impervious to some broader economic trends; for instance, in a recession, enrollment in higher

education tends to increase as people seek further education to better their employment

opportunities, resulting in more sales of college books (Annual Report, 2011). However, there

are threats to this sector, including new developments in etextbooks and the used book market.

In response to this, Barnes and Noble has created an online platform, NOOK Study, for an

enhanced method of accessing electronic versions of textbooks.

3) Online retailers: the landscape for brick-and-mortar bookstores has altered drastically in the

past decade, primarily because of the rise of Amazon.com, which offers customers expanded

selections and the convenience of acquiring materials at their leisure. Although Barnes and

Noble does provide its customers with a comparable online shopping experience, Amazon’s

sales in 2011 ($48M) were almost seven times those of Barnes and Noble ($7.1M) (Hoovers:

Barnes and Noble, 2012).

4) NOOK: although the NOOK has received high praise in reviews, its sales have lagged behind

other ereader and tablet devices (Greenfield, 2012). Amazon’s Kindle devices are the most

popular, while Android tablets are growing at a significantly faster rate than the NOOK—

Android (a subsidiary of Google) is the platform for many tablet devices, including the NOOK

and Kindle Fire, but the rise of other hardware, including Google’s own Nexus 7, is of particular

note. The success of Amazon both as a book retailer and as an online bookstore destination for

ebooks is a double threat to Barnes and Noble. Furthermore, these competitors have

considerably larger profits and can invest heavily in research and development. Microsoft’s

investment in the NOOK may provide needed funds to develop this product, but currently there

is no reason to suggest that it will overtake Amazon or grow at the same rate as Android

products.

In short, Barnes and Noble has only a very slim competitive advantage through its brick-and-

mortar bookstores and its college bookstores. It must find ways of developing new products that

differentiate it from its competitors in order to remain profitable, particularly as consumers seek

more electronic media.

Key Trends

Two major trends that will affect Barnes and Noble in the future are the growing importance of

electronic media (in particular, books) and increased enrollment in higher education:

1) Electronic media: there is little doubt that an increasing number of customers will prefer to

read electronic books over hard copies, a trend that has already made a marked difference on the

industry as a whole (Rainie et al., 2012). Although Barnes and Noble has sought to capitalize on

this trend through its NOOK and ebookstore offerings, it continues to lag behind its competitors,

specifically Apple and Amazon. Barnes and Noble’s approach is to offer its customers an

integrated experience: for example, books ordered online can be picked up in person at a retail

outlet; customers in a brick-and-mortar location can bring their NOOKs and browse books for

free while in the store; and loyalty programs can decrease costs for repeat customers (Annual

Report, 2011). However, this model hinges on the continued importance of the retail locations,

which have seen declines in revenue (Waterman, 2012). Barnes and Noble needs to find a way

of bringing customers into their integrated experience and retaining them that minimizes the

importance of the brick-and-mortar location.

2) Increased enrollment in higher education: the National Center for Education Statistics projects

that student enrollment in degree-granting post-secondary institutions will increase by 13% by

2020 (Hussar & Bailey, 2011). Barnes and Noble stands to benefit from this trend since it

already has a significant presence on college campuses.

Evaluating Trends

Evaluating the impact of these trends on Barnes and Noble should be possible with the following

sources of information:

1) Industry reports: Barnes and Noble should monitor reports on bookstores, ebooks,

ereaders/tablets, mobile platforms, higher education and etextbooks. All of these topics have

attracted the attention of industry groups (such as the Book Industry Studies Group) and

government entities (such as the US Department of Education). New opportunities and trends

can be identified from these resources.

2) Customer surveys: Barnes and Noble needs to be aware of its customers’ needs, which are

shifting drastically as new technology becomes available. In particular, it should tap its college

student base to learn more about what these customers want. Barnes and Noble has created

initiatives in response to this group’s unique needs; for example, their college bookstores now

offer textbook rentals to help reduce the cost of higher education (Annual report, 2011).

However, this segment should be highly valued since positive associations formed during the

college years could create long-term customers.

