The Many Reasons Why Borders Bookstores Failed – Courtesy of Management Gurus

None of the gurus named or implied actually said anything about Borders, just taking their stated recommendations and applying it to Borders. You can see the futility of adopting that single magic, one-size-fits-all and Guru’s pedigree based recipes for running a business.

  1. Marketing is about telling stories. Borders failed to tell a compelling story that customers want to believe.
  2. Borders did not have a Level 5 leader. That would have moved them from Good to Great.
  3. They should have focused on their existing customers and retained them. Because increasing loyalty by 5% will increase profits by 80%. Not only that, the loyal customers will continue to pay higher prices.
  4. Borders stores were not managed and run by designers, they lacked Design Thinking.
  5. They did not follow the Toyota Way of lean manufacturing and lean inventories.
  6. Borders should have been a Long Tail retailer. (while this may sound as plausible, I would point you to the fact that Amazon makes bulk of its revenue not from the so called Long Tail products).
  7. Borders failed to Enchant their customers, the should have influenced people to keep coming back and pay the full price even though Amazon was selling it at 40% off.
  8. Borders failed in the area of customer service. They should have under-promised and over-delivered.
  9. Borders should have increased their prices by 1% because that would have resulted in 12-15% profit they could have used to grow the business.
  10. Borders lacked good copy-writing in their Ads. If the copy is fun and engages the customer they would come and pay full price for the books.
  11. Borders failed to recognize that marketing is about customer conversations. Your customers are having conversations about you whether you are part of it or not. Borders was left out of the conversation.
  12. Borders should have adopted co-creation, working with the customers to design the books they want to read.
  13. They should not have been running the business based on Airport business books instead they should have run this like a Silicon Valley startup. They should have gotten out of the building and talked to customers and pivoted.
  14. They should not have been running the traditional media Ads. They should have been blogging and done inbound marketing.
  15. Their website should have been ridiculously easy to use. It is all about the user experience.
  16. Borders employees were not in the “flow“, when employees are really engaged in what they are doing the business results take care of themselves.
  17. Discovering books should be fun, a game. Customers must be surprised, not knowing what is going to come next week. They failed to recognize this.
  18. A street vendor selling vegetables in India is still in business. Borders is not. They should have learned from that vendor.
  19. Borders stores and their eBook were not remarkable. When you are remarkable, people will remark on it.
  20. Borders should have given free lessons on each subject. Like Lulu Lemon did they should have asked local speakers and tutors to come teach free classes on various subjects at their stores.
  21. The should have adopted , The Sony Way, The Motorola Way, The GE Way, The Apple Way, …
  22. They should have followed in the footsteps Justin Bieber, Lady Gaga, Bruce Lee, Michael Jordan, …

Do you have one?

 

Shining New Light On nook Investment and nooks Sold

[tweetmeme source=”pricingright”]Barnes & Noble announced its Q2-FY10 earnings last week. Their balance sheet shines some new light on their cost of nook product development and marketing and the number of nooks they might have produced. nook was so successful that Barnes & Noble cannot anymore deliver one before Christmas nor can it sell through its stores. How many nooks were sold? B&N is silent about the number of nooks they sold, but from their latest balance sheet I estimate they sold about 200K-400K nooks, read on.

12/26/09 Update: Techcrunch says, based on its sources, 60,000 nooks sold but I stand by my 200K-300K estimate unless I get data on cost per unit that is different from the assumptions I made.

  1. Increase in Intangible Assets: Their Intangible assets jumped from $82 million in Q1 to $587 million.  This is surprising for a bookseller. Part of it should have gone towards acquiring rights to digital content and part  to product R&D. The latter cannot be capitalization of their product development costs (3 months is short time),  so I think they bought the design and other patents form outside.
  2. Long-term Debt: There is now long-term debt, to the order of $325 million, showing up in their books. There was no debt in the previous quarter. The long term debt definitely went into their nook product line – for manufacturing and marketing.   B&N does not own the factories, it rents capacity from Prime View International of Taiwan, who also owns the rights to e-Ink technology and makes those displays for all Kindle and Sony as well (source: GigaOm). To guarantee capacity B&N may have had to invest or at least cover part of the assembly line. But I think most of it went into design acquisition (described above).
  3. Increase in Other Long-term Liabilities: Another increase is their “Other long-term liabilities”, by about $240 million. There are no footnotes explaining this. For the purpose of this discussion I would allocate a good part of it towards its increase in Intangible asset (design acquisition).
  4. Cost of R&D: So the total cost to design and manufacture nook is about $500 million – that is going big for a bookseller!
  5. Accounts Payable: Their accounts payable increased by $500 million. It is expected that this would go up as stores build inventories for the Holiday season, but in the previous year it increased by only $200 million from Q1-2008 to Q2-2008. I do not think the other $300 went for stocking more books and merchandise, it must have gone to content suppliers, nook suppliers and for marketing campaigns.  Accounting for the rest, $100- $2o0 million (guesstimate) went to Prime View for making the nook.
  6. COGS for nook: The $100-$2o0 million is possibly allocated for the right to acquire capacity, labor and parts. If we assume half of that $100-$200 million went for parts and if we assume the cost per unit is $250, they made about 200,000 to 400,000 units. Which is what I said they should have manufactured based on the projected market.

