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The B&N Conundrum: Why Physical Bookstores Have An Uphill Battle - The Watchtower of Destruction: The Ferrett's Journal
August 19th, 2010
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The B&N Conundrum: Why Physical Bookstores Have An Uphill Battle
onyxhawke has a post on why Barnes and Noble is now nearly broke. His answer: Barnes and Noble has reduced its stock to the most popular items - Harry Potter, Dan Brown, Stephen King - and considering that he can get those anywhere, why bother with B&N?

It sounds like a good argument, right? Just stock up on a ton of authors, deepen your selection, and wham! Suddenly you're relevant again. But unfortunately, that completely ignores the way that Amazon's business model completely smashes physical bookstores.

Here's my qualifications: I used to buy books, nationwide, for both Waldenbooks and Borders. That's right - if you thought the Computer Books and Graphic Novel selections at Waldenbooks sucked a decade ago, I was the guy to blame. So while obviously things have changed in a decade, I was also part of the team telling Borders they had to get on the damned stick and get a working website that was better than Amazon's. They didn't listen. Bad Things happened.

So. Let me tell you how the physical bookstore model works.

You have a budget for a given timeframe, and you have $X to buy books. You have a full list of every book that will be coming out for the quarter - and so you look at past history, try to estimate what sales will be, and then finally make a big ol' spreadsheet that says, "Here's how I'm going to spend my $2.1 million for Fall 2010." (It's a lot more complicated than that, but that's the way it works. Keep in mind that I'm radically simplifying, because I don't want to be here all day.)

Your profitability is judged by a large part on inventory turn - which is to say, "How much of your inventory do you sell through in a given time frame?" Grocery inventory turn is frighteningly fast - averaged out, they sell everything on their shelves about once a week or more. (Then again, they have to - it'll go bad if they don't.) Bookstores are more sedate - selling through inventory twice a year is a solid store.

You need that inventory turn, because the quicker you sell a book, the faster you make back your money. You don't pay for your books right away - you have a few weeks before the bill comes due. If you can sell the book before that bill comes due, you've made a quick and righteous profit and never have to send your distributor a check. If you can't, well, you have to send the distributor a check from your checking account, and be down cash. And, eventually, you must pay taxes on that book in your store. And if that book doesn't sell, you can get a refund on the book from your distributor, but then you have to pay for your clerks to find the book, box it up, and ship it back - a cost that's more than you'd think.

Inventory on your shelves has real costs. Not only do you pay for the books, you pay for the square footage, you pay for the clerks to find and shelve it - a lot of inventory not only slows down your turn, but it drastically reduces your profitability. So your inventory is of prime concern as a bookstore.

Now. How do you buy?

Let's say you go the B&N route and purchase a lot of copies of a few books. (Comparatively, of course - the average B&N still has a ton more books than any non-supersized bookstore.) On the turn model, that's great - you blow through those Harry Potters! But here, Amazon is eating your lunch. Because you don't have a lot of back stock, the only reason people have to come to you is for Harry Potter - which you can have shipped to your house, plus any of those weird books you wanted, for free. (Well, if you order over $25, which everyone pretty much does.) So over time, you train your customers that you're not that vital to their well-being bookwise, and your sales decline severely... Which is what happened.

Plus, Amazon's business model? It's better than yours. When you're ordering the new Stephen King, you have to order all of those books months in advance, guessing what your sales will be based on the old sales models, all so you can put stacks on the shelves so people will see it. (And you do want stacks - people are amazingly capable of overlooking a single copy of a book.)

Amazon, on the other hand? They know what their pre-order sales are to the number. And they get the cash right away, because you pay up front for Harry. Depending on how ridiculous a fan you are, you might just have floated a loan to Amazon for months. (EDIT: Apparently, Amazon doesn't charge cards in advance for pre-orders - though I could swear they'd done that for a few of mine. Even if they don't, though, the fact is that they'll ship your pre.order almost immediately after they receive the book, resulting in lightning-fast turns and free loans for them even in the absence of advance card-charging.)

