- Retailers
The book retailing business was divided in independent local bookstores, larger chain stores and superstores. The 12,000 independent stores in the United States lacked a close connection with publishers and have a less commercial approach to merchandising books. They depended on local reputation, specialization and expertise. Although the most successful independent stores achieved higher sales per square foot than larger chains, a high number went out of business every year because of the growing success of superstores.
Mall-based chain stores revolutionized bookselling in the 1960s. They took over techniques from other retailing categories: they piled up books on tables, ordered little of everything and quickly restocked fast-moving titles like supermarkets and department stores did with their goods. Most of these middle-sized chains were taken over by the country’s largest retailers. Barnes & Noble which will be discussed in greater detail in the next chapter bought the chain B. Dalton and later on several others to continue its expansion. The investment in superstores, however, turned out to be a more successful for bookselling business in the 1990s.
Superstores had extended opening hours, access to major road and parking facilities. They encouraged browsing and tried to build up a sense of community within the store. Although there was no pressure to buy the average amount of money spent was $20 which is twice as large as in mall-based bookstores. The two leading superstore chains, Barnes & Noble and Borders, were encouraged by these significantly high sales and had plans to double the number of their superstores until the year 2000. The rise of online retailers, such as Amazon.com, however, brought an unexpected shift of consumer habits and decreasing turnovers for superstores and bookstore chains. Before we discuss the struggle between Barnes & Noble and Amazon.com for the dominance in online retailing we look at he business models of both companies.
- Barnes & Noble’s Business Model
With sales of approximately $2.45 billion a year, Barnes & Noble was the largest bookstore chain in the world throughout the eighties and mid-nineties. It had at least one story in every major US city and employed more than 20,000 employees. In 1993, the company went public, but 26% of it was still controlled personally by Chairman and CEO Leonard Riggio. He purchased the Barnes & Noble chain for $1.2 million in 1971. The basic concept was to have a few so-called superstores with more than 70,000 square feet of total selling space in the biggest cities and a large number of smaller sized discount stores across the country, often located in malls. The superstores turned out to be a huge success and so their number rapidly grew from four units to more than 400. In 1997, superstores accounted for 77% of the company’s sales and more than 85% of its operation income. Over the years, Barnes & Noble also became a publisher for old titles such as Webster’s Dictionary, it established a mail-ordering book business, ran a membership club for book discounts and became the largest supplier of books through catalogs in the US. Although the company broadened its capacity to those book-related businesses, the revenues and profits continued to be dominated by its bookstores.
3.1. Procurement and Logistics
Procurement and logistic functions were centralized by Barnes & Noble for all their store operations and were located in its headquarters in Manhattan. This was one of several measures to grant discount book prices to their costumers. The centralization process allowed Barnes & Noble to order from publishers in large numbers by which they obtained greater discounts than other book retailers. Inventory costs for both, Barnes & Noble and the publishers, were reduced by a superior access to books in short supply and longer payment terms. The relationship between Barnes & Noble and the publishers, however, was not entirely balanced because the superstores had particularly high return rates. In order to prevent these returns the publishers should have allowed even higher markdowns what they were not willing to do. Despite this fact, direct purchasing from publisher increased because large numbers of books were stored in large company-owned warehouses. The main advantage of this procurement was short-term availability: books in stock in warehouses could be shipped in stores in two to three days while ordering books from publishers often took several weeks. Logistic systems were further improved by the introduction of an internal online inventory tracking system called WINGS in the early 1990s and by the installment of a new generation of store systems called ‘BookMasters’, which will be described later on.
3.2. Store Operations
As mentioned above, Barnes & Noble’s store operations can be divided into selling in superstores and in small stores. The vast majority of the stores were leased because commitments under long-term operating leases could be kept off its balance sheet. If these leases would have been capitalized, the company’s invested capital would not have been $694 million as reported but approximately $2.97 billion in 1996. Barnes & Noble’s superstores have an average size from 10,000 to 60,000 square feet. A new superstore of a size of 27,000 square feet cost about $2 million and would have needed average sales of $11,000 a day to survive. An individual store carries roughly 60,000 titles and the title selection became the store manager’s responsibility after the opening. The computerized store system BookMaster, which became standard in all stores, supported faster register transactions, real-time communication among stores, the distribution centre, and wholesalers, and a 2.5 million title database designed for book browsing. The use of these computer terminals, however, was restricted to Barnes & Noble’s employees and could not be used by costumers for online purchasing, neither in stores nor at home.
