CASE 2 Industry Analysis-, Barnes and Nobel versus Amazon.com* eonard Riggo, founder, chair, and CEO of Barnes and Noble, had transformed boolaelling into a giant indusbry, relying on the J philosophy...

CASE 2
Industry Analysis-,
Barnes and Nobel versus
Amazon.com*
eonard Riggo, founder, chair, and CEO of Barnes and Noble,
had transformed boolaelling into a giant indusbry, relying on the
J philosophy that people bought books based on emotion.
Shopping, Riggp believed, was a recreational activity. Fortune's-May
z00i cover story feat'red Riggio's archrivaf lllfos' Glair'
jumping on a kampoline. It remarked that
during the Internet bubble, Bezos' 'oversized personality made him seem
fun and inspiring," but "$ n-
'-...hisbehaviormadehimlookclueless."lTheindusty
:in which Bames and Noble and Amazon.com comPetgd was changing
rapidly. HoW athactive was this industry? What poCition 5heuld these
companies occupy? Tlis-ggse provides an a@
industry and the posid;;; i" iL'
. THE n fOUSfnY \
The Census Bureau, the source of table 2-I below, takes into aecount
retail establishments that market general and specialty boola, college
texb, and related items such as secondhand books, magazines, apparef
and stationary.. Calculations from industry sources add elementary and
high school iexts (about $5 billion a year), religious books (about a $I
billion per year), books sold on the Internet, books sold by mass merchandiser retailers (such as Wal-Mart, supermarkets, and drugstores),
books sold by publishers directly to consumers, and boolcs sold by puboThis case was written by Alfred Marcus, Univenity of Minnesota, Carlson School of
Managemenl Copyright @ 2009 by Marsh Publhati-ons-ttr 9.^{l lthb reserved'
l.Fred Vogelstein,-'tvtighty Amaz on! Fortune, May 26, 7007:70.
l9
CASE 2
Industry Analysis,
Barnes and Nobel versus
Amazon.com*
eonard Riggo, founder, chair, and CEO of Barnes and Noble,
had transformed boolaelling into a giant indusbry, relying on the
J philosophy that people bought books based on emotion.
Shopping, Riggo believed, was a recreational activity. Fortune's-May
200i cover story feat'red Riggio's archrivaf llfos' Glair'
jumping on a kampoline. It remarked that
during the Internetbubble, Bezos''oversized personality made him seem
fun and inspiring," but "$ n-
'-...hisbehaviormadehimlookclueless."lTheindusty
:in which Bames and Noble and Amazon.com comPetgd was changing
rapidly. HoW attractive was this industry? What poCition 5heuld these
companies occupy? Tlis-grse provides an a@
industry and the posid;;; i" it'
. THE n fOUSfnY \
The Census Bureau, the source of table 2-I below, takes into aecount
retail establishments that market general and specialty books, college
texb, and related items such as secondhand books, magazines, apparef
and stationary.. Calculations from industry sources add elementary and
high school iexts (about $5 billion a year), religious books (about a $l
billion per year), books sold on the Internet, books sold by mass merchandiser retailers (such as Wal-Mart, supermarkets, and drugstores),
books sold by publishers directly to consumers, and boolcs sold by puboThis case was written by Alfred Marcus, Univenity of Minnesota, Carlson School of
Managemenl Copyright @ 2009 by Marsh Publhations-ttr 9.^{l lthb reserved'
l.Fred Vogelstein,-'tvtighty Amaz on! Fortune, May 26, 7007:70.