If they indeed manufactured 400,000 nooks, given that they are sold out, they must have sold 200,000 to 400,000 nooks in just one month.  That is extremely impressive! B&N has indeed gone really big on nook but still missed the opportunity to price it right!

Footnotes:

The final number is based on the assumptions I made on allocating the step increase accounts payable, the total material costs and cost per unit. Any or all of which can be wrong but at least we have a small range of numbers to work with.

Should Barnes & Noble have Gone Big with nook?

Barnes & Noble received so many pre-orders on its ebook reader nook that it cannot anymore deliver nook for Christmas. With more than a month to go before Christmas, B&N says it can only deliver after January 4th.  It makes me think if they could have done things differently for the launch:
  1. Market size: Forrester says 900,000 eBook readers will be sold just during the holidays. Amazon is the market leader with 65% and Sony the rest. nook is the new entrant, and Barnes & Noble is not saying how many units they sold.  Introduction of this new and better looking and functional device definitely would have grown the market, bringing in new customers who did not want to go with Kindle. B&N should have planned on selling 400K to 500 units during Holidays.
  2. Did they plan on under supply to create buzz? I doubt it, even though brands have previously been accused of doing it to create buzz, Barnes & Noble already had enough buzz going for it with the device and the marketing campaign.  Since they priced it as penetration pricing, shouldn’t they line up the supply chain to meet the volume?
  3. So why did they not plan on selling 400K-500K units? If we assume their margin is so low that nook cost $250 to make, for 500K units the total cost is $125 million. They have no long-term debt in their books (amazing) and could have financed this investment with debt – besides they need not take long-term debt if they could strong-arm their suppliers to delay their account payable until after B&N gets paid. (Update: B&N did take debt but did not have the power to strong arm its supplier because there is only one)
  4. The device looks definitely better than Kindle and they positioned it as such – so why follow Kindle’s price leadership? If they had priced it higher could they have not only handled the lower demand but also delivered more profit?  For instance if they had priced it at $279 with a profit per nook (i am not including book sales) of $29, even if they managed to sell only a third of current sales (which is an unlikely drop) they would make more profit than current price.
  5. Customer Margin: nook profit is about total customer lifetime value, from all those ebooks customers buy, accessories and the 2-3 year refresh cycles. So footprint helps and they do not have to make up all the profit just from the device. But it appears they did not calculate what the demand is going to be and followed Kindle’s lead (which could easily be wrong as well).

Now I waited too long to order a nook and I am not going to gift one for the Holidays.

Update: Here is an estimate of number nook readers Barnes & Noble sold in the early days.

Should Barnes & Noble Go After Kindle?

With Borders shutting down stores and facing declining profits, Barnes & Noble remains the only strong brick and mortar bookstore. While it faces strong competition from discounters like Amazon, WalMart and Costco, its new threat comes from the change in consumer preference from  paper books to eBooks. While there were other eBook formats and readers, the threat was not credible until Amazon entered the market with its own Kindle eBook reader.

The real threat is not from the device but from Amazon’s strategy to own the distribution through its Kindle store. Amazon is more than a bookseller, it is a Platform company (Mr. Jeff Bezos once described Amazon as the Ideas company). It has the wherewithal to develop a home grown distribution platform, build an ecosystem around it and quickly gain control of the ecosystem. But B&N does not have the technology and a strong R&D team.

Clearly B&N knows this weakness and sees the threat posed by Amazon’s Kindle store. It however can acquire the technology to fast-track its eBook strategy and it did exactly that. B&N is  set to answer Amazon with its own eBook store with its acquisition of FictionWise an eBook retailer.

Stated in the same report is that B&N is going to develop its own eBook reader, a competitor to Kindle if you will. This is not the right strategy for B&N. As I stated in my previous article the Kindle device is not the main focus of Amazon and it will gladly give that market to control the distribution value chain. B&N should not be distracted by the success of Kindle device. The war is about the control of distribution platform not handheld devices. It cannot dilute its scare