Barnesandnoble.com Takes On Amazon in the E-Commerce Space

A Tale of Two Booksellers

It was the best of times for the Riggios. By the early 1990s, after 25 years of running campus bookstores in lower Manhattan, and buying up chains one by one, the tough entrepreneurial family from Brooklyn had amassed an empire that stretched across the country, with hundreds of superstores selling discounted best-sellers. Their company, Barnes & Noble, had battled such formidable competitors as Borders Group, the bookstore chain based in Ann Arbor, Mich., and had used comfy couches, fragrant cappuccino bars and a massive selection to change the rules of bookselling. And with more bookstores and market share than its closest rivals, Barnes & Noble had plans to grow even bigger.

But it was soon to be the worst of times. Although e-commerce was only a glimmer on the horizon, entrepreneurs across the country were developing plans that would change the status quo for Barnes & Noble and other large retailers. In July 1995, Seattle-based startup Amazon.com launched its ambitious website, sending the first e-commerce shockwaves through corporate America and directly threatening the Riggios’ perch atop the bookselling world.

At Barnes & Noble the reaction to the upstart online competitor was anything but swift. The retailer first set up shop on America Online and waited 20 months to launch an e-commerce site. When it did, the spinoff Barnesandnoble.com was barraged with criticism: The site was slow and hard to use, and there was little connection between the well-known stores and the website. It reached millions fewer online shoppers compared with Amazon.com. Like other retailers, it struggled with order fulfillment glitches and miscalculated the enormous importance of creating ties between its physical stores and its online one. And its stock debut during the raging IPO season of 1999 was a whisper for such a well-known brand. All told, Barnes & Noble’s predicament gave rise to a new term for what happens when an online competitor knocks an established business on its heels: getting Amazoned.

Four years after the website’s launch, Barnesandnoble.com is far from down for the count. The online book merchant’s story is in many ways a parable for what went wrong when traditional companies approached e-commerce during the early days of the dotcom boom and how a major brick-and-mortar presence can learn from its initial missteps.

Now, even as e-commerce has largely fallen out of favor?and Amazon.com is still struggling to eke out a profit?Barnesandnoble.com is refocusing the venture to take advantage of its brand name and 40 million regular in-store shoppers. Customers can now return online purchases in the stores?where they initially met with frustration?and dozens of customer service counters are opening in Barnes & Noble superstores across the country, allowing shoppers to check inventory or order books online.

Recent evidence shows that the company’s new approach is working: In the first quarter of 2001, Barnesandnoble.com reported a higher-than-expected jump in sales, leading analysts and company officials to declare that the number-two online bookseller is starting to take market share from Amazon.com. And although profits are not expected until next year, the dotcom has burnished its image by cutting marketing and cumbersome fulfillment costs.

“We had a very steep learning curve,” says Stephen Riggio, Barnesandnoble.com’s vice chairman, whose older brother, Leonard, is chairman and CEO of the website’s brick-and-mortar counterpart. “But we’re getting a lot better at e-commerce. We’ll be the first multichannel retailer to offer pervasive service on a massive scale.”

Long Day’s Journey to the Web

When Barnesandnoble.com got started in 1997, the e-commerce landscape for large brick-and-mortar retailers was mostly barren. K-Mart, Staples, Wal-Mart and countless others had taken only small, faltering steps onto the Web, and none of them faced such direct competition like Amazon.com.

To understand the significance of Amazon.com’s arrival, it’s important to remember how quickly the startup built an important brand out of nothing. When Amazon.com went live in 1995, no one paid much attention, but the Internet company quickly started ringing up sales and creating a community of book buyers by encouraging customers to post their own reviews. Amazon.com swiftly took control of the online book market and investors took notice, boosting the company’s value to close to $25 billion by late 1999, even as it branched out to sell a host of other products such as video games and toys. That December, Time named Amazon.com Founder Jeff Bezos its “Person of the Year.”

Today those in charge at Barnesandnoble .com play down the rivalry with Amazon.com. They say Barnes & Noble faces a slew of competitors that also includes Walden Books and even Wal-Mart. But they do acknowledge that the early days weren’t easy and that Barnesandnoble.com took the challenge seriously. “The history of the company is to never underestimate the competition,” Stephen Riggio says. (The company even sued Amazon.com over the use of the marketing phrase “Earth’s biggest bookstore.” The parties eventually settled.)

