marzo 24, 2020

«Barnes & Noble’s New Plan Is to Act Like an Indie Bookseller. Can the world’s most feared hedge fund rescue the last big American bookstore?»


Thomas Buckley (@tgbuckley) and Scott Deveau (@scottdeveau)
Bloomberg Businessweek (@BW)



Photo illustration: 731; Photos: Getty Images; Alamy.


«Last fall, during a visit to Barnes & Noble’s (@BNBuzz) flagship store in New York City’s Union Square, the British bibliophile James Daunt strode about the ground floor in oxblood loafers deploring the bookshop’s hideous appearance. The carpets were dusty, and the escalators had broken down. A cheap pine table was littered with trinkets and scented candles. A vase was wedged between new titles, its bouquet of sunflowers sagging in brown water.

»“I like the idea of the flowers, but you have to change the water,” Daunt said. “And you have to put in decent flowers—you can’t just go down to the petrol station and grab a bunch. I mean, look at it.”

»Daunt has opened about 60 bookshops in his three-decade career, every one of them profitable, making him one of the Amazon era’s most successful booksellers. After founding Daunt Books, a popular, independent brand of stores in the U.K., he was credited with saving the country’s largest chain, Waterstones, from ruin by giving managers more agency over their inventory. Those credentials impressed Elliott Management Corp. (@Elliottmgmtcorp), a notorious $40 billion hedge fund better known for seizing an Argentine warship as collateral and berating corporate governance at Twitter Inc. and AT&T Inc. It acquired Barnes & Noble Inc. last year for $683 million including debt and appointed 56-year-old Daunt chief executive officer, the man in charge of its rescue.

»In its 1990s heyday, Barnes & Noble’s superstores blended the sociability of a Starbucks with the bargaining talent of a used-car dealer. But two decades after Amazon.com Inc. capsized the bookselling industry, America’s largest chain of bookstores was flirting with bankruptcy. By the time it was acquired by the hedge fund, its footprint had been slashed in half to a little more than 600 stores, sales were in their seventh straight year of decline, and the company was hemorrhaging cash.



»Elliott became traditional bookselling’s unlikely defender in 2018 after its buyouts of Waterstones and Foyles, a British chain that had been owned by the founding family for more than a century. For Paul Best, who runs a portion of the investment firm from its London office and has taken a shine to companies battered by the retail apocalypse, the distress at Barnes & Noble signaled that he was buying the clunker at exactly the right time. “The more disrupted the category, almost the better,” Best says. “Because if you’re still there after that, you probably have durability and you’ve demonstrated a reason to exist.”

»His research showed the book business had potentially reached a nadir: The e-book market had started shrinking in some countries; the overall value of physical books was rising; and America’s smaller bookshops were growing again. At three times the size of its closest competitor, and the only major chain left of its kind in the U.S., Barnes & Noble was the cockroach after the catastrophe.

»No corner of retail has been more disrupted by the decline of the physical shop than bookselling. In 1995, Jeff Bezos began selling books on Amazon.com because there were more items in the category than in any other. He aimed to sell the majority of the 3 million titles that were circulating in print, more than 20 times the number carried by the largest physical bookshops. Today about two-thirds of all books in the U.S. are sold online, almost exclusively through Amazon. Barnes & Noble is fighting to keep selling 1 in 5.

»It’s a dramatic reversal of fortune for a bookstore chain that itself was once considered the big, bad, ugly machine that corporatized the staid practice of bookselling. Founded 134 years ago as Arthur Hinds & Co., Barnes & Noble was acquired from U.S. conglomerate Amtel in 1971 by Leonard Riggio, a Bronx native who ran the business until 2002, expanding it from a single, now-defunct location on Fifth Avenue into a nationwide network. Under Riggio, the chain became the first bookstore to advertise on television in 1974 and, a year later, the first to steeply discount literature, selling New York Times bestsellers at 40 % off the publishers’ list price.