Barnes & Noble’s smaller stores are usually operated under chain trademarks such as B. Dalton Bookseller, Doubleday Book Shops, and Scribner’s Bookstore. These stores have smaller selections, higher prices, and fewer markdowns. Some place greater emphasis on hardcover and gift books. Some chains, however, became victim of cannibalization: Barnes & Noble has closed, for example, more than 50 B. Dalton stores per year since 1991. The reduction of small stores led to increased turnover in superstores and consequently to ambitious expansion plans. Decreasing earnings in 1996, however, made the company reduce building of new superstores from 90 to only 70 a year.
3.3. Marketing
As far as marketing is concerned, the small stores relied on the convenience of going to the nearest store incorporated in a mall to draw traffic, marked down rather selectively but generally took off 15% to 25% of the publisher’s suggested price for hardcover bestsellers. The superstores with a general lower price structure tried to attract destination shoppers. Discounted books, such as all hardcovers, a selection of bestsellers, new editions, and special promotional items, were placed in the front of the store. Besides price reductions, well-informed salespeople and in-store service were decisive marketing factors. Barnes & Noble served Starbucks coffee and got authors into its stores for book signings, talks, and other events. The Barnes & Noble brand name which is reserved for the superstore business should suggest qualities like a large selection, everyday low prices, and an unintimidating atmosphere. The brand name was built up by humorous TV commercials, extensive print and radio advertising, direct-mail marketing, and community events.
4. Amazon.com’s Online Business Model
At the beginning of the 1990s, while Barnes & Noble and other chains were expanding their networks of superstores, first steps were set into another radically different approach to book retailing: online, over the Internet.
Several hundred book “cyber-stores” were estimated to be in operation on the WW in mid-1997. Their quality varied; from simple websites to full operative e-commerce portals which actually helped process transactions with the general public. Book Stacks Unlimited () had been one of the pioneers: It began selling books online through a bulletin board service (BBS) in 1992 and in October 1994 launched a website that offered a selection of more than 500.000 titles.
In the mid-90s, Book Stacks was still a significant player in online book retailing but had clearly been overtaken by Amazon.com. Latter was expected to post sales between $100 and $150 Million in 1997, up from $16 Million in 1996. As far as Amazon’s market-share for online book-retailing is concerned, estimates ranged as high as 90% back then.
Amazon.com’s founder, Jeff Bezos, who had a summa cum laude degree in electrical engineering and computer science from Princeton, was working as a “quant” at a hedge fund on Wall Street in spring 1994 when, in the course of surfing the WWW, he came across a site claiming an annual growth-rate of more than 2000%. This explosion in demand inspired him to think about opportunities in online retailing. After analyzing over 20 products on the basis of a number of criteria – including the size of the market, distribution patterns and competitors he decided to focus on books. He also thought that preformed marketing designs and distributional systems could prove to be a good basis for similar products, such as CDs, that also fit well with the Internet.
Bezo’s new company, named Amazon.com (“Earth’s biggest river”; “Earth’s biggest bookstore”), shipped its first book in July 1995.
4.1. Procurement and Logistics
While Amazon.com had offered customers more than 1 million titles from the outset, it still carried only 2000 of them in its own warehouse in Seattle. Packages of books were shipped from the publisher or wholesaler’s warehouse to Amazon’s, where they usually had to be “broken down” and repacked before being shipped out to customers.
Amazon’s dependence on others to stock most of the books that it sold prompted it to place more emphasis on going through wholesalers rather than dealing with publishers. Orders from publishers could take weeks to arrive. Wholesalers, in contrast, could ship a book within on to five days if they had it in stock. Amazon obtained 59% of the books frome just one wholesaler, Ingram, which had a warehouse in Oregon.
The most obvious benefit of this “just-in-time” logistics system was that it multiplied inventory turns and reduced working capital requirements. Amazon turned its inventory over 70 times in 1996, although this figure had declined by the second quarter of 1997 to 56.