Recommendations

My recommendation for Barnes and Noble is to continue to expand its educational offerings,

both by further developing its college market and by entering a new market with materials for

homeschooling:

1) Increased presence for students: Barnes and Noble is well positioned to take advantage of the

increased number of post-secondary students; however, there are several additional actions that

the company should take to ensure that it capitalizes on this opportunity:

i) Barnes and Noble should increase its online offerings, such as etextbooks, since

distance education is also expected to grow during this time. New and innovative ways

of delivering these materials to students could provide a competitive advantage to Barnes

and Noble. For instance, it is anticipated that students will expect materials to be

available in various formats, particularly through digital and mobile channels (Van der

Werf & Sabatier, 2009). Barnes and Noble needs to capitalize on these trends with the

services that it currently offers, as well as developing new ones. For example, the NOOK

Study platform could be promoted in conjunction with its brick-and-mortar college

locations to integrate its customers into the Barnes and Noble experience; additionally,

Barnes and Noble should seek new and more innovative ways of making educational

materials available to students in traditional and non-traditional settings, such as in a

mobile format.

ii) Barnes and Noble should also make available a student loyalty program, such as the

one already in place by Amazon. Such a program could serve to transition its college

students into long-term customers once they graduate. A loyalty program that offered

discounts or incentives would encourage students to continue doing business with the

company.

2) Develop homeschooling materials:

i) The number of students who are educated at home has been increasing steadily since

1999 (Aud et al., 2009). Currently, there are approximately two million students who are

home schooled at an average annual cost of $600/student. If Barnes and Noble could

capture one quarter of that market and sell $200 in educational materials to each student,

it would stand to earn $50M annually.

ii) Homeschoolers already affiliated with Barnes and Noble would be more likely to

order additional materials from this retailer instead of its competitors. In a 2003 survey

of homeschoolers, 76% reported purchasing materials from a bookstore for their

curriculum (Princiotta et al., 2006). Currently, none of Barnes and Noble’s competitors

offer a specific set of materials for this market, although it is possible that Amazon or

Apple could compete. Apple, in particular, already has a textbook agreement with major

publishers, and could become a significant rival in this venture (Cheredar, 2012).

However, Barnes and Noble would have a price advantage for hardware since the cost of

a NOOK is significantly less than that of an iPad ($269 versus $399 respectively);

furthermore, NOOK software can be used on any operating system, whereas many of

Apple’s features are limited to iOS.

iii) Barnes and Noble already has the resources it needs to create a platform and materials

for homeschooling. NOOK Study could add more features, such as a method for tracking

what has been covered in lessons—state requirements demand that those who

homeschool keep records of the topics that they have covered. Such a system could

alleviate one of the chief challenges that home schooling educators face. For materials,

Barnes and Noble could draw from Sparknotes, specifically its literature reviews and test

preparation materials; AP courses and similar evaluation methods are an important way

for homeschool students to demonstrate that they are viable candidates for colleges

(Brenzel et al., 2008). Barnes and Noble could also partner with respected figures in the

field of homeschooling who have significant online presence, therefore legitimizing this

venture for the homeschool population.

Conclusion

While Barnes and Noble faces fierce competition, it can remain in business by drawing on its

core resources. In particular, it already has advantages in its relationship with college students

and expand into the market for homeschooling materials. By cultivating the resources that it

already has, Barnes and Noble can maintain its niche as a purveyor of books—regardless of the

format in which they are delivered.

Bibliography

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Nachazel, T., Hannes, G. (2011). The Condition of Education 2011. National Center for

Education Statistics.

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content/uploads/2011/08/BarnesAndNoble.pdf

Barnes and Noble (2012). Form 10-K.

http://www.sec.gov/Archives/edgar/data/890491/000119312512285399/d361699d10k.ht

m

Barnes and Noble (2011). Annual Report.

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http://questions.blogs.nytimes.com/2008/12/17/qa-college-admissions/

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Rationing Books --- Small Booksellers Saw a Way to Stock Shelves With Below-Cost

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