l9
N
20 INDUSTRYANALYSIS
TABLE 2.1 Bookstore sales (as tracked by the Census Bureau)
lishers directly to libraries and book clubs. Industry sources estimate
total book sales in 2006 at about $27 billion. As can be seen from the
table, the rate of sales increase in the industry was low. Sales also were
seasonal, peaking around Chrishnas and not picking up until studenis
returned to school at the end of the summer. The indushy can be under-
- -
stood in terms of customers, substitutes, competitors, suppiiers, and new ---7.rrtrr.rtr. -.----J a-
-'/'--
Customers. Customers were roughly divided among buyers of trade
books (more than 3 5 percent), college and K-I2 textbooks (about 20 per-
" cent), professionai books (about l5 percent), mass-market paperbacks
(about I0 percent), and religious books (nearly 7 percent). The rest of
market consisted of book clubs and mail-order catalogs, subscription re[-
erenee books like encyclopedias, and university press books. Customers
cared about store selection, service, and localion. Ifthey lacked an enioyable and pleasant climate for browsing, bookstore executives believed
that they would lose out to Internet browsing. They hied to create a special feel in their stores- Some stores decked themselves out like small or
full-scale libraries. In most stores it was common to have places to sit -
comfortable chairs and/or writing tables. The stores tried to create a "literary climate"; they had readings by famous authors and other events-
Bames and Nobel versus Amazon.com 2l
They usually had pleasant music-iazz or classical-in the background.
fu well as selection, they paid a great deal of attention to d6cor, layout,
furni display, and signage.
There were numerous alternatives to spending time in a
People could go to a movie, the theater, or a concerf they
could participate in voluntary activities like serving on the board of a
charitable organization; they could be involved in sports-run a
marathon, golf, work out,.or go to a iporting event like a hockey or football game. They could attend religious services, browse the Internet, or
play a video game. They could play a board game, bowl, or sinlply watch
television- There were many activities from restaurants to yard work to
shopping in departrnent and outlet stores that competed with boox--
selling.
Competitors. In the traditional bookselling indusbiy, competition was
intense, growth was sluggish, profit margins slim, and t}e product that
was sold was e commodity. A book was the same no matter who/reseller was. Like any industry, this one can be understood in terms o[Porte/s
five forces: gtqtomers, substifute products, competitors, suppliers, and
new entrantp-./
The competition among booksellers was intense.. Independent bookstores had been losing market share to chains. Membership in the
American Bookseilers Association, which represented independent booksellers, had fallen. The two main chains were Barnes and Noble and
Borders. Bames and Noble began as B. Dalton. It was originally owned
by Dayton-Hudson. Borders began as Walden Boola. K-mart bought
Walden Books in 1984.
Lenny Riggio, Bames and Noble's founder, grew up in a working-class
Italian neighborhood in Brooklyn and had been too poor to attend college full-time,.so he worked during the day as a clerk in the New York
University bookstore. In .1965 he created his own campus bookstoreDuring the next six years, he established four other boolatores on campuses in New York City. In l97l he bought Bames and.Noble, then an
unprofitable New York textbook seller, and in 1974 he opened a
Manhattan Barnes and Noble annex where he aggressively marketed lowpriced, remaindered books. In 1986, when Riggio bought B. Dalton, he
owned I42 college bookstores and J7 Bames and Noble stores. With the
purchase of B.Dalton, Barnes and Noble became the largestbookseller in
22 INDUSTRYANALYSIS
the United States. By the late 1980s, both B. Dalton and Walden had
more than 600 mall-based stores.
In the early 1990s Riggio decided to do something different. His main
competitor at .that time was Borders, a chain based ia Ann fubor,
Michigan, that K-mart bought in 1992. Borders had pioneered a new concept-the superstore. Riggio decided to match Borders. His company was
an aggressive second mover that acted faster than Borders and expanded
more rapidly. Riggiot father had been a professional boxer-the only one
to defeat middleweight champion Rocky Grgi4no twice. The younger
Riggio said that he learned 6o- his father td be quicker on his feet and
more nimble than his oppon.ggZ \
The superstores had a speJal annosphere. They were meant to be a
gathering place for people. They tried to get people to linger. They had
comfortablerlaces to sit, coffee to drink,and late-nighthours. They hied
to build a sense of community. Cglebrity authors sold their boola at instore readings. Advertisemenb featured pictures of literary greats like
Hemingway and Virginia Woolf- The usual purchase at a superstore was
about twice that of a purchase at a mall-based store. The premise was that
the morb time a person spent in a store, the more a Person would buy.
Bames and Noble cenbally acquired about 50,000 titles for each superstore, but local managen had the freedom to adapt selection to local
tastes. The typical store had 175,000 titles packed into 30,000 square feet.