With the rise of Amazon.com, Barnes & Noble and other brick-and-mortar retailers began to question age-old assumptions about success. “Amazon.com destroyed the complacency of American business,” says Kathy Biro, vice chairman of Digitas, a professional services company based in Boston. “Here was a company that had no inventory, customers without the expenses of a brick-and-mortar, unlimited access to capital and not a worry about earnings. They were completely rewriting the rules of business.”

With much of the focus on the new online challenge, Barnes & Noble’s rate of store expansion began to slow in the late 1990s, and the company made a bid to buy La Vergne, Tenn.-based Ingram Book Group, the country’s biggest book distributor, in order to get rid of the middleman and boost profits in book sales. Ingram’s distribution centers could also help Barnesandnoble.com get books to customers more quickly than Amazon.com. (The deal was ultimately abandoned after the Federal Trade Commission voiced antitrust concerns.)

Meanwhile, the staff of Barnesandnoble .com was struggling to put together a competitive e-commerce site. “We had to do everything on our own,” Stephen Riggio says. “At that point [1997], there weren’t any third-party technologies or consulting companies to help out. Not everything we did worked very well.” Barnesandnoble.com was like many e-commerce startups at the time, but the stakes were much higher. If it failed, a successful site was just a click away at Amazon.com.

Specifically, the company was “besieged with orders” without having adequate technology to handle them, Stephen Riggio says. Although the search technology has always been effective, CRM and personalization technologies?areas in which Amazon.com was excelling?were completely absent, he says. Some companies were building those in-house at the time, but the vast majority were just getting started in that area, and software packages were largely unavailable. The result was a site that lagged far behind Amazon.com when it came to ease of use and customer friendliness. However, “once you open your doors in e-commerce, you can’t shut them,” Stephen Riggio adds.

Barnesandnoble.com wasn’t alone. “Most retailers stumbled with ease of use,” says Carrie Johnson, an e-commerce analyst at Forrester Research in Cambridge, Mass. “Barnes & Noble was up against Amazon, the easiest site to use on the Web, and they fell victim.”

“When Barnesandnoble.com first launched their site, it was the Internet gold rush. The assumption was that if you put your product out there, you’d get the traffic and everything would be wonderful,” says Michael S. Katz, senior vice president in the IT group at Booz, Allen & Hamilton in New York City.

In reality, Barnes & Noble’s Web venture frustrated users with its lack of integration to the 483 retail stores, where there were no signs of the e-commerce arm. At the time, Barnesandnoble.com was locked in a discounting war with Amazon.com, and remaining separate allowed the company to avoid charging sales tax for online sales in states where it had stores. Barnesandnoble .com and its brick-and-mortar parent were pushed further apart in 1998 when the GŸtersloh, Germany-based publishing giant Bertelsmann took a 36 percent stake in the company, becoming equal partners with Barnes & Noble. The following year, Barnes & Noble sold 20 percent of the online company to the public in an initial public offering that was roundly panned by the financial press. The company’s stock rose only 27 percent the first day of trading, a paltry showing at the time.

By the end of 1999, the e-commerce landscape was looking distinctly unfriendly to Barnes & Noble. Barnesandnoble.com ended the year with 4 million customers, compared with Amazon.com’s 16.9 million. Revenues in 1999 were $193.7 million versus Amazon.com’s $1.6 billion. Shopping at Barnesandnoble.com was completely inconsistent with the in-store experience, Forrester’s Johnson says. “The competition became a price game, and Barnesandnoble .com started losing it to Amazon,” she says.

Two years later, spinoff has become a bad word. Disney conceded earlier this year that setting up a separate “tracking” stock in November 1999 for its Go.com portal was a bad idea. Ticketmaster, which carved out a separate online unit?Ticketmaster Online-Citysearch?in 1998, decided in March to reunite the two entities. And Staples, the Framingham, Mass.-based office supply company, folded its Internet arm back into the parent company after flirting with the spinoff idea. In the end, companies are finding that customers who buy from both online and store channels are more loyal and spend more money than those who shop through one channel.

