Barnes & Noble

Barnes & Noble case

In 1996, Barnes & Noble enjoyed a competitive advantage over other local stores as evidenced in its ability to grow revenues over 5 years by 24%, a healthy profit margin of 21% and ROIC of 16%.

But despite being the largest chain in the world, it did not have a clear competitive advantage over other large chains. Its operating margins were 4.9% compared to its biggest competitor Borders Group with 5.3%. Its interest coverage ratio of 3.1x was significantly less than Borders at 17x.. signaling that Borders would have less difficulty meeting its annual interest and principal obligations...or that Borders is less leveraged. And they both had similar asset turn ratios, indicating that they were both as capital intense. Higher than industry average capital intensity and high leverage would make B&N of particular concern to creditors because it magnifies the business risks faced by the firm. Same stores sales growth was also performing sluggishly in comparison to Borders, with 5.2% and 9.9% respectively.

However, B&N was able to sustain a consistently lower cost structure relative to its competitors. This results from several factors-- a) leverage with economically stressed suppliers resulting in volume discounts of upwards of 55% and co-op marketing dollars of 2-3% of sales b) economies of scope/horizontal diversification- with its publishing arm and mail order book business and membership club, 20% Chapters stake and seasonal cards kiosks stakes--and most importantly d) its mall based location/superstore model strategy- allowing it to squeeze out local stores and create barriers to entry for other chains.

Though Borders did enjoy the same volume discounts, B&N's horizontal diversification and its differentiation along other dimensions -selection, service and location- allowed it to enjoy competitive advantage B&N also benefited from economies of scale as evidenced that sales per average sq. ft out performed that of Borders $228/27,000sq. ft. to $284/30,000sq ft.

The chart below summarizes the key drivers of their higher WTP/P and lower WTS/C

1b) B&N was a value creator and was uniquely able to capture a sizeable portion of the value it created. Its value proposition to its suppliers was a distribution channel that could deal with high volumes and result in fewer costly returns/mark downs for the publishers. The number of titles carried by a Superstore grew from 60,000 to 175,000. The superstore/ convenience of malls delivered value to customers as it made books easier to find, purchase and transport, for example, 50,000 books were common to all superstores. They also added value by creating the book as gift item and de-loftifying books. Books were now like items in a grocery store, for display or for gifting.

Amazon's entry into the market portends to disrupt the Barnes & Noble superstore model. For it presents its on compelling value proposition. It was fast, convenient and provided another distribution channel to suppliers that was could be more attractive than the B&N model. Amazon's entry into the market place added value. It is marketing and advertising Associate Program model of partnering with other websites via referrals, hot links and clickthroughs allowed for low cost viral advertising that allowed them to keep their costs for such lower than their competitors. With operating margins growing to 9.6% by 2001, Amazon is position to capture sizeable market share. The chart below summarzes the drivers of Amazon's value prop.

The value proposition of B&N of superstores is that you walk out with your purchase and convenience of superstore. Now Amazon has segmented the market into two populations- those who want a book now for a low price, and those who can wait a day or two for the same or potentially lower price (see Exhibit 5) . In Exhibit 5 a hardcover book bought at B&N superstore costs $3 dollars more than one shipped by Amazon.

B&N has to decided to get into this business or risk losing market