Competition between Borders and Bames and Noble was fierce. Both
Bames and Noble and Borden had been in a race to see which of them
would expand most rapidly- Their rnain fear was that Wal-Mart and other
mass-market retailers would take away their business.
K-martcould notkeep up with Bames and Noble and spun offWalden
and Borders in 1995. The number of superstores in the United States
iumped to nearly 800 in the mid i990s and they made up nearly 70 percent of the revenues of the two principal chains. Including their mallbased operations, they captured about a quarter of the U. S. market.
Barnes and Noble's market share was about i 5 percent and Borders' was
about l0 percent. Intemet boolcselling was just getting started and the
executives of Barnes and Noble and Borden did not know where it would
lead.
Suppliers. Publishen brought out more than 1,000 new titles each year,
adding to the millions of titles already in prinl Bames and Noble bought
from more than I,000 publishen and 50 wholesalers. It also had a list of
titles that it self-published and sold under ib own imprint. The United
Baaes and Nobel versus Amazon-com 23
States had thousands of pubiishers but the top 20 accounted for nearly 90
percent of sales. The number of publishers was declining as large media
.companies and global conglomerates swallowed up smaller companies.
Pubiishers sold books in two ways-through wholCIalers and by direct
sales. The two largest wholesalers were Ingram and Baker and Thylor.
Ingram had about a 50 percent market share. It did more than just distribute bools. It dishibuted personal computer hardware and software and
home videos, which was 90 percent of its business. When publishers sold
direcdy to retailers, the discounts uiere 44 percent to 55 percent offthe
list price. When they sold to wholesalers, the discounts were 2 percent to
3 percent higher. Because the average wholesaler had margi':s of about
1.5 percent, it had to be super-efiicient. To achieve higher levels of efficiency, Ingram had upgraded its systems earlier than Baker and Taylor,
but Baker and Thylor was catching up. Both companies invested heavily
in warehousing and electronic ordering and inventorying. Ingram had
very fast delivery times. It could get 90 percent of its books to retailers
within 36 hours.
Wholesalers like Ingram and Baker and Thylor generally supplied most
of the boola that the independent boolaellers sold. The publishers hied
to supply the. chains direcdy. Under a consent order the publishers
signed, they agreed not to-give chains like Borders and Bames and Noble
higher discounts than independent retailers, but suspicion still existed
that they favored the chains. Popular movies likeYou'w Got Mail castigated the publishers for conspiring against independent booksellers.
Wholesalers and retailers bought books on consignmen! they could
return what they did noi sell for full credit. This practice originated during the Depression, when there was no other way for publishers to get
their books on booksellers' shelves. More than 30 percent of new hardcover books might be returned because they did not sell. For the publishers this problem was addressed in a variety of ways. They might offer an
additional discount of 3 percent to 5 percent if the fetailer or wholesaler
was willing to give up the reh:rn privileg6. They might give rebates at the
end of the year if the retailer or wholesaler refumed a low percentage of
boolwould either reprint the book or bring out a new edition.
Before overhead and advertising, the profit for a publisher of a successful $25 novel that sold 30,000 copies was about $217,500 (see table Z.Z
below).
24 INDUSTRYANALYSIS
TABLEZ.T Publisher's costs and profito
souRCE: Table created from estimates found in Jeffrey Trachtenberg. 'Tide Role: Barnes & Noble
Pushes Booksfrom Ambitious Publisher: ltselt'71e Wall StteetJourna/, June 18,2003: A1'
The gross margins were about 30 percent. Overheads and advertising
ate into the margins and could deskoy them. Celebrity authors like the
Clintons could demand huge advances in the millions of dollars, but the
typical author got just i0 percent to 15 percent of each copy sold. Not all
books, moreover, were successful. If 50,000 copies of a novel were printed, it might sell 30,000 copies. The 20,000 unsold coPies would be
shipped back to the publiiher to be "remaindered" or destroyed. If the
boo[s *et. remaindered, they would be distributed to other channels to
be sold at. a discount. Publishers tracked sales better today than they did
previously because they had point-of-sale data. They also made better
i'orecasts about how well books would do, but they still made mistakes,
and even an experienced publisher could not always anticipate demand.