In retrospect, however, Stephen Riggio says he doesn’t regret the Barnesandnoble .com spinoff: It raised $486 million, money that was necessary to build the website and the fulfillment operations. The decision to create a separate online company was based on the fact that the capital markets were looking favorably on Internet companies and because a separate company with stock options could attract the best talent. “Of course, that was then, and this is now,” he says.

Zen and the Art of Website Maintenance

Barnesandnoble.com’s headquarters in Manhattan’s Chelsea district sports colorfully painted walls and exposed pipes that hearken back to the dotcom days. In the middle of a massive, open floor of cubicles and exposed beams, dozens of servers hum and blink in a dark cavernous room. The cavelike space, known as the NOC (or network operations center), serves as the website’s nerve center. Technology investment has been at the front of Barnesandnoble.com’s strategy as it has struggled to figure out what its customers want and to differentiate itself from the customer service and personalization specialists at Amazon.com. Instead of giving up, as Borders did in April when it turned over its Web operations to Amazon.com, Barnesandnoble.com has set out to improve its site and build a distribution and logistics system for its North American operations.

Gary King, who was hired as CIO in December 1998 and is now executive vice president of operations and chief technology officer, stresses that 1999 was pivotal for Barnesandnoble.com. “In addition to adding new product lines and new capabilities to the website, we also sat down and said, ’What does our infrastructure need to be to provide the kind of service that our customers are going to want?’” he says.

King and his IT team set out to relaunch the website, a process that overhauled the e-commerce company on both the front and back ends. The new front-end look for Barnesandnoble.com appeared to follow Amazon.com’s lead with more reviews and fewer clicks between a customer’s order and purchase. King’s team also started to design a distribution and logistics system that would include two new distribution centers in Memphis, Tenn., and Reno, Nev., and cost upward of $75 million. Stephen Riggio points out that this would give the company better order fulfillment capabilities than any rival and five times the selection in books, music and videos of Amazon.com. Barnesandnoble.com now stocks 1 million titles in its distribution centers, up from 100,000 titles four years ago. “We had to build the largest and most expensive supply chain in the industry,” Stephen Riggio says. “No one stocks as much or ships as fast as we do.”

The online bookseller also fought back against Amazon.com by venturing into new and experimental areas of technology, including digital books (books that are downloaded electronically), wireless ordering and printing on demand (in which shoppers can order out-of-print books). With those innovative ventures, Barnesandnoble .com sought to set itself apart from its larger competitor. Not all have been successful. The company is pushing ahead with e-books and printing on demand, but the wireless project was dropped in April, after Internet-ready cell phones failed to catch on. “We believe completely in the eventual adoption of wireless once the appliance makes sense to humans,” King says. “For now, we’re happy to have people just call us and not fool around.” (See “Wireless in Manhattan,” March 15, 2001.)

King says that Barnesandnoble.com’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 Barnesandnoble.com, 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 Barnesandnoble.com” 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, Barnesandnoble.com 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 Amazon.com, 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 [Barnesandnoble.com’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, Barnesandnoble.com is far from declaring Web victory. Amazon.com still has three to four times the audience of Barnesandnoble.com, according to Nielsen/NetRatings from April. Visitors to the site also spend less time there than those to Amazon.com, Buy.com and Cdnow. “I think Barnesandnoble.com is barking up the right tree, they’re just not far enough up it,” Booz, Allen & Hamilton’s Katz says.

Still, Barnesandnoble.com’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, Amazon.com’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, Barnesandnoble.com 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 Barnesandnoble.com had gained “significant market share” from “arch rival Amazon.” Barnesandnoble.com doesn’t provide statistics on market share. But Prudential Securities says that Barnesandnoble.com captured 28 percent of total combined books, music and video sales of both Amazon.com and Barnesandnoble.com 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, Barnesandnoble.com’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, Barnesandnoble.com 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, Barnesandnoble.com offered free shipping for orders of two or more items to U.S. destinations, one month after Amazon.com 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 Barnesandnoble.com at a time when many e-commerce sites are struggling to survive.

“Barnesandnoble.com 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.”