»In the 1980s, Barnes & Noble acquired 798 B. Dalton stores and 22 Bookstop superstores, making it the largest bookselling chain in the U.S. It used its scale to negotiate lucrative marketing agreements with publishers vying to display their books in every shop’s front window. Such deals infuriated independent booksellers, which were unable to match Barnes & Noble’s prices. By 1998 the company was fictionalized in Nora Ephron’s You’ve Got Mail as Fox Books, a totemic big-box chain that threatens the independent bookstore across the street.



»The chain’s clout in the publishing industry also meant it could comfortably fend off Amazon, which logged several years of financial losses before eventually turning a profit in 2001. Barnes & Noble was large enough that it could at least match the startup’s discounts as well as its breadth of inventory. Now Amazon’s bookselling operations account for only a fraction of the group’s annual sales of close to $300 billion, which are mostly derived from online retail and cloud computing services.

»“No one was really sure that Amazon was going to last or truly threaten brick-and-mortar-style bookselling, because all it did initially was what any bookstore could do, which was, in a sense, special-order any book in print,” says Laura Miller, a professor of sociology at Brandeis University and the author of Reluctant Capitalists: Bookselling and the Culture of Consumption. “The idea of getting it delivered on your doorstep was not necessarily so enticing that you would stop going to a bookstore.”

»Over the past two decades, that’s exactly what happened. Since Amazon’s founding, the number of bookstores in the developed world has collapsed. Crown Books entered bankruptcy for the second time in three years in 2001, and Borders filed for Chapter 11 in 2011, resulting in the closure of thousands of stores. Books-a-Million Inc., the second-largest chain in the U.S., went private in 2015 after losing 90 % of its market value. Barnes & Noble discontinued B. Dalton in 2013 after closing down all its bookshops.

»Barnes & Noble Education Inc., the college bookstore division that was separated into an independent public company five years ago, is expected to report its third consecutive fall in annual revenue this summer.



Barnes & Noble’s flagship store in New York City’s Union Square. Photographer‎: Richard Levine / Alamy.


»By 2015, Amazon opened the first of its own 21 bookstores in the U.S.—clinical data-driven spaces where titles are organized according to the bestseller list on its website. (“Not Built for People Who Actually Read,” read a New Yorker headline.) The company also sells some titles at its Amazon four-star stores, a bizarre and more extensive embodiment of its purchasing algorithm where books are mixed in with laundry bags, motion-activated doorbells, and other four-star-rated products.

»What really terrorized Barnes & Noble was the Kindle tablet. About 3 in 4 e-books in the U.S. are bought and read on a Kindle, giving Amazon enormous sway with publishers. In 2010 the company pulled books from Macmillan Publishers Ltd. in a dispute over the pricing of its e-books on Amazon.com. The fear that e-readers would soon kill the assembly of ink, paper, and glue fueled the development of Barnes & Noble’s own tablet, the Nook, which sought but ultimately failed—at a cost of more than $1 billion—to compete with the Kindle two years after Amazon introduced it in 2007.

»The experiment drastically weakened Barnes & Noble at a time when its commoditized approach to bookselling effectively rendered the chain a collection of charmless warehouses. Revenue peaked at $7.1 billion in 2012, which it attributed in an earnings call to a temporary rise in visits to its stores following the liquidation of Borders. Sales have been in free fall ever since. In 2018 revenue crashed to $3.7 billion, the lowest since 2000, and the company has consistently failed to turn a profit.

»That February, Barnes & Noble laid off almost a tenth of its employees, a majority of them full-time staff who’d worked at its bookshops for decades. It was one of several culls that saw the company’s onetime workforce of 56,000 slashed in half since the early 2000s. Months later an unnamed acquirer rescinded an offer to buy the chain when its then-CEO, Demos Parneros, described the business in a meeting as “an ugly mess” with “no realistic prospects for success,” according to court filings.