lFrr.
sellers- By I Qo7, it was estimatedthat-there were red of them
@"fi"g on the Web. By 1998, they had captured nearly 2 percent of the
adult book market. Still, Barnes and Noble was the undisputed champion of bookselling. When Arffiopened online inrlll$P*
Barnes and Noble pgidJflffftriig& Instead, it focused on its comrnitment to continued expansion. The key competitive challenge the company faced was to open new stores quickly. The goal was to exPand at a pace
oi about l00 new siores Der vear. But there was |eff Bezos with whom to
contend.Teror' foundTfh-azon.com was th. stuff of legend- A
sumrna cum laude graduate of Princeton in 1986 with a degree in computer science, he had worked for a telecom startup and a hedge fund.
-seeking
to begin a business on his own, he examined 20 possibilities for
Internei "o*ri.r"" before settling on bookselling. He believed that there
Bames and Nobel versus Amazon.com 25
were great opportunities in books because the industry was highly fragmented. Internet selling offered many advantages including a large selection, high inventory tumover, high sales Per square foot' and high sales
per operating employee
-
Bezos moved from New York City and located his business in Seattle,
Washington, to take advantage of the software talent and proximity to
Ingram's large wholesale warehouse in Oregon. There also happened to
be no state taxes on retail purchases, which made Internet sales more
competitive with retail. Amazon's return rate of boola to the publishers
was only 1 percent to 2 percent, something publishers found very attractive because they were Ieft with fewer books to remainder. The comPany
fulfilled a high percentage of its original orders through Ingram, but still
had to warehouse many titles. To carry out its operations, Amazon.com
had to innovate and pioneer in the development of software for Intemet
shopping. Amazon spent vast amounts bf money on R&D. Amazon.com
"r.rtid tle look and feel of an Interrrbt shopping site. It provided information about ihe books it sold, posted author interviews, offered free book
reviews, and gave links to other sites and features. In 1999 Amazon
obtained a patent for its one+lick technology, which allowed customers
to order from its site with a simple click of the mouse. In contrast to a
physical store, which had fixed times when it opened and closed, a person could shop at Amazon any time of the day.
The venture capital firm Kleiner Perkins Caulfield & Byer gave
Amazon $8 million to get started and the business grew rapidly. In less
than a year, Amazon had nearly $l million in sales- Repeat customers
provided more than 50 percent of the orders, and the average hansaction
was in excess of $50. Technical and business books made up a high percentage of Amazon's early orders. When the company went public in
l997,ls market capitalization rose to $560 million on the first day. Bezos
suddenly was a multimillionaire, as he owned 42 perceni of the stock.
Investors had confidence in Amazon's business model even though
Arnazon-com did not make a profit and it was not clear when it would do
so. Investors liked the cash flow. The typical customer paid Amazon with
a credit card; Amazon then collected the sale price (minus a fee) within
a few days from a credit card comPany. In the weeks that passed before
- the supplier was paid, Amazon had the use of the customert moneyBames and Noblet executives were concerned that Amazon's opening thrust was iust the beginning of a historic shift toward buying more
books online. Ertry into online boolaelling seemed relatively easy and
Barnes and Noble's executives expected others to follow. These might
26 INDUSTRYANALYSiS
include small booksellers that had loyal followings in special categories
like science fiction and fantasy, publishers like Simon and Schuster,
warehouses like Ingram, and mass-merchant retailers like Wal-Mart or
Target.
BARNES AND NOBLE'S RESPONSE TO AMAZON'S ENTRY
Bames and Noble launched ib own Website in the spring of i997. The
site featured personalized book recommendations and deep discounts
every bit as good as Amazon's on most items. The company used its brand
name to capture leadership in the general interest and fiction categories.
Because of iF warehouses and greater experience in shipping books,
Bames tried to beat Amazon's delivery times. It built two new warehouses-in Atlanta and Reno-that it added to its existing warehouse in New
Jersey to ensure prompt distribution. It also built its own version of the
one-click technolog;r, which it called "express lane' ordering. But it did
not seamlessly integrate brick and mortar operations with the Intemet.
