Barnes & Noble Vows Not to Abandon Its Retail Stores

Conventional book sales will plunge $2 billion during the next four years as electronic versions surge to $6 billion in annual revenue, Barnes & Noble Chairman Leonard Riggio said Tuesday at an analyst meeting in New York.

The increase in e-book hardware and software sales will come as B&N grows its share of the market to 25 percent from 20 percent in 2010 and two percent a year ago, he said. And while bricks and mortar retail now accounts for 90 percent of B&N’s annual sales, that will shrink to slightly less than 70 percent by 2014, Riggio said. About 90 percent of sales of B&N’s Nook e-reader currently are through its 720 retail stores, Riggio said. B&N also has 637 college bookstores. In addition to hardware, B&N’s e-reader software is available on more than 400 devices including Apple’s iPad, where it’s the second most downloaded application, CEO William Lynch said. It’s had more than 2.4 million download through Apple’s applications website, he said.

As e-books cut into sales of conventional books, B&N is revamping its stores, cutting back some inventory and adding new categories. A 50-store test with educational toys, including 4,000 SKUs available at B&N.com, will expand to more than 400 outlets by late summer. And a new B&N at School section catering to teachers will be installed in 400 outlets following a 60-store test last year. B&N also is continuing to test bundling a conventional book with its electronic version, company officials said. B&N will have “fully stocked” e-book sections in its stores with “devices of all sorts,” Chief Operating Officer Mitchell Klipper said. B&N has electronic distribution agreements with 450 publishers and will expand this summer with the debut of the retailer’s self-publishing website Pubit, which will offer, among other things, subscription-based newspapers and magazines, company officials said. Pubit will be available through B&N.com and B&N’s eBookstore.

Despite its aggressive push in e-books, B&N won’t abandon its retail stores, Klipper said. The chain will close 6-10 stores annually through 2013, shutting those outlets that are near top-performing B&N outlets, Riggio said. It has no plans to shrink the standard 26,000 square foot store or return to shopping malls, he said. B&N has 400 leases coming up for renewal during the next 48 months and will seek to renegotiate them on better terms, Klipper said. B&N leases typically run 10 years with two, 5-year options for renewal, company officials said. Recent renewals have reduced rent 10-20 percent, Klipper said.

B&N will spend about $150 million on capital projects in fiscal 2011, up from $128 million a year earlier, Chief Financial Officer Joseph Lombardi said. About $40 million will be allocated for B&N’s digital business including its website and e-books, he said. About $20 million will be for bricks and mortar stores, Lombardi said. “We'll be in the retail book business for years to come and will only get better at it,” Klipper said. “We won’t be exiting any markets, but may focus more on the better stores."

The shift to e-books will most affect “secondary” booksellers, those retailers like mass merchants that have smaller book sections largely carrying best-sellers, Riggio said. Many of these “mass-market” retailers will likely cut back on their book selection as e-books become more popular, he said. Mass market retailers account for about 50 percent of annual U.S. book sales, he said. B&N also will seek to buy other retailers, he said.

B&N will continue to add features to its e-readers, having recently released a 1.3 version of its software that included a web browser, Lynch said. The retailer has no plans to drop hardware despite its emergence as a supplier of e-reader software to many competitive devices, company officials said. B&N will continue to pursue a “multi-tiered” strategy focusing on hardware and software, a company spokeswoman said last week at the Digital Experience in New York City. “Our aim is to have the most full featured” e-reader driven by the release of new software, Lynch said.

B&N’s recent move to introduce a Wi-Fi-equipped Nook at $149 will cause some suppliers of e-readers with electrophoretic displays to alter their strategy, Pandigital Assistant Vice President Jason Topel told us at the Digital Experience. Pandigital is shipping an LCD-based e-reader in about three to four weeks at $179 and will have an electrophoretic-based version by late summer, he said. Amazon and B&N both have sub-$200 e-readers.

The retailer’s price move “gives us pause for e-paper anyway,” Topel said. While Pandigital had set the price for the electrophoretic display-based model, it will likely revise the retail tag, Topel said. B&N has made a “decision to buy marketshare and lose money on hardware,” he said. “We're partners with Barnes & Noble so maybe it’s a question of working something out with them. They say they are not in the hardware business and just want to sell the content. But with Amazon going like gangbusters they needed something to be in the game."

Pandigital’s Novel e-reader, which contains B&N’s software, ran into a problem in May when about 76 units were sold largely through Kohl’s website with incomplete software, Topel confirmed. The devices which are getting a firmware upgrade, leaked into the market without the required approvals to include B&N and Adobe software, Topel said. The Novel also lacked the software needed to operate in both portrait and landscape modes, he said. The Novel was scheduled to hit retail June 10, but delivery since has been postponed to late July, Topel said. “Now all the functionality is there and it’s just a matter of getting the final approvals” Topel said. “For us, it’s been a little but of nightmare in that regard."

B&N’s agreements to supply software to e-reader suppliers like Pandigital have benefited its sales. B&N’s Q4 sales rose to $1.31 billion from $1.10 billion a year earlier as B&N.com revenue jumped 51 percent to $141 million. B&N.com’s results include e-book/e-reader sales. Q4 retail store revenue declined three percent to $962 million on a 3.1 percent drop in same-store sales. B&N Q4 net loss widened to $32 million from $2.69 million. B&N’s fiscal 2011 sales are forecast to grow to $7 billion from $5.8 billion a year earlier as Internet-related revenue increases to $880 million from $572 million, Lombardi said.