»Four CEOs have helmed Barnes & Noble in the past five years, two of them with mass-market retail experience—at Staples Inc. and Sears Holdings Corp. They sought to standardize Barnes & Noble’s network of shops into a single, transposable model—a national blueprint for how books should be sold everywhere. Daunt aims to undo that work, spending three weeks per month in New York running Barnes & Noble. He wants to encourage booksellers to arrange their local window displays with titles that will be relevant to the shoppers passing by. “Anybody will know that people don’t read the same way in Birmingham, Alabama, as they do in New York City,” he says.

»Promotional agreements, in which publishers pay bookstores to take on inventory and showcase it, are a common source of revenue in the bookselling industry, but they can be grossly inefficient. Months later shops have to return thousands of unsold copies to their suppliers if demand is weaker than expected. Barnes & Noble’s current return rate across all titles is about a quarter, roughly the same as when Daunt joined Waterstones. It’s worse for new releases: About half of the latest books Barnes & Noble stocks are returned unsold, he says.

»Daunt was also aghast at Barnes & Noble’s overzealous focus on in-line merchandising—shelves snaking through the checkout lines targeting impulse shoppers with irrelevant last-minute products such as stockings and sunglasses. The chain, which for years sold complementary but more profitable items including puzzles and calendars, was now hawking lukewarm bottles of Fiji water at its cash registers, along with essential oil diffusers and Himalayan salt lamps.

»Under Daunt, Barnes & Noble will shrink the space it allocates to miscellany, including its CD and DVD section, replacing it with expanded children’s and young adult sections. The company is also testing new layouts at some of its stores, such as lower tables instead of midlevel units, to speed up the traffic. Daunt says the New York flagship could start looking “pretty good” after an investment of $5 million. Elliott has agreed to front the initial cost of renovating Barnes & Noble’s stores until the bookshops are profitable enough to reinvest in themselves. “Ultimately it’s going to cost an immense amount,” Daunt says. If the return justifies his early initiatives, the total amount spent on renovating the branches will surpass $100 million.



»Beyond repairing the elevators, steam-cleaning the carpets, and swapping in sleeker fixtures, Daunt says, the company’s bookselling strategy needs a complete overhaul. In a misstep that attracted national headlines last month, critics accused Barnes & Noble’s Fifth Avenue store of “literary blackface” after it redesigned covers of classics, depicting Moby Dick’s Captain Ahab in various skin tones and casting Frankenstein with a black monster, all to celebrate Black History Month. The initiative, which Daunt says despite its good intentions was “a little bit daft” and that he knew nothing about until it was announced, was canceled within hours.

»Another major aspect of the strategy to revive the company will be to open new locations in “significantly under-bookstored” parts of the U.S. Daunt is aiming for a total of about 1,500 shops, which would match the company’s historical peak. He also sees an opportunity to relocate some of the bigger stores to smaller locations in high-end shopping malls and on street corners in affluent neighborhoods, where he says the brand would fit well alongside other targets of middle-class spending, like Aveda soaps and Peloton exercise bikes. Downsizing some branches, as Daunt did at Waterstones, would also save on rent—all but one of the company’s bookshops are leased.

»The test will be whether each bookshop can be mindful enough of the community it’s attempting to sell to and curate a stock appealing enough to bring back readers. At the New York flagship, changes as small as displaying more softcover books than hardbacks, which are less practical for reading on the subway or in a nearby park, can drive sales. “I don’t want every Barnes & Noble to become a version of Union Square,” Daunt says. “I want Union Square to be the obvious store to have on Union Square, in New York City, where it becomes really sophisticated, metropolitan, urgent, vibrant, young, energetic, sharp-elbowed—because that’s what’s going on in the city out there.”

»Daunt, who has a degree in history from the University of Cambridge, began selling books after his wife advised him to pursue a more spiritually rewarding career than investment banking. In 1990, after leaving J.P. Morgan, he opened his first store after acquiring the space of a former antiquarian bookshop in the affluent London neighborhood of Marylebone. The Edwardian interior is a spectacular corridor of oak banisters and herringbone floors lit through the stained glass of a large baroque window. At the store’s entrance, books lie flat on tables in a kaleidoscope of mismatched colors and fonts—the titles related to one another in diagonals of true crime, philosophy, and military history.



