Barnes & Noble: Controlled landing or slow-motion liquidation?

Barnes & Noble just ended a bad week: First, It announced that it plans to close as many as 200 of its superstores over the next ten years. Then, a few days later, IDC released its global tablet shipments report for Q4 2012, which found that while the worldwide tablet market increased 75% in Q4 2012 year-over-year, shipments of  Barnes & Noble's Nook tablets actually fell 27.7%, from 1.4 million units in Q4 2011 to one million in Q4 2012. Those numbers added to the gloom from the company's quarterly financial report issued in early January, which stated that B&N's sales from bookstores and its eCommerce site in the holiday quarter fell 10.9% year-over-year, while its same-store sales for stores open at least 15 months fell 3.1%. Revenue at Barnes & Noble's Nook Media unit, which includes Nook devices, eBooks and college bookstores, fell 12.6% year-over-year.

The question to some observers isn't what the company will look like once it closes a third of its stores over ten years--it's whether B&N will even be in business ten years from now. The signs aren't good. As an example, take same-store sales, one of the most important financial indicators for retailers, because it only looks at sales growth in stores open a year or more, not new stores. In Barnes & Noble's case, the same-store number for the holiday quarter was -3.1%. However, that -3.1% is an average. Some stores probably had year-over-year increases, but no one outside Barnes & Noble really knows for sure, and that's a critical factor in whether or not the company's plan to close a third of its stores will work. If B&N has a relatively small number of poor-performing stores, the company can close them as quickly as possible and concentrate on the successful stores. However, if sales are falling across most of B&N's locations, a 33% reduction plan won't be nearly enough to stop the bleeding.

Another example is B&N's failed merchandising strategy. Nothing that the company has tried has done anything to improve its stores' performance. It cut back on its music and video departments and used that space to create dedicated display space for its Nook tablets and eReaders, which are usually prominently featured at the front of its stores. However, its Nook business is actually falling faster than its retail business in general, and it's adding to same-store sales declines. It replaced some of its book display space with an increasingly large assortment of toys and games, but that isn't improving same-store sales, either.

Barnes & Noble's situation is looking uncomfortably like that of Borders and Circuit City, both big-box retailers that closed stores and experimented with a variety of merchandising changes, only to find themselves bankrupt and in liquidation. That's where the "controlled landing" vs. "slow-motion liquidation" question comes in. If B&N starts closing stores, and that results in sustainable year-over-year same-store sales gains, the company's plan to slowly weed out poorly performing locations is likely to work. However, if the same-store declines continue, even with fewer stores, B&N will have to dramatically increase its pace of store closings or come up with even more radical merchandising changes that actually work. As much as I want to see Barnes & Noble's retail stores survive, especially now that Borders is gone, my gut tells me that the company is going down the slow-motion liquidation path.

Amazon's emerging strategy: Same-day delivery

Slate's Farhad Manjoo has written an article that explains Amazon's recent change of tactics over sales tax. For several years, Amazon did everything it could to avoid collecting state and local sales taxes, including filing suit against states, cutting off affiliates, threatening to close distribution facilities, and offering to build facilities in states in order to avoid collecting sales tax. In the last year, however, Amazon has begun to agree to collect sales tax on a state-by-state basis, and is even building distribution facilities in many of those states. (In some states, Amazon is getting development funds and tax incentives to build and operate its warehouses.) So why the change in tactics, when it means that Amazon is giving up a significant price advantage?

Based on an analysis of Amazon's strategy done by the Financial Times, Manjoo writes that Amazon's new strategy is to build warehouses near every major metropolitan center, improve their efficiency using Kiva Systems' technology (Amazon acquired the company earlier this year,) and offer same-day delivery to most of its customers. Manjoo believes that this strategy will enable Amazon to offer the same "instant gratification" that consumers get from going to local brick & mortar stores, with the advantage that they don't need to leave their homes or places of work. He also believes that this ties into Amazon's test of automated lockers in 7-Eleven stores and other 24-hour retail outlets in Seattle, New York and the U.K., where consumers can have their packages securely delivered and stored, and then pick them up on the way home from work. (It also ties into Amazon's test of groceries in Seattle, which is another application for same-day delivery.)

Manjoo believes that brick & mortar retailers are deluding themselves if they believe that forcing Amazon to collect sales tax will put them on an equal footing.

The "Connected Store" and the future of retailing

Intel and a number of partners, including Adidas, Procter & Gamble, Best Buy, Kraft Foods and the MIT Media Lab, are showcasing a two-story, 2,400 square foot "Connected Store" at this week's National Retail Federation Convention in New York. Intel is using large flat-panel, touch-sensitive displays to showcase how its processors can be used to improve the retail "experience".

The Adidas demonstration uses three displays to showcase Adidas' entire shoe line. Shoes that aren't in stock can be delivered to the store for pickup or directly to the customer's home within 48 hours. The Best Buy demo, built in conjunction with MIT's Media Lab, enables customers to get a demonstration of any product on any vertical surface in the store.

These demonstrations go far beyond the digital signage systems found in many retail stores, in that consumers can interact with them instead of simply passively watching them. These systems could help drive a trend to downsize retail locations. For decades in the U.S., there's been a proliferation of "big box" stores, led by Walmart, Target, Costco and Best Buy. The problem is that real estate is leased based on square feet, and bigger stores means higher real estate costs, as well as higher costs for utilities and more employees needed to staff the physical space.

The "big box" cost problem is very clear at Borders and Barnes & Noble. They've built bigger and bigger bookstores, even as print book sales have declined. Many consumers still like to look at physical books in bookstores, but they then go home and purchase them online as eBooks. Bookstores can recreate the "books on bookshelves" experience using much less floor space with big-screen touch-sensitive displays. Consumers can open "books", page through them, and make a purchase decision right there. eBooks can be sent to their portable devices for immediate download, and the sale is made by the retailer, not by Amazon or another competitor.

These systems will also enable consumer electronics retailers to shrink their stores. They can keep the most popular products in stock in the stores for immediate delivery, yet let consumers interact with and order the same assortment of products that they already carry on their websites. One might argue that consumers can do that already from home on their personal computers and tablets, but closing the sale in the store means that those customers won't compare prices with other online merchants and buy at the lowest price.

In short, the era of the "big box" store isn't over, but "little box" stores enhanced with interactive digital technologies will take their place in many markets and segments.

Circuit City files for Chaper 11 Bankruptcy

According to Dealerscope, Circuit City filed for Chapter 11 Bankruptcy this morning. In a written statement, the company said that it plans to reorganize and remain in business. That may be the company's intent, but the odds of successfully emerging from Chapter 11 are increasingly slim for retailers. For example, Sharper Image initially filed for Chapter 11, but within a few weeks the company modified its filing to Chapter 7 and liquidated. Mervyns, a chain of department stores, filed for Chapter 11 last July, and then a few weeks ago, it filed for Chapter 7 liquidation and is now going out of business.

Circuit City may beat the odds, but I think it more likely that we'll see many more than the 155 stores already running "going out of business" sales close their doors before the end of the holiday season.