Takes On Amazon in the E-Commerce Space

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King says that’s ability to launch new projects quickly has allowed the company to bounce back from setbacks such as the wireless initiative. As an example of such speed, he cites an SAP implementation for financials, which he started in August 1999 and finished in January 2000. "When most people think of an SAP implementation, they’re thinking about 12 to 24 months," King says. "The ability to make things happen quickly across a number of initiatives is perhaps our biggest innovation." Large technology investments don’t guarantee online success, however. In order to build customer loyalty and boost conversion rates, which measure the number of visitors who actually make purchases, the dotcom badly needed to market itself through Barnes & Noble stores. For observers of, one of the most hopeful developments came after the abrupt departure in January 2000 of CEO Jonathan Bulkeley, who had been brought in after Bertelsmann made its investment. Stephen Riggio, who had stepped aside during Bulkeley’s tenure, retook the helm, signaling that the struggling dotcom would be finding new ways to integrate with its powerful parent company.

Great Expectations

On a sunny afternoon in late May, customers line up at a customer service counter at Barnes & Noble’s sprawling superstore in Manhattan’s spiffed up Union Square. "Powered by" is emblazoned above the counter in shiny chrome letters. At the counter, salespeople stare intently at computer screens, checking to see if books are available online and in some cases, ordering books for customers. Shoppers can also apply to join the "Reader’s Advantage" program, in which they’ll receive online and in-store discounts for a yearly fee of $25.

The customer service counters, which will be installed in all of Barnes & Noble’s more than 500 stores by the end of the year, are symbolic of the new integration between the physical bookstores and the e-commerce site. Four years after its launch, is mining its biggest potential competitive advantage over its dotcom competitor: well-frequented stores. Since August 2000, online shoppers have been able to return purchases at Barnes & Noble stores. Later this year, the bookseller will issue a universal gift card that can be used for purchases online or in the stores, says Stephen Riggio. "Our customers see us as one company, and increasingly as more Americans go online they will go to brands that they know and trust," he says.

So why did it take so long to see the light? Stephen Riggio, a fiercely loyal man who bristles at comparisons between his company and, dodges this question, asserting that it was always part of Barnes & Noble’s long-term plan to integrate the website with the brick-and-mortar operations. Early on, however, in addition to the question of online sales tax, "it was important to establish experience on [’s] own, especially since no retailer had ventured aggressively into e-commerce," he adds.

Barnes & Noble is also in the midst of introducing new systems into its stores, which would allow employees to check the availability of titles in real-time; the installation of these systems have made it easier in recent months to unite the retailer’s IT with the e-commerce infrastructure, King says.

Despite the recent upbeat mood, is far from declaring Web victory. still has three to four times the audience of, according to Nielsen/NetRatings from April. Visitors to the site also spend less time there than those to, and Cdnow. "I think is barking up the right tree, they’re just not far enough up it," Booz, Allen & Hamilton’s Katz says.

Still,’s sales report for the first quarter showed that recent efforts to exploit all of the sales channels are making a mark. Revenues grew by 23 percent over the previous year to $109 million. By contrast,’s core books and music business in the United States, which brought in $410 million in the quarter, grew by only 2 percent. Without providing specific numbers, Stephen Riggio credits the better-than-expected results with rising conversion rates. Gross margins, which measure the net sales minus the cost of doing business, rose to 23 percent from 15.8 percent. At the same time, was able to cut marketing expenses as well as the cost of fulfillment and customer service.

Mark Rowen, an e-commerce analyst at Prudential Securities in New York City, upgraded the company’s stock after the first quarter results came out, saying he estimated that had gained "significant market share" from "arch rival Amazon." doesn’t provide statistics on market share. But Prudential Securities says that captured 28 percent of total combined books, music and video sales of both and in the first quarter, up from 21 percent in the fourth quarter of 2000.

And while profits most likely won’t come before late 2002,’s balance sheet looks strong, with $174 million in cash and securities and no debt.

All I Really Need to Know I Learned on the Retail Floor

During its four-year existence, has experienced all of the ups and downs of the e-commerce roller-coaster ride, from the euphoria of launching a site to the sting of criticism. And it doesn’t look like things are going to smooth out completely anytime soon. The retail business, and bookselling in particular, has always been a narrow-margin, cutthroat industry. To make things worse, recent studies from the National Retail Federation show that online book sales are leveling off after five years of growth.

All this and still that titanic online battle rages. In July, offered free shipping for orders of two or more items to U.S. destinations, one month after had offered a similar deal.

Expect more skirmishes. Barnesandnoble .com has learned enough to proceed in a still-uncertain environment by keeping costs down and making the most of its brand name. "Growth prospects have come down for everything in e-commerce, and that has compelled us to be more efficient," Stephen Riggio says, noting that the company cut 16 percent of its workforce in February and has cut back on expenses. Ironically, things are looking up for at a time when many e-commerce sites are struggling to survive.

" showed a lot of courage and has learned a tremendous amount," Biro of Digitas says. "Amazon created the online phenomenon. But brick-and-mortar companies that stuck with e-commerce are now going to be the ones left standing."

Stephen Riggio is resolutely upbeat about the future of online retail despite the pall that hangs over the e-commerce sector. "The current downturn and lack of favor of e-commerce shouldn’t prevent companies from developing e-commerce channels," he says. "We have demonstrated that a brick-and-mortar retailer can add a sizable new channel of business into their operation. If anything, it’s a lot easier to do it today than when we did it."


Copyright © 2001 IDG Communications, Inc.

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