Barnes and Noblet executives were enraged,when Amazon advertised
that it was the "earth's biggest bookstore." Since 1970 Barnes and Noble's
slogan had been that it was 'the worldt biggest bookstore." Thus it sued,
arguing that Amazon was not a bookstore ai all, but a book broker.
Amazon, in furn, countersued. It sought an iniunction against Barnes and
Noble.com for using one-click technology. Barnes and Noble, Amazon
argued, had violated its patent. The companies setiled itrese cases oui of
court. In i998 Amazon again went on the offensive. It ran an advertisement purporting to show that the number of Amazont titles dwarfed
those of Barnes and Noble. Bames and Noblet retort was "Whot kidding
f \tt wnor
In 1999 Barnes and Noble had an IPO that spun off Barnes &
Noble.com as a separate company. Bertelsmann owned 36 percent of the
new company, Bames and Noble owned 36 percent, and 36 percent of
the shares were sold to the public. One month before the spin-off,
Amazon took a number of aggressive steps to counter it. Amazon added
1.5 million more titles to those it already listed, it inhoduced a personalized book recommendation service, and it started to sell bestsellers at a 50
percent discount. % was especially galling to
Barnes & Noble.com. It was forced to match the discount, which meant
that it had to sell books at cost.
Amazont aggressive moves had their desired effect. The stock of the
new company climbeBames and Nobel venus Amazon.cofi 27
disappointment in an era when stocks routinely doubled or hipled the ini
tial asking price. Amazon was beating Bames & Noble.com on the criterion that mattered most to Wall Street.-What mattered w.,as 'eyeballs;" and
on this measure Amazon dominated. /r}.Jt94jtFl!hd
Intemet customers to Barnes & Noble.com's 1.7 million. Its Internet marketshar'e was75 percent to Barnes & Noble.com's 15 percenl Bames and
Noblet CEO, Riggio, desperate to shike back at lwrazon, thought the
only option was to go after Ingam., He made an offer to buy Ingamt
Book Group in i998, only to be rebuffed because of antihust scrutiny.
AMAZON REINI\4ENTS ITSELF
n-to reinvent itself as a general merchandiser and Intemet se . In June lQaR it bu**" ,n t.tt
, mrtsie nnline and quickly heeerne the biggest onli-e selleri *tis wes felIo ear. In both these
casds, it engaged in the full range of e-commerce activities- buying,
warehousing, merchandising, shipping, and customer sewice. By the end
of i999, it had moved beyond books into other retail categories such as
electronics, home improvement goods, and toys, while Bames &
Noble.com only sold media-related products and limited its increased
consumer offerings to a few items like music, posters, and prints. In 2000
Amazon added lawn and patio and kitchen products, cell phones, and
wireless services to the array of products it sold.
Amazon also decided that in some of ib initiatives it would not own the
goods sold or take responsibility for order fulfillmeni. I;ike eBay orYahoo,
it would be an e-commerce parhrer for individuals and for small and large
businesses, eaming fees for bringing people together and providing a
technolory for the marketing, dishibuting, and warehousing of their
goods..In 1999 it launched an auction initiative oriented mosily toward
higher end arb and antiques in partnership with Sotheby. In a few short
years Amazon morphed from an online boolstore to a puweyor of everything from CDs and Palms to power tools and waffle irons.
In 1999 Amazon created an area on its Website wherb it facilitated
transactions between customers and sellers. It signed agreemenb with
dot.coms like Drugstore.corn, Living.com, Audible, and the online carsales company, Greenlight.com. Each would pay Amazon fees for the
opportunity to be showcased on Amazont Website. Unlike the launch of
a new Amazon product category, which required spending on products
and physical infrashuchrre, these deals cost Amazon virtually nothing,
28 INDUSTRYANALYSIS
but the fees helped it get closer to profitability. The premise was that
Amazon wduld not be just selling more products, but selling the attention
of its customers to other Intemet retailers. Amazon would become more
like an Internet portal such as Yahoo. In comparison torYahoo and the
other portals, however, Amazon customers were not just surfers and chatters;
I r retailers ]ike
Target, Circuit City, Virgin Records, and Borders. Amazon agreed to run
all or part of their e-commerce operations. It would sell the retailers'products on Amazon.com, and in some cases, warehouse products, dishibute
orders, and run the partner's Web site.