So let's compare:
  • You have to guess what your sales will be for an upcoming book based on past sales only, excepting a handful of preorders (and who preorders at a physical store these days)? Amazon, by and large, knows exactly how many they're going to sell, because they've already sold them (barring the inevitable spikes and differences). Amazon has a much better future data for knowing what to order than you do - because their preorder sales are large, and they can use that very effectively to track what the sales will be. If pre-order sales for the new Stephen King are disappointing, comparatively, they'll know well in advance and can simply not order as many for the day of release. You, on the other hand, don't know until the books hit the shelves, by which time it's too late.
  • You do not make money until a customer pays you and takes the book out of the store. Whereas Amazon gets the money for a large number of pre-orders, so they've already made a profit on a significant number of books before the first book even ships. And when those books ship, they get the sales on day one, so they have a few weeks of float time to pay their distributors - meaning that they're getting free loans all the time.
But wait! What if you reverse that? What if you buy a lot of backstock, with all the weird books a customer could hope to find? Well, the money's gotta come from somewhere - which means you'll be buying less of Harry Potter and Stephen King, possibly selling out of them. That's embarrassing. But that's the cost of having a deep selection, amiright?

No. There are greater costs. Because those deep backstock books? They don't sell fast. That's the nature of deep backstock. Which means you'll now be carrying a lot of inventory that you've already paid your distributor for that you may not see a profit on for a year. Maybe two years. Maybe never. And all those books will be clogging up your cash flow, preventing you from ordering what you need.

(And let's not think about what happens when that single copy of a book is shelved in the wrong section, either because of incompetent bookstore clerks or lazy customers shoving it back wherever. That book might have customers clamoring for it, and still be unfindable and thus unsalable - particularly if you have a very deep backstock with lots of books to get lost in.)

Oh, and you have to order those books spread across a large number of stores. Don't forget that. If you decide it's essential to have some deep backstock, that same backstock has to be at a significant number of your stores. If you sell, on average, one a week across the chain, you have to keep copies stocked across the chain. To sell that one book a week, you may have to keep fifty copies in stores across the country. That's a lot of books.

And you know what? Amazon is still eating your lunch. Amazon killed the special order. There was once a time where if you walked into a store with a lot of books and didn't see what you wanted, you'd say, "Well, I really want this, can I special order it?" And the store would spend six to eight weeks trying to find it and eventually you'd come in to pick it up. (Or they'd forget about your SPO entirely, which is why I was happy as a customer to see Amazon arrive.)

Amazon means that if you do not have the book right now, you lose the sale. "Screw it, I'll just get it from Amazon." And they leave. So no how matter how deep your backstock is, any thing you're sold out of or don't carry is now a sale that will never be replaced. And remember, you're carrying lots of books, one to each store, that sell maybe one copy per store per year to get that reputation of depth - your turn's shot to shit.

Amazon business model, however? They sell one a week? Great. They have one store. If they sell one a week across their chain, they can keep one on hand. Their inventory costs are almost automatically lower than yours. (In reality, it's probably closer to "one a week per warehouse," but they have fewer warehouses than you have stores.)

So you're damned if you do, damned if you don't. Carry only the top-sellers, and people just buy those top sellers from Amazon. Carry a deep selection, and your profitability tanks, and people order the books they can't find from Amazon anyway. It's why physical bookstores are having a hell of a time competing - if you're going to be a good bookstore in this day and age, you'd better offer something that Amazon doesn't have. And that's tough to do, because while people say they love "expertise," it often doesn't translate into profits, and specializing can only work in certain areas.

Amazon's winning the bookstore war because it's hard for physical stores to compete with online ones. And books are just the first casualty.

(111 shouts of denial | Tell me I'm full of it)

Comments
 
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From:murnkay
Date:August 19th, 2010 03:17 pm (UTC)
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Thank you!

Also, his theory ignores that there are regional buyers and while they may carry bestsellers, the smaller stocks are local or close to, not national.
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From:mariadkins
Date:August 19th, 2010 03:19 pm (UTC)
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This.
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From:manycolored
Date:August 19th, 2010 03:26 pm (UTC)
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It's obvious that this is happening in a smaller way for things like vacuum cleaners. Every store in town - Walmart, Target, Home Depot, Lowes, Sears, Best Buy, and Bed Bath & Beyond - have the same half-dozen vacuum cleaners for sale. To get the one I actually wanted, I had to order it online.