4.2. Store Operations
Amazon’s “physical” headquarters was located in Seattle, Washington. Bezos had selected this location for a number of specific reasons. First, it was close to the largest book distribution warehouse in the world (it was owned by Ingram). Second, the region had a large pool of high-tech talent. Third, the fact that Washington state’s population was relatively limited had a positive impact on the tax situation. In fact, under the existing legislation, Amazon would not have to make customers in other states pay sales tax on their online purchases.
Amazon’s physical operations in Seattle were decidedly Spartan: The corporate Headquaters were located in a low-rent downtown district and office space was very limited. Bezos liked to say that Amazon kept everything short, except people and computers. In March 1997, Amazon employed about 250 people; half of them were involved in packing, shipping, and customer service, and the other half in computer programming, the editorial function, marketing, accounting and management. The top-managers’ backgrounds were generally computer-related rather than book related.
Amazon’s Web page, which limited graphic content so that it could be downloaded quickly, had been named on of the 10 “Best Websites of 1997” by Time Magazine. However, 80% percent of the resources spent for software development were used for back-office operations, due to the lack of existing software. Amazon needed a customer service centre for handling e-mails rather than phone calls and inventory management software that could automatically send e-mail messages when orders were placed and shipped.
4.3. Marketing
Customers were able to shop at Amazon any time of the day, any day of the week. They could search through its catalogue, which originally consisted of 1.1 million titles, by author, title or subject. First-time shoppers had to fill out a simple order form with their names, addresses. Password protections meant that this information would not have to be re-entered in the future unless an order was to be shipped to a different address. Customers were instantly informed of the prices and inventory status of the items they had ordered.
The main point is that Amazon did far more than just sell books. It also provided a range of services, including information about books: interviews with authors, book reviews and recommendations from other customers.
5. Barnes & Noble’s Online Offensive
Barnes & Noble had begun monitoring developments in online book retailing shortly after Book Stacks started up its Web site in late 1994. The company tracked all the early online efforts but did not benchmark itself against any particular one because it saw a unique mission for itself: bringing the Barnes & Noble brand name into the new formed online community.
In 1996 the company decided to launch its own transaction oriented Website and it formed a “New Media” division that consisted of seven people. In 1997, Barnes & Noble officially announced its plans to become the exclusive bookseller on America Online’s (AOL’s) “Marketplace”. On March 18 that year, the company went online at AOL with deep discounts: 30% for hardcovers and 20% for paperbacks. Barnes & Noble also launched its own Web site, with a similar deeply discounted price structure later in May.
In the same month, the company also sued Amazon.com because of their claim to be the “largest bookshop on Earth”. According to the lawsuit, “Amazon is not a bookstore at all”. Rather it is a book broker making use of the Internet to generate sales to the public.
6. Amazon’s Response
Although Jeff Bozo officially stated that he did not take the Barnes & Noble online threat seriously, still Amazon.com did seem to pay attention to Barnes & Noble’s entry online. On March 17, 1997, the day before the launch of BarnesandNoble@aol, Amazon.com added 1.5 million titles to the more than 1 million that were already listed and furthermore expanded discounts on bestsellers.
It also began negotiating deals with “Web landlords” as Yahoo! and Excite, and with AOL’s NetFind (a search engine) which fell outside the scope of Barnes & Noble’s deal with AOL Marketplace. Amazon.com, unlike Barnes & Noble, also continued to advertise offline. Finally, despite the original business plan to avoid fixed assets at all costs, Amazon.com built its own large warehouse in Delaware as a way of speeding up deliveries.
- Conclusion
After almost a decade of online book retailing passed, who would have thought that Amazon.com turned out as the winner in this financial battle against almighty Barnes & Noble for online bookselling supremacy?
Yet, when we now look at the most recent figures Barnes & Noble’s online spin-off posted a loss on flat sales growth. In fact, Barnesandnoble.com was never able to post a quarterly profit. Meanwhile, Amozon.com has found a way to enhance its profitability and managed to grow its top line by 28% this past quarter. Amazon.com did not only succeed in keeping the pace with them but they even established a market share which is ten times the size of Barnesandnoble.com’s.
To sum up, 2003’s number clearly show that Amazon.com turns out to be the winner of this battle between two online book retailers. So, while Amazon.com has scored one billion-dollar quarter during the same period that Barnesandnoble.com was lucky to narrowly top the $100 million mark in sales.
-
Appendix
„Leadership Online: Barnes & Noble vs. Amazon.com“, Harvard Business School, April 2000