Amazon's main revenues and income continued to come from books
and media like CDs and DVDs. But gross margins in services were outstanding. They far outshipped the profitability of Amazont other businesses, though they remained a small portion of what Amazon did. In
2000 Amazon moved further in its efforts to reinvent itself as a general
merchandiser and Internet service provider. Each of Amazon's sellers
had a single page on the Amazon Website where they could display their
goods. Amazon also invested in five U. S. warehouses and made huge
invesknenh in technology that integrated ib Web site, customer service,
payment processing, and warehouse operations.
WHAT NE)ff?
Amazon was evolving from a retailer to a commerce plaform, department store mall, and service provider on the Web. There was a risk in the
path Amazon had chosen. Its customers, who were mo-stly wealthy and
highly educated, identified Amazon with books. Would they cease to visit
the site if Amazon was just a place to buy charcoal giils and kitty litter?
Amazon had succeeded because it represented boola. Bezos maintained
that Amazon stood for high-quality custorner service over the Web-and
this service would attract customers regardless of what Amazon sold. But
Barnes and Noble's CEO Riggio thought thatAmazon's moves would not
work in its favor. If Amazon became the Wal-Mart of the Internet, then
Barnes & Noble.com's narrbw focus-its comrnitrnent to books-would
be an advantage.
Bames and Noble, however, was hedging ib bets too. Its stores also sold
impulse items, which had higher margins than boolto expand the number of titles it published on its own. This put pressure
were experienced online shoppers.
Barnes and Nobel versr:s Amazon.com 29
on other publishers to lower costs. For both companies the question was
what to do next.


^ rru$refitirr- -
On most measures Amazon was outperforming its bookseller competitors.
Industry growth rates were low but Amazon had recorded doubledigit
growth every year since 200i, when it surged ahead of archrival Bames
&Noble.com. Barnes and Noble and Borders' declines were greatest at B.
Daltons and Waldenbooks, which still'had not been entirely phased out
in favor of superstores. And all booksellers anxiously watched Google as
it announced in 2006 that it intended to launch eBooks as a complement
to its Google Scholar and Google Books, but Google did not follow
through on the move, much to the relief ofthe booksellers (see table 2.3).
The question for Amazon was not iust how well it did against other
booksellers, but how well it did against other Internet retailers. Though
competitive with Yahoo, Amazon did not match up well against the enormously well-capitalized Google. Amazon's nonbook sales (electronics,
jewelry etc.) had become nearly 40 percent of its total sales, so whether
to coinpare it with booksellers like Barnes and Noble and Borders or
other Intemet retailers was a serious issue. Prices tended to be higher and
ma,rgins beftei on nonbook items. Going forward, Amazon had to decide
where to place its emphasis. To what extent did it wish to cast ib lot with
other booksellers and to what extent did it wish to cast its lot with other
t",i
selling through
rketplace, Merchanb, and other programs) accounted for
+eady-t!+€rcent of its unit sales; however, the firm's third-party sales had
peaked in 2005 and had not grown in 2006 (see table 2 .4).
They constituted about 30 percent of Amazon's 2006 revenue, and with the decline" in the dollar and
the gowing purchasing power of foreign consumers, intemational sales
had great promise. For Amazon, the question was where to put ih focus:
Was the most promising area bookselling, nonbook sales, third-party revenues, or global income?