From Amazon.
From:apocalypse_0
Date:August 20th, 2010 02:59 am (UTC)
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Yeah, but simple, popular stuff? Why are you buying at a bookstore when you can pick it up while you're at Walmart?

Those guys turned bottom-feeding into a science.
From:eddiehawkins
Date:August 19th, 2010 03:27 pm (UTC)

for the record...

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I think if you preorder something on Amazon, you don't actually pay until it ships. So no long-term loans.

(I think.)
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From:theferrett
Date:August 19th, 2010 03:37 pm (UTC)

Re: for the record...

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Corrected. Thank you.
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From:custardfairy
Date:August 19th, 2010 03:32 pm (UTC)
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Pretty spot on.

One minor quibble: when I worked at Amazon (2001-2005), we didn't charge your credit card until an item shipped. If that happened, it was usually due to some kind of glitch or error (and was rare). For 3rd party orders, the card was charged immediately and, of course, if you pay by check the funds have to be in the account before they ship. I think it still works the same way, so I'm not sure that anyone is floating Amazon a loan for months when paying via cc - unless there was a different deal for HP specifically? I'm curious.
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From:theferrett
Date:August 19th, 2010 03:35 pm (UTC)
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It used to be back when, but that may not be true today. I'll clarify.
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From:reasie
Date:August 19th, 2010 03:39 pm (UTC)
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Whereas my small, local bookstore seems to be doing a booming business. Perhaps because people don't go there for the same reason they go to B&N or Amazon. When I enter the boutique book store, it's not to find a specific item; I'm looking to browse and find something I never knew I wanted.
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From:custardfairy
Date:August 19th, 2010 03:50 pm (UTC)
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I'm looking to browse and find something I never knew I wanted.

This is how I feel about Nicola's Books. I go there because I like it; the environment makes me actually feel happier and I find all kinds of neat things I may not have noticed either online or at a larger chain store.
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From:ravenblack
Date:August 19th, 2010 03:42 pm (UTC)
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Also Amazon is frequently cheaper, and 'carries' used books too. And you can't even win by also doing boardgames, because Amazon does that too.

The only ways a bookstore has to compete are:
1. you can get your book instantly, assuming it's in stock.
2. attached cafe.
3. some people are still scared of internets.

It seems like maybe the better business model to go for would be to become a library with a cafe.
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From:lordkiev
Date:August 19th, 2010 04:37 pm (UTC)
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I read that as "become a library with cake"
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From:andrewducker
Date:August 19th, 2010 03:44 pm (UTC)
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I can't see any way that the high-street book stores can compete with Amazon, except on the "Well, I dropped into a store on the way home and bought something on a whim." buyers. I don't know how much of the market that is.
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From:theferrett
Date:August 19th, 2010 08:11 pm (UTC)
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It's a major problem. And then I can see it becoming a major problem again if this abundance of cheap shipping goes away and we have to convulse back to the old model.
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From:elgatocurioso
Date:August 19th, 2010 03:44 pm (UTC)
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I do buy a lot from Amazon. It's easy. Also, going through their partners I can often get a used book + S&H for cheaper. Plus, I'm a book slut... I like the feel of a used book, and the nostalgia of an early edition cover from a decade or two ago.

I don't go into B&N or Borders as much (frankly, with a kid, I don't make it to the mall as much), but I still make a point of going. Why? Because the mall supersized bookstores invariably have a cafe these days and it's a good place to rest my feet and relax while flipping through a magazine or a book someone suggested I check out.

Amazon can't do that ;)

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From:elgatocurioso
Date:August 19th, 2010 03:50 pm (UTC)
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I suppose it needs to be said that I *do* still buy a book about 50% of the time I'm in B&N. I'm not just dirtying up their books and magazines at the cafe and walking out.

I imagine that must be an issue for them too though...
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From:sammiantha
Date:August 19th, 2010 03:45 pm (UTC)
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The only reason I visit the UKs main bookstore around here (Waterstones) is when I have gift vouchers to spend. I absolutely love wandering around all those shelves with someone else money to spend on anything that takes my fancy.

