July 21, 2011
"Borders & Barnes" – The importance of spotting emerging Megatrends!
If you read the WSJ over the past couple of days, you saw several articles on the "demise" of the Borders Group, Inc. This one hits me hard. I personally have some sort of illness as part of which I seem to be unable to enter a bookstore without leaving with at least four or five new books. Not that I ever get a chance to read them all… they are piled high on my nightstand (ask my husband)… but what if I did…
On February 16, 2011, Borders filed for Chapter 11. At the end of fiscal year 2011 (ending January 29, 2011) the company still maintained 642 retail stores (FYI: the four states with the most stores at the time were CA (81), IL (41), PA (41), and NY (36)). Since then, Borders has already begun closing stores and according to the WSJ is down to 399 U.S. retail stores today. The company hopes to begin liquidating this Friday, July 22nd. In its Annual Report Borders stated that it employed 5,700 FTEs and 10,700 part-time employees who will now have to search for new opportunities. Sales have slowed consistently over the past fiscal years from 3.4 billion in 2007 to 2.3 billion in 2011. Net losses on the other hand increased to $299 million this past year. Leadership attributes the demise to missing the boat on developing a presence in the e-book/e-reader space, an area that Barnes & Nobles on the other hand has invested in quite heavily over the past years.
According to the WSJ, Barnes & Noble (B&N) reported growth of +0.7% for fiscal year ending April 30, 2011. Growth in the e-book segment offset declining sales of physical books and now Liberty Media Corporation is interested in acquiring Barnes & Noble for $1 billion. I was unable to quickly identify fiscal 2011 sales, but prior year B&N sales reached $5.8 billion; net profits were roughly $73 million. This valuation is very interesting. I would love to know the math behind it. Valuations in the industry I work in are typically multiples of sales, not fractions, but clearly, this is an eroding market and different rules apply. 0.7% growth is after all <1%. [Now there is a quote to remember!!] The WSJ referenced a net loss for fiscal year 2011.
What I think is impressive is B&N's ability to recognize the importance of the technology evolution and predict critical changes in its industry. Isn't this what we are all attempting? To identify emerging trends and assess their relevance and potential impact so that we can make appropriate investments and build competitive advantages? Good for B&N to keep an eye on emerging megatrends and incorporating them into their corporate strategy, which resulted in being among the first to launch an e-reader (the Nook) back in 2009. But… competition is tough and CEO of B&N.com William Lynch will have to be bold and creative. B&N has committed substantial investments to its digital strategy, which will heavily impact its bottom line. Liberty Media Corp seems to believe something can be gained from the acquisition. Liberty Media Corp owns interests in select TV and radio channels (i.e., QVC) along with ownership stakes in evite, Expedia, AOL, and Starz. I wonder what they will do with the physical retail outlets?
Given that the investments will have to be high in order to compete in this space with intense players such as Amazon and Apple, the offer may not be that unattractive to B&N. On the other hand, the company could decide to stay independent and focus on expanding its educational business. This is an area that could probably allow B&N to expand its share. I would assume additional notable changes in this arena are imminent and an area for growth. Amazon is potentially too diversified to build a leadership position in this segment. But these are only my personal thoughts without any further insights into either of those companies' visions. I met a software engineer at a conference earlier this year who used to work for Apple. He claimed that Apple, aka Steve Jobs has no interest in pursuing the professional business; it is all about consumer products. Some kind of involvement on the education side, however, is expected given the potential.