Barnes'Choices
Though still the largest U.S. bookseller, with 793 boolatores in February
of.2007, Barnes and Noble had fallen behind Amazon on many parameters. It had a publishing business and a subsidiary that operated kiosks,
,iq-": -
Bames and Nobel versus Amazon.com 3l
SOURCE: httf''//hooksfatist's com/sitedf'an/rerr'rcedstatistici cf m'
and it remained committed to the "community stole" concept, kying to
make each store an integral part of the community in which it was located by offering titles with local content, a cafe, a children's and music section, and amagazine department. Each store also had a series of ongoing
community evJnb. Bestsellers llkeHarry Poffer continued to account for
3 percent io 5 percent of Bames and Noble's total sales. Most of its sales
"ar]r"
fro* bools that were issued by the maior pubiishing houses,
though the firm also bied to promote books from university presses and
independent publishers. Barnes and Noble typically had to discount its
bestseilers by as much as 30 percent to athact customdrs because the market for bestiellers had intense competition from discounters and mass
merchandisers like wal-Mart and costco. Recently, Barnes and Noble
had started to offer music, used books, and movies at some of its stores. Its
Web site, Barnes&Noble.com, which it repurchased from Bertelsman in
2004, was among the top 30 e-commerce sites in terms of haffic, but it
was far behind Amazon in terms of sales.
Bames and Noble's choices centered on the types of bools it should
sell, to whom, and under what conditions. It Ian many university bookstores, often not under its own name, and it could invest in or take over
other specialty bookstores provided that this opportunity had real Promise. In lhe short term, ib maior problem was sinking profits. Gross margins had declined by more than a percentage point in the first quarter of
:OOZ *"d the company actually lost money. Profits were sinking becauseof severe pricing pi"rrrrr" from discounters, warehouse clubs, and online
retailers. ir, ,"rporrr., Barnes and Noble raised the discounts it gave to
customers who signed up for it $z5-a-year membership club. Members
had the right to , +O pet""rit discount on bestsellers, a Z0 percent discount on iU oth"r hard covers, and a l0 percent discount on everything
else sold either online or in " store, including paperbacks and coffee'
iEO L"on"rd Riggio's 2007 remarks'to analysts emphasized the imporrty sales of items as a percentag" of 411to" llbl #
32 INDUSTRYANALYSIS
tance of discounting: "r,owering prices was the most significant decision...made last year."2 Intense competition was Riggiols reason for raisi1q the loyalty program discounb. He noted that the company could
afford to make this move because of its strong financial position and lack
of debt The move shook up Bbrders and dealt it a nisty brow, but not
without pain inflicted on Barnes and Noble.
Riggio wanted to lock in Barnes and Noble's best customers. He wanted to keep them from defecting to competing booksellers, but would discounting continue to work as a shategy designed to take market share
from the independenb? The number of independents kept steady at
about 18,000 despite the ongoing assaults. The,independents survived
mainly because of their intimate knowledge of their customers and the
books they sold. The personal service they offered was hard for the chains
to match..Many also gave steep discounb on books of special interest to
their customers. where it really counted, the chains diJ not necessarily
have a price advantage.
Borders started a membership club similar to Bames and Nobret but
quickly retreated and reduced its scope when the firm's profin shrank. It
was not earning enough money from the scheme to iustify the expense.
Neither was Barnes and Noble, but that did not keep Riggio from persisting. Instead of going the discount route, Borders was befting on a new
store concept. The remake of its stores would be very expensive, however- It would cost Borden about $2,4 .million per store: $ I .2 million in capital expenditures, $l million for new inventory and $200,000 for prlopening cosb. Not only was the concept very expensive, it was going to
take a long time to accomplish. The question facing Bames nnd Nobl.
was how long it could wait to match Borders on this front. would traffic
flow from the older Bames and Noble stores to the newer Borders store at
the end of the process, to t}e dehiment of Bames and Noble? would it
end Barnes and Noble's dominance over its chain store rival?
l Amazon'sNicheJ
JeffBezos, &e CEO ofAmazon, had been moving his company in different directions than other boolaellers for quite some time. Amazon had
the capability to be much more than a bookseller. Third-party sales had
been a very important component of it' growth. It prd'iid6dEffifr-nicd
Z- fames cover! "Bames and-Noble_-su,ings to a Loss; Books Retairer Brames Heavy
Discounting, Warns of Weak Profit," T/re WaIl Street loumal, May 25, 2007: P.5.
