Turnaround Strategies: Barnesandnoble.com Plays Catch-Up

The Problem: Fell behind upstart competitor.

Barnes & Noble was slow to react to Amazon.com’s launch in July 1995. When it did launch an e-commerce site in 1997, its online spinoff, Barnesandnoble.com, was barraged with criticism for being slow and hard to use. What’s more, there was little connection between the site and the well-known stores. It reached millions fewer online shoppers compared with Amazon.com, and like other e-tailers it struggled with order fulfillment. By the end of 1999, Barnesandnoble.com had 4 million customers, compared with Amazon.com’s 16.9 million. 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.

The Solution: Play catch up.

Starting in 2000, Barnesandnoble.com began to refocus its venture to take advantage of its more than 600 stores across the country by allowing customers to return online purchases in the stores. The parent company, Barnes & Noble, also started to open customer service counters in stores, where shoppers could check inventory or order books online. In addition, CIO Gary King oversaw the relaunch of the website, overhauling the e-commerce site on both the front and back ends. The new front-end look included more reviews and fewer clicks between a customer’s order and a purchase. The company also spent $75 million on a distribution system that would include two new centers in Memphis, Tenn., and Reno, Nev. And the online bookseller issued a universal gift card that can be used for purchases online or in the stores.

The Situation Now:

Barnesandnoble.com has customer service centers in all of its stores, allowing customers to check inventory on the Web while shopping in the brick-and-mortar stores. But integration efforts have stopped short of the click-and-brick approach that allows customers to place an order on the Web and pick it up at a store. “That doesn’t seem to be high on the list of customers’ desires,” says Marie Toulantis, who took over as CEO of the online bookseller in February.

Toulantis stresses that Barnesandnoble.com continues to gain market share in sales of new books, music and videos. However, the company is still posting a loss, compared with Amazon.com, which reported an operating profit of $59 million in the fourth quarter of 2001. Toulantis predicts that the e-commerce company will be profitable toward the end of 2003. Barnesandnoble.com’s gross margins, which measure the net sales minus the cost of doing business, were 23.5 percent for the second quarter of 2002, compared with an overall 27 percent for Amazon.com.

Barnesandnoble.com’s shares have also taken a beating. In August, the online bookseller received word that its stock, which hovered under $1 a share for most of the summer, faced delisting from the Nasdaq Stock Market.

Toulantis is sanguine about the online bookseller’s future, however. “We will definitely survive,” she says, noting that shareholders Bertelsmann, the German publishing giant, and Barnes & Noble (both of which own 36 percent of the company) are “interested in our survival.”

Leadership:

Stephen Riggio, former vice chairman and acting CEO of Barnesandnoble.com, was appointed CEO of the brick-and-mortar counterpart Barnes & Noble in February. Toulantis, who had been president and COO of Barnesandnoble.com since May 2001, took over as CEO. One year later, CIO King moved over to become CIO at Barnes & Noble. Replacing King is David Willen, the former CIO for financial news service Thestreet.com.

Challenges Ahead:

Price remains a major challenge. On a spot check of several titles, Barnesandnoble.com’s prices are higher than those at Buy.com and Amazon.com, and fierce competition is unlikely to let up. (Analysts note Amazon’s bulk gives it the ability to lower prices.) Staying competitive also means continually upgrading the site and adding new features. In addition, the online retailer needs to continue its efforts to integrate with stores to drive traffic both online and offline. “The big mistake we all made was believing the projections that this would be a $2 billion business in five years,” says Toulantis. “Instead, we are a $400 million company. The challenge has been to grow the business as if it’s a normal company. It’s not astronomical growth, but it’s another channel, and it will be here to stay.”

What the Experts Say:

“I don’t think Barnesandnoble.com will ever out-Amazon Amazon because they can’t outprice them,” says Michael S. Katz, senior vice president in the information technology group at Booz, Allen & Hamilton in New York City. “Their key to success is if they can truly leverage their stores. That has yet to be proven.”