Jeff Trachtenberg

More thoughts about the future of bookstores, triggered by Barnes & Noble’s own predictions for itself


On Monday, the Wall Street Journal published a story by Jeffrey Trachtenberg quoting Barnes & Noble’s retail group CEO Mitch Klipper on the company’s plans for shrinking its store footprint over the next decade. Klipper suggested only a gentle acceleration of what has been the pace of contraction for the past couple of years far into the future.

Klipper was quoted as saying that “in 10 years”, the chain would have “450 to 500 stores”. Trachtenberg reports that the chain had 689 locations operating as of January 23.

In addition, the chain operates 674 college stores. The college stores are, along with the NOOK device, BN.com, and the ebook business, part of “NOOK Media” which took recent investment stakes from Microsoft and Pearson.

As usual, Cader’s overview is a helpful summation of the facts.

On Tuesday, I got a call from a reporter who started out by asking me, in effect, “how will publishers manage with 200 fewer B&N stores in 10 years?”

That question jumps past what I think are the first two questions the WSJ story begs.

The first one is to please tell me how much shelf space for books will diminish, not just how many stores will be closed. The piece reports that B&N peaked with 726 stores in 2008, which means a net reduction of 37 stores in the past five years. That’s a five percent reduction in locations. But publishers know that shelf space at B&N has contracted considerably more than that, as space in the stores that used to be devoted to books now merchandises NOOK devices and a variety of non-book items.

Trachtenberg reports that sales of print books (as reported by BookScan) have declined 22% since 2008. Anecdata and intuition suggest that sales of print in stores have fallen more than that. Every time a store closes, online purchasing becomes the more convenient option left for some of its customers. Even if BN.com keeps some of that business away from Amazon.com, it doesn’t help support a physical store of B&N’s or anybody else’s.

The second one is “how likely is Klipper’s forecast to be right?” They had a net reduction of 5% of the stores in the past five years and he’s suggesting a further 30% reduction over the next ten. That calculates to net closings at about triple the recent rate. Is that realistic?

Frankly, I’d be concerned that it isn’t.

Among the developments of the last five years has been the shuttering of Borders. That took something like 400 big competitor locations out of the market. There is no comparable subtraction of competition available in the future.

And while the migration to digital, as measured by what we can glean about what percentage of the publishers’ sales are ebooks, has slowed, we don’t know if that’s temporary. We also don’t know if the split we see between books of narrative reading and other books will continue. There is good news and bad news for stores if it does.

The good news is that stores will continue to be desperately needed for illustrated books. The bad news is that the readers of narrative books won’t be in the bookstores to have their eye caught by them anymore.

Forecasting of this kind is highly dependent on intuition and belief because there’s no data today on which to base a prediction for a product form that hasn’t evolved yet. There are still legions of techies and illustrated book publishers trying to find the formula that will enable the books which haven’t “converted” to digital to do so in the future. If somebody finds the way to make a digital rendition of illustrated books that consumers want, it might save the illustrated book publishers from their dependence on physical stores. But that would, at the same time, accelerate the reduction of stores.

I’m personally skeptical that there is an answer to this. I’m not expecting or predicting the demise of illustrated books anytime soon. To the extent that they are replaced by digital products, I expect something far from the 1-to-1 relationship between the print and digital iterations that has saved the publishers of narrative reading from far greater pain than they’ve felt so far. And if the digital products aren’t close to the books, then book publishers might have very little to do with making or selling them. Since we don’t even know what the replacement for books will be, I think we can assume all these questions will take a long time to answer.

It is clear that bookstores have an uphill battle in front of them even if we don’t know the steepness of the slope or how big the boulders rolling down on them will be. The questions that all publishers should be asking themselves now are “what are the bookstores really worth to us” and “what, if anything, can we do to bolster them financially”.

Michael Cader has made the point that B&N’s market cap (my app says it is $775 million at the moment) combined with B&N’s own valuation of its new business (nearly $1.8 billion based on the valuations of the Microsoft and Pearson investments) is worth pondering. One could interpret the numbers to mean that the stores are worth considerably less than nothing. Of course, that’s not true; the stores still generate more than $300 million in EBITDA annually (and that number was up slightly in 2012 over 2011). But it does suggest that having the legacy B&N store business in a common entity with the NOOK Media businesses (NOOK, the college stores, and dot com) is not making the investment community jump for joy.

So could somebody come along and do everybody a favor by buying the retail component of the B&N business? Would the market reward that move, or would it just reveal that the notional value of the new business is wildly inflated?

The businesses with the biggest strategic interest in keeping the stores alive, of course, are the publishers. So if publishers were to seriously ask themselves what they can do to help the B&N stores, buying them would have to be a recurring thought. One wonders whether the DoJ would like it better if one big publisher bought them or if a bunch of publishers got together to do it.

Cader has also made the point that the physical stores are being made the last line of defense for book pricing. It is a virtual certainty that if a book has three different prices: print in the store, print online, and ebook, the printed book in the store will cost the most. This is not a formula to assure bookstore survival.

Philip Jones of The Bookseller tried to sum up the ideas that have been offered from around the industry about how publishers could help booksellers be more profitable in an emailed post entitled “Books Need Bookshops”. What he covered were sales on consignment (the store doesn’t pay the publisher until they sell the book); higher discounts (more margin); a suggestion that bookstores could somehow exploit Amazon’s “weaknesses” in online selling (good luck with that one!); that bookstores themselves should change into something slightly different (based on B&N’s claim that they are creating new “prototype” stores); and creating special print editions of particularly high quality (which Random House has done for Indigo in Canada).

Examining whether any of these suggestions point the way for publishers to make stores more profitable will be the topic of another post, maybe even the next one.

 

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