»This spring the independent chain will open its ninth shop. Each branch thrived by trusting the instincts of well-read employees rather than leaning on publishers’ payments to promote titles on desirable shelf space. Among London’s yuppie classes, Daunt Books is an institution—its tote bags are a staple accessory for cosmopolites affecting the highbrow mating-call look.

»That indie cachet made Daunt Books the polar opposite of Waterstones, which had soured under the ownership of stationery merchant WHSmith Plc and later music retailer HMV. Founded in 1982, the U.K.’s largest bookstore chain—with about 300 shops—had become a bland and unprofitable network of outlets staffed by scores of part-time employees. In 2011, hours before Waterstones was set to file for bankruptcy, Daunt was brought in by the Russian billionaire Alexander Mamut to lead the company’s turnaround.

»In his first weeks, Daunt scrapped the employees’ funereal black uniforms, replaced the furniture to make the shops feel more spacious, and angled spotlights on bookshelves tilted at a precise 3 degrees, the better to catch the eye while also protecting the book spines. He also ended Waterstones’ promotional contracts with publishers, which cost the chain millions of pounds in lost revenue but gave managers unprecedented agency. It allowed booksellers at the company’s stores outside London to promote more relevant titles to their individual locations. In the northern seaside resort town of Blackpool, managers devoted more shelf space to Japanese comics than fiction, and a book about a local soccer team was prominently displayed at a shop in the southern county of Surrey.

»It also helped reduce the return rate—Waterstones’ has since dropped from a quarter to between 3 % and 4 %, which has drastically cut labor and freight costs. (Daunt says lowering Barnes & Noble’s return rate is a major priority.) Another strategy was to open smaller and more discreet stores, without the Waterstones moniker, that passed off as independents in the bucolic market towns of Rye and Southwold.



»By 2016, Waterstones earned its first annual profit in eight years. But not all of Daunt’s decisions were celebrated. He removed 40 % of employees from Waterstones’ middle-management ranks and invested some of those savings in raising the pay of senior staff, but not of junior hires. Five Waterstones booksellers delivered a petition to him last April, with 9,300 signatures calling for salary increases, and later resigned from the position because of low pay. In February, Waterstones lifted the average compensation across the company by 6.2 %.

»The success also came at the expense of some publishers, which paid handsomely to pass their risk on to the sellers that would pile their books up to the gunnels everywhere. “But the reality was we weren’t selling them everywhere,” Daunt says. Last November, at the Bookseller magazine’s conference on the future of the industry, one attendee said her company was now having trouble selling books to Waterstones and Foyles. Daunt suggested the problem probably rested with the products’ appeal rather than the distribution channel. “We’re growing, we’re selling more books, and we’re making money,” he said. “We’ve also managed to sell ourselves to a hedge fund not renowned for making dud purchases.”

»If Daunt succeeds in rescuing Barnes & Noble, it would earn Elliott a stellar return. In typical hedge fund fashion, it’s already insulated itself against not earning anything at all from its bookstore empire. Corporate filings show that a £32,279,784.11 ($41,598,957) dividend was paid last year from Waterstones to Book Retail Holdco, an entity controlled by the firm and domiciled in a Channel Islands tax haven that indirectly owns the U.K. chain. “I’m not emotionally attached to the business,” Best says of Elliott’s investment. “I like bookshops. I like being in bookshops. I buy books in bookshops and, in so doing, I noticed there were a lot of other people in the bookshops I was in.”

»Daunt says he’s answering a higher calling. “There aren’t remotely enough independents to maintain our industry. Publishers won’t keep that infrastructure going, it will become a world completely dominated by Amazon, and the traditional bookshop will disappear,” he says. His life’s work now depends on saving the giants that were once the enemy. “If we can achieve that goal, the owner will also make a lot of money, so they’ll be happy as well.” ».


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el 3/24/2020
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