Bames and Nobel versus Amazon.com 3J
and logisiical components of other companies' Intemet businesses with
technology it had created for process{ng orders and shopping. It might be
compared to Wal-Marf if that giant chain provided its unparalleled supply chain and logistics services to other businesses inc*i*ding ib retailing
rivals. Amazon had more than 12 years of experience and it had spent
more than $2 billion in perfecting the infrashucture for oniine shopping,
which it now marketed to others. Some examples were businesses that
licensed Amazont software code and rented rack space in its warehouses, spare computing capacity on ib servers, and data storage on ib disk
drives. These sewices were not only meant for starhlps and small comPanies, as Amazon attracted large customers like Microsoft as Vsell, which
was using Amazon's excess storage to speed downloads of softwareAmazon's concern was no longer iust with the likes of Bames and
Noble and Borders. In comparison to other e-commerce businesses, its
sales growth rate was average. It was especially wonied about new rival
Google, which had an active shopping site, Froogle, and it continued to
be concerned about Yahoo and eBay, whose Intemet shopping sites were
well-known and respected.
As an Intemet retailer A,rnazon faced stiff competition from rugged
rivals who would not easily be overcome. On the horizon Amazon might
face competition from MySpace, which News Coqp had boughg and
YouTube, which Google had bor:ghr As they reconfigured themselves for
additional revenue, they could become direct competitors. Amazon's initiatives were meant to position it for ihe long haul and to distinguish it
from the other firms trying to dorniuate e-commerce. But there was no
assurance that these initiatives would work, though it was bue that none
of Amazon's potential competitop had a comparable infrastructure. The
bottom line for Amazont rivals was how easily they could copy the firm's
model.
Bezos, as he had when Amazon first started, cautioned patience to
investors. He told them that his e-commerce initiatives were for the long
run, and that in the short term they might not eam much money He was
quoted as saying, "'What we've historically seen is that the seeds we plant
can take anywhere from three, five, seven years" to make a difference.3 In
making a long-term commitmen! Amazon was hoping to deter comPetitors from entering ib space.
Using such language in the past, Bezos had built up credibility with
3- Robert D. Hof,'|effBezos'Risky Bef" BusinessWeek,November ll, 2006.
34 INDUSTRYANALYSIS
analysb and investors. The question was whether they would continue to
believe in him, or would they decide to abandon him? An idea Bezos was
trying to promote was to make maximum use ofAmazon's excess computer capacity. Like other firms competing in Intemet,l.bommerce, Amazon
employed as little as i 0 percent of its computer capacity at any one timb,
saving the rest for spikes in demand. Higher capacity use of the firm's
computers and its dishibution centers meant that Amazon could offer
more products and improve efficiency. The rnore producis Amazon
shipped, the better ihe price cub ii obtained from shippers, but when it
was not shipping so many products it had to figure out a way to use the
capacity it had accumulated. Bezos believed that Amazon should rent or
sell its excess capacity on a temporary basis to other companies. He
believed he had identified a unique edge that other players in the Internet
space could not match.
Continuous maneuveing. Amazon had taken another important initiative. This one again struck directly ai its bookselling rivals. Kindle was a
handheld book reader unveiled in 2A07 for $399; it could hold about 200
books in a paperback-sized package and display them on pages that
appeared more like paper than an LCD screen. The device was wirelessly hooked into the Internet, permitting users to download boola any time
they wanted. Initially, 90,000 titles were available for about $I0 each.
Kindle'i design was meant to compete.with newspapers and magazines as
well as books. It was billed as "a single-pulpose reading device."+ Ib main
competitor was Sonyk Reader, which sold for a similar price.
Thking a page from Amazont book, Bames and Noble also was innovating by bringing Web-style technology into ils stores. It was installing
kiosks that allowed people to search inventory locate merchandise, and
order out-of-stock items. Order a book from the in-store kiosk and
BarnesandNoble.com would deliver it in one to two days. As in E-commerce, Bames and Noble was considering feafuring endorsements from
readers in ib product displays. These testimonials would be different from
the Web version in that they would not involve negative ratings and
reviews though they might involve Web-like comparison shopping.
Customer reviews had proven to be effective sales tools on the Internet;
thus there was little reason to think they could not be extended to the instore experience. Seamlessly integrating its in-store and Web-based capacities was Barnes' challenge.
4. Stephen Wildstrom, "Amazon's Breakthrough E-Book," BusinessWeek Online,
November 20,2007 .