Online vouchers just wouldn't be the same. Browsing online is nowhere near as much fun as browsing the shelves for real. I fear that one day this approx bi-annual joy will be taken away from me if the amazon trend continues.
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From:shadeofnight
Date:August 19th, 2010 03:47 pm (UTC)
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Amazon is my favorite online store, and they are starting to sell Everything.

They also have a crazy music selection now, that you can hear before you buy for the most part. Thus I will spend one day every few months, just clicking on all of the recommended music, and picking one or two new CD I like.

Amazon, also has listing for books that are out of stock, and out of print, but you can get from all of the used book stores now using amazing to sell. This means they are a one stop shopping for just about any book ever printed.

They have even put in new features, like author blogs, as well as reading the first few pages of the book online before you buy.

No wonder they rule
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From:theferrett
Date:August 19th, 2010 08:12 pm (UTC)
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They've been trying to sell everything for a long time. Borders' Management used to refer to it sneeringly as "the big ball of snot" theory, ignoring that the expertise it took to sell books wasn't nearly as great as they thought when you could crowdsource reviews.
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From:elgatocurioso
Date:August 19th, 2010 03:52 pm (UTC)
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The TW in Boston turned into a Virgin, and lost a lot of it's indie selection. That was definitely a very sad year...
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From:sterling_raptor
Date:August 19th, 2010 03:50 pm (UTC)
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I have yet to see a physical bookstore compete with Amazon's pricing. I seriously hate buying hardbacks. They now run me $25 which is 1/4 of my personal money for the MONTH. Amazon will often sell its hardbacks for around $13 so I can get two for $26 which then gets me free shipping.

There is also the utter convenience of not having to get dressed, leave the house, get to the bookstore and they don't have what I want anyways.

However, Amazon failed with the Kindle. It had the chance to be epic and then they got too involved and bitchy. They acted like oppressive dictators and ruined it for me. I have a Sony Touch e-reader that I love to death instead.

Speaking of E-readers...I didn't buy a Nook because I seriously think B&N is going to lose the war and at that point, what good are half the features as well as how would I get product support?

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From:lots42
Date:August 19th, 2010 04:43 pm (UTC)
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Kindle would have sold a LOT more if they made it look a little futury.
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From:jnanacandra
Date:August 19th, 2010 03:51 pm (UTC)
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There are still some draws of the physical bookstore that Amazon has yet to be able to compete with.

If I've heard about a given book, but want to look through it to see if it really is interesting to me. Amazon's "look inside" feature doesn't let me pick out a couple of interesting chapters to skim, or get a feel for the quality of the print and the binding.

I often just like to scan the titles in a given section to see if any of my favorite authors have come out with something new, or if the new thing is out yet in paperback. If Amazon has a way to track authors for new releases, I've not been able to find it.

I actually adore the clearance section, even though I know it's probably not much of a moneymaker for bookstores. As an artist, I can find fantastic photo reference books there that I could never afford at full price, and find many things in general that I would never have thought to look for in their regular sections.

The "bookstore experience", where you can browse and sit and read at leisure.

Instant gratification.

All of these are things that the physical store could use to build on more. Many of them are things that libraries can fulfill, but libraries are dusty and unfashionable to the masses. I suppose I'd rather see libraries make a comeback than physical bookstores, but if the physical stores want to succeed these are the features they should build upon.
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From:dscotton
Date:August 19th, 2010 08:19 pm (UTC)
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I shopped at The Other Change of Hobbit a few times and I found the staff to be kind of unpleasant - although this was about 10 years ago so maybe it's not the same people anymore. After that I tried to buy my books at Cody's and the B&N on Shattuck - but I think they've both closed down now.
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From:lots42
Date:August 19th, 2010 04:37 pm (UTC)
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And Amazon gives a shit; the local box book store has a comic book race with very low shelving bards, the comics, by their sheer weight, bend forward.
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From:theferrett
Date:August 19th, 2010 08:23 pm (UTC)
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Depends on the place. The reason chains are considered good is not because chains actually ARE good, but because there's an evenness of quality you don't get with indie stores. Indie stores are the best AND the worst.
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