Asymmetrical Information - Megan McArdle

02.06.13

Why Is Barnes and Noble Getting Out of the Bookstore Business?

Don't they want to sell books?
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Spencer Platt/Getty

You might have thought that with Borders shutting down, Barnes and Noble would be sitting in the catbird seat.  They're now practically the only place in America where you can go to get your hands on an actual physical book before you buy it.  Sadly, the reality is not so cheery: with Nook sales weak, Barnes and Noble is closing a bunch of stores, including a high profile local store, in DC's Union Station.

Alexandra Petri says it's time to stage an intervention

That is why we are staging this intervention. Whenever you see someone you love doing something that is hurting them and you, you feel bound to say something. Absence does not make the heart grow fonder, where books are concerned. Seldom seen and soon forgot seems to be more likely to be the model. Why would you assume that if there are fewer Barnes & Nobles, there will suddenly be more people dashing to BN.com?

And physical bookstores are — as even Klipper noted — not unprofitable. Is getting rid of them really such a good way to save money?

Physical bookstores still serve a vital role as showcases for books. These are places where people encounter many titles for the first time, titles we may decide to buy later, or may just take with us to the restroom and linger over in blatant defiance of the posted signs. We certainly would not know that Teen Paranormal Romance was such a unified genre if you did not display it so beautifully. Their ability to bring us into contact with hundreds of things we did not know we wanted is not to be underestimated. And they help even the online trade. Twenty-four percent of people who bought books from online retailers did so after seeing them in real live bookstores first, according to a 2011 survey. Yes, this is irksome if you are the book retailer, but it’s critical publicity for the book. Lose the showrooms, and the Book suffers.

As a matter of fact, closing bookstores is a good way to save money.  It pains me to say this.  Some of the happiest hours of my childhood were spent curled up behind the shelves of two bookstores--Shakespeare and Company and Murder Ink--on New York's Upper West Side.  But the sad fact is that Amazon is crushing the margins of physical retailers, including bookstores, in two ways.  Fewer customers are coming to the stores, as people let their fingers do the walking instead.  And Amazon's low prices have forced retailers to cut their prices to stay competitive.  As a result, many stores are unprofitable, borderline profitable, or experiencing declining revenue.  It's true that having a physical bookstore around probably means that more books get sold.  But it doesn't seem to be true that those extra book sales produce enough revenue to cover the cost of all that lovingly organized and curated real estate.

Okay, but why close stores that aren't actually losing money?  Doesn't that just do long-term damage to the brand?  

The answer is "leases".  In my recent piece on Best Buy, I made the following observation:  

Every retailer that gets into trouble ultimately does so the same way: all those prime real-estate leases that were an asset in boom times become an expensive liability when the foot traffic falls off—and the operating costs don’t. Ultimately, going even a little bit upmarket is going to mean losing a lot of the value-driven customers who came to Best Buy when they were the ones with the lowest prices. And losing those customers probably means that the number and the size of their stores have to shrink. But those leases are binding contracts; short of bankruptcy, Best Buy may not be able to close stores fast enough to save its bottom line.

Retail leases typically run for ten years.  That means that if the lease is up on a store which is only marginally profitable, you should think hard before renewing.  If you expect profits to turn around, then hey, go ahead.  But if you think they might fall, then you should probably bite the bullet and shutter your store.  Otherwise, that lease may be the thing that pushes you into bankruptcy six years from now, when sales have fallen to the point where they no longer cover the cost of inventory + physical space.

And sadly, I think that we can expect sales at Barnes and Noble to fall further.  They can't compete on price with Amazon, because running a warehouse is much cheaper than running a physical store, with all those staff and expensive displays.  They're barely competitive on convenience (when was the last time you needed a mass market book RIGHT THIS INSTANT!!!).  And while bookstores may be able to compete on service and the shopping experience, that's more likely to happen in a more intimate shop with a highly dedicated staff than in a big box retailer.

Don't count Barnes and Noble out entirely.  Their college bookstore business still seems to be strong, and they may be able to reimagine their way to a higher-value, more premium experience.  But doing so will almost certainly mean shrinking, down to a manageable number of premium outlets with a specialist staff.  Which means, alas, closing bookstores and getting rid of those expensive leases before they drag the company under.