Signed, Sealed, Delivered

10/11/2019

Do you remember the 1998 rom-com “You’ve got Mail!”? It starred Tom Hanks and Meg Ryan, and was actually a remake of a prewar Jimmy Stewart movie called “The Little Shop Around the Corner.”

I used it as the basis for an editorial 20 years ago because the storyline was timely for our industry. Tom Hanks plays the CEO of a huge bookstore chain, based on Barnes and Noble, that is in the process of crushing a small independent store owned by Meg Ryan’s character. It’s personal to her, as she grew up in the store that was founded by her mother.

Those of you who were around the school supply industry in the ’90s will remember a very similar dynamic going on at that time. School Specialty was the oversized, aggressive conglomerate buying up family businesses or forcing them out of the market. I don’t recall seeing any movie stars, but otherwise it was pretty much the same story.

I was channel surfing recently when I happened to land on that film and it sucked me back in. It was engaging, funny, slickly produced and just generally better than I remembered, and of course I loved the Nilsson songs and the golden retriever.

The premise of the story was outdated, but in a way that made it more interesting to me. Barnes and Noble (like School Specialty) is still around, but it is no longer an existential threat to mom-and-pop bookstores. Over the past two turbulent decades it has closed 400 locations, leaving it with 627 shops and a greatly reduced market share of about 8 percent. Amazon, by contrast, has built up a U.S. market share of 50 percent.

Ironically, the “mail” referred to in the title is not the U.S. mail, but AOL’s Instant Messenger, through which the lead characters meet and fall in love. Neither the filmmakers nor the audience realized that the seemingly innocuous internet would soon make the competition between chains and independents virtually irrelevant.

In August a private equity firm called Elliot Advisors bought Barnes and Noble for $683 million. Elliot is the owner of Waterstones, the largest bookstore chain in Great Britain.

The week that sale closed, The New York Times published an article posing the question, “Can Britain’s Top Bookseller Save Barnes and Noble?” The title was not referring to a British company but rather to a British person.

In 2010, the Waterstones chain was itself on the verge of bankruptcy. It was purchased by a Russian billionaire named Alexander Mamut for $66 million. To run it, Mamut brought in James Daunt, who had founded an independent store and expanded it over 20 years into a very profitable six-store chain.

It took about four years for Daunt to turn the 300-store operation around, but in 2015 he managed a 10-percent return on $500 million in sales, and has continued to maintain those numbers ever since. Last year Mamut sold the business to Elliot Advisors for $250 million.

So now Elliot is sending Mr. Daunt to New York to take over the reins of Barnes and Noble, with the apparent expectation that he will accomplish the same sort of turnaround that he did at Waterstones. I find it a little ironic that a man who was running a “mom-and-pop” a few years ago is now managing the largest bookstore operation in the world. It’s as if Meg Ryan had ended up being Tom Hanks’ boss.

In Great Britain, Waterstones has held onto a 25-percent market share while keeping Amazon “down” to 40 percent. The question is how those numbers were attained, and whether the same strategy will work in a different place and time.

In hindsight there is general agreement on one point. If you try to beat Amazon at its own game, you are likely going to lose. Barnes and Noble lost hundreds of millions of dollars, and years of precious time, trying to become an ecommerce merchant. Failing that, it made the even-worse decision to partner with Amazon on fulfillment.

B and N’s third strike was the Nook e-reader, which was launched to compete against the Kindle. The problem was that a successful e-reader required the backing of a successful ecommerce site. That was another billion down a rabbit hole.

So we have a list of things not to do when trying to survive as a bookstore in the Internet Age, but we also need a to-do list. James Daunt has not made a public statement of his intentions, but I think we can make a few assumptions from his record at Waterstones.

One is that the big picture is made up of many small details, and he pays attention to those details. Here is how he recently described Barnes and Noble – “It’s a bit ugly. There’s piles of crap around the place. It all feels a bit unloved, the booksellers look a bit miserable, it’s all a bit rundown.”

According to the Times article, Daunt once carried on a vehement argument with a store designer for several weeks about the proper angle of tilt for bookstore shelving. The designer wanted 4 degrees and Daunt insisted on 3.

Another tenet is that bookstores are local businesses, and will only flourish if they reflect local tastes. Waterstones, like Barnes and Noble, had made all the product decisions at headquarters and encouraged every store to look like every other store.

The parent company still makes a lot of product decisions, but it also allows managers to adjust their stores to the community in which they exist. In some cases, even the name of the store has been changed to fit its environs.

Finally, there is one other principle Daunt has applied that may be the most significant, and it has to do with those books that are selected by the home office. When he took over at Waterstones, it was taking in $38 million a year in “co-op fees” from publishers. That was a lot of money for a struggling business but it allowed publishers to decide what was stocked in every store, as well as what was displayed, and where.

Daunt compares that situation to a crack habit, that feels great at first but will eventually kill you. By putting a stop to it, he was able to cut returns from 25 percent to 4 percent, and free up thousands of employees from all that packing and shipping.

Now customers understand that Waterstones makes recommendations based on merit, not money, and Daunt’s selection for a book-of-the-month may sell 100,000 copies. Amazon will offer you a lot of fancy algorithms that analyze your shopping habits, but it will not offer you its own judgement.

That may be the most valuable commodity that you have to sell.


You can e-mail Kevin at kfahy@fwpi.com.

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