Such deep discounts on a type of product responsible for such a large percentage of the company's profits will clearly have a negative effect on the company's profit margin.
Thus one of the corporation's key vulnerabilities at the present time is the competition that it faces for bestselling titles from big box retail stores like Wal-Mart. It shold be noted, however, that this race-to-the-bottom-of-the-price war for bestselling books carries risk for other companies as well, as Surowiecki (2009) describes:
Wal-Mart began by marking down the prices of ten best-sellers -- including the new Stephen King and the upcoming Sarah Palin -- to ten bucks. When Amazon, predictably, matched that price, Wal-Mart went to nine dollars, and, when Amazon matched again, Wal-Mart went to $8.99, at which point Amazon rested. (Target, too, jumped in, leading Wal-Mart to drop to $8.98.) Since wholesale book prices are traditionally around fifty per cent off the cover price, and these books are now marked down sixty per cent or more, Amazon and Wal-Mart are surely losing money every time they sell one of the discounted titles. The more they sell, the less they make. That doesn't sound like good business. (http://www.newyorker.com/talk/financial/2009/11/09/091109ta_talk_surowiecki#ixzz0j9zXEIuV)
It may well be that given the financial down-sides of such a strategy, it may well be that the other corporations following this strategy -- Wal-Mart, Target, Costco, Amazon -- may forgo it in the relatively near future. If they do so, then Barnes & Noble may be able to reduce the discounts offered on bestsellers while keeping their current market share of bestsellers and simultaneously increasing its profit margin on bestsellers (and therefore its overall profit margin).
Of course, Barnes & Noble also faces continuing competition from other retail booksellers, including primarily Borders and Books-a-Million. (Independent bookstores have not been a significant competitive threat for at least a decade. [Popper, 2009]) These stores currently have lower market shares than does Barnes & Noble, which is encouraging financial news for the latter. However, it is also true that Barnes & Noble has relatively few defenses against these companies -- and especially against Borders -- since all three are offering essentially the same products. Market share tends to produce market share, and so Barnes & Noble may well keep its higher market share simply because it has the momentum to do so. However, it should also look for ways to distinguish itself from these other two mass booksellers.
Second area of risk or weakness
The second major risk is also cited as a potential strength -- which sounds contradictory but it is in fact true that the Nook has the potential to be either a substantial weakness or strength for the company. Given how little is yet known about the profitability (or market share) of the Nook, it is impossible to assess in an accurate way how much the company should base its future plans on the success (or failure) of the Nook).
Third area of risk or weakness
Barnes & Noble receives a relatively small degree of its profits from its online division. Amazon.com has a far greater market share for online sales. This would not be such a problem for Barnes & Noble if profits from retail stores and online enterprises were equivalent. But retail stores have much higher operating costs, of course, and so Amazon can afford to undercut Barnes & Noble in terms of much of its pricing structure. This will remain a weakness for Barnes & Noble as long as it relies so heavily on its in-store sales. (Of course having retail stores is also an advantage for many people continue to want to be able to drop in to a retail store on the spur of the minute, browse for a while, and then pick up something to read that day.) According to its quarterly SEC filing, Amazon's book sales increased by 7% in the first quarter of FY 2009 because of the popularity of its Kindle 2.
Pursuing a More Profitable Strategy
A few weeks ago Barnes & Noble hired a new CEO. Reading the tea leaves around who was selected it is possible to discern (at least in broad form) the direction that the company intends to take to meet the kinds of projections outlined above. The new CEO, William Lynch, was instrumental in designing and initiating the company's online division and headed the introduction of the Nook. Given the selection of Lynch, it is impossible not to believe that the company is intending to rely more and more on its online sales and its e-reader.
But is this the wisest course? There are two basic modes that businesses can use to compete with other companies. They can either do the same thing that other companies are doing but offer these same products or services in some way that is perceptibly better than its competitors. Or they can create a new niche and offer something that their competitors are not doing. In seemingly casting its future lot with its online and e-reader divisions, Barnes & Noble is betting that it can do the same thing as its competitors -- but do it better.
Given the thin margins that it currently has -- when it is making a profit -- this seems less than an obviously good strategy. The current bookseller marketplace (online, electronic, and traditional) is already so crowded with such low profit margins that trying to eke out greater profits by extending its current strategies seems ill conceived. It is hard to imagine that there will be a significantly greater potential profit for Barnes & Noble if it continues to split its revenues (and its profits) between retail stores and online services. Or rather, Barnes & Noble should not depend on its e-reader and online services in a traditional way. Just trying harder with the same model and the same overall market design will not be sufficient to protect Barnes & Noble from declines in profits or market share.
In an already-saturated marketplace, and with more competitors in the online and e-readers media likely to occur, Barnes & Noble should increase its focus on its retail stores. This does not mean that it should abandon its online and Nook divisions. But given that it makes the majority of its money from its retail stores, and given that most new competition is likely to come from online and e-reader rivals and not from new brick-and-mortar stores, a renewed focus on these stores seems the wisest choice.
So how might Barnes & Noble increase the profitability of their retail stores? One obvious way is by incorporating electronic media into the store sites, by embedding the use of e-readers and smart phones, for example, into the physical buildings. For example, if a person buys a coffee at a Starbucks in a Barnes & Noble, the person might be able to download a collection of recipes for free in the store onto his or her e-reader. This might lure a customer into a store who would not otherwise go there. Of course, this step alone would not be sufficient: It is simply an example of the ways in which Barnes & Noble could increase the value to the customer of offering options that require the customer to come into the store. And once customers are in the store, they may well buy other items.
Other possibilities along this path might include at least some of the following. A customer who buys a book in a series for full price in the store would get an earlier book in the series for free or at least for a greatly reduced price for the Nook. Another possibility would be to have book-printing machines installed in stores. These print-on-demand machines are already making appearances in bookstores (and have been for several years). They allow a customer to print any book from the inventory in under a half-hour and can be used to supplement the physical stock of the store, giving the store a capacity that is closer to the variety of Amazon.
Moreover, POD machines are ideal for printing books that may have only regional demand. One of the points that Barnes & Noble has used as a strength of its organization is that one can go into any Barnes & Noble in the country and get the same books -- in much the same way that McDonald's offers the same French fries to everyone. But it is still true that books are not equivalent to other retail products and this one-size-fits-all approach thus plays less well for bookstores than for other kinds of stores (especially franchises). POD technology could provide books about local history, books on local travel, books of short stories or poetry written by local authors and so forth -- thus making the visitors to Barnes & Noble stores feel that the store is more attuned to them as local residents.