S4 - Barnes & Noble

Summary

Questions

1. What are the structural characteristics of the US bookselling industry before the advent of Amazon in 1996?

Supply chain related to this industry;

  • Author sells copyright to publisher (in exchange for 10-15% royalties), that can sell to wholesalers, who sells to retailers, who finally get to the end consumer.

  • OR publishers might sell directly to retailers

  • Some people are aggregated into communities (unis, schools, library users), so some publishers sell directly to these big organizations, who contain these users.

For US market:

  • Overall value of the market;

    • 26 billion$

    • Growth; 5.4% (meh)

    • What is going wrong overall? Substitutes; video games, tv/vcr, gyms

  • Publishers:

    • +- 50k titles per year

    • 40k publishers

    • 20 publishers = 88% of sales

    • Simon & Schuster = 11% of market (top publisher). Why?

      • As an author, I’d like a big publisher. A publisher can bring awareness to the book (brand recognition)

      • Economies of scale in production (as compared to smaller publishers)

      • Bigger publisher = more bargaining power with wholesalers

    • How can smaller publishers still be in the market?

      • Level of specialization (in terms of language, genre, topic within the genre, etc.)

      • Lots of differentiation (can bring concentration or fragmentation)

        • Fragmentation lessens financial risk

  • Wholesalers:

    • Ave wholesaler connects publisher to retailer

    • Decreasing net profit and growth in the 90s

    • Ingram; over 50% of market shares

    • Offers volume-based discounts

    • Exist to lessen financial risk of publishers

    • Space/time logistics

    • Fragmentation leads to greater consolidation..

    • As a retailer, no longer need to go through wholesalers – can go directly to publisher

    • Serves to small independent bookstores.

  • Retailers:

    • Initially independent local bookstores

    • AQUISITIONS: B. Dalton is bought by Barnes & Noble (3rd retailer) and K-Mart bought Waldenbooks and then Borders

    • SELLING APPROACH: destination shopping rather than convenience to build traffic.

      • Encourage browsing (more time more sales).

      • Average transaction 20$ (double than small bookstores)

    • Independent bookshops still exist

      • Less commercial approach

      • BM brings less returns

  • Consumers:

    • Shift in def of the book itself (now it’s a good to be possessed & showcased rather than to just to be read)

Superstores = new market standard

  • High level of differentiation and market scope

    • Ambience

    • Cafes

    • More books

    • More hours spent in store

    • Lower price for some categories

    • Larger number of options

2. What was originally the competitive advantage of B&N?

Front end:

  • Biggest retailer - size and quantity

  • Client loyalty (club, brand image)

  • Bundling

  • Experiential shopping

  • More W2B

Back end:

  • “in-sourcing” wholesale function (centralization of procurement)

  • IT system for interface between S, W and stores.

  • ++ payment terms

3. How come Amazon was able to enter the market and consolidate its position in the late 90’s?

Front end:

  • Interface/software: easy to use, suggestions for customers, lists

  • Discounts

Back end:

  • IT and people

  • Relationship with wholesalers

  • Location and other connections (delivery operators)

4. What are the pros and cons of B&N and Amazon strategies at the beginning of the new millennium – i.e., end of the case narrative?

B&N;

  • Pros

    • Establish brand loyalty through community programs in their superstores

    • Connections to big brands (Starbucks, AOL, etc.)

    • Leverage on economy of scales

    • Leverage relationship with publishers and retailers

  • Cons

    • Huge costs in building new stores

    • Split focus – both developing its online and offline store

    • Bigger costs in general

    • Brand is narrowed to books – no possibility to expand without diluting their brand identity (with a big risk of failing)

    • Online sales is going to cannibalize store sales due to gigantic discounts. It’s like B&N is competing against itself

    • No connection between the online and offline operations – customers couldn’t even pick up purchases in their stores, or make orders from them

Amazon

  • Pros

    • “Sell all, carry few”

    • “Redecorate the store for every visitor”

    • Unprecedented ability to collect data on consumer preferences and history

    • Low return rates on books

    • Focus fast, cheap delivery (they are building own storage)

    • Allows them to expand - "web service first”

    • Knowledge of the online space – presence in other sites (Associated program)

  • Cons

    • Susceptible to shocks all along the supply chain

    • Difficult to access by older generations – those that are technologically illiterate

    • Risk: Even the biggest online website (AOL) only had 8mil users. It was still a small market, at that time nobody knew the internet would be the next best thing

    • Did not have a plan B (as opposed to B&N) – super risky strategy

How amazon evolved

  • New millennium - The everything store

    • Largest retailer - 47mil active accounts. Operates in 7 countries and active in 60+

    • Customer-centric - strong investment in IT and marketing

    • Only 9k employees

    • Inventory turn-around 16x a year

    • Reduced price elasticity to -0.45 (B&N -3.5)

  • The cloud company

    • AWS

    • Amazon prime videos

    • 1.6mil employees

Core Takeaways:

  • Three reciped for a great business idea:

    • Evolution of industries across standards can be competence-enhancing or destroying

    • Entrants have an advantage in case of competence-destroying change

    • It takes time and effort for a standard to subsitute its predecessor

Evolution of industries across standards can be competence-enhancing or destroying

Amazon has brought in competences that were profoundly different from the rest. It’s much better to be a start up than an incumbent in this case. Probability that you will be able to sustain the radical change (as Nokia or Blackberry with the smartphone).

Entrants have an advantage in case of competence-destroying change

The entrants can be:

  • Competitors from other businesses with useful know-how

  • Newly founded startups

It takes time and effort for a standard to subsitute its predecessor

There are no standards in the market until the standard is demonstrated by the winner of the competition in radical innovation processes. What matters is the effort of the entrepreneurs that they put into the market, with the agility to move into it.

  • In certain markets, emergence of a new standard can be fast because the industry has a constant pacing of new standards (videogames)

  • In other markets, it takes more time (pharma)

  • In general, no one knows if a standard will become a standard. A standard is “de facto” and “ex post”, not “ex ante”

Abernathy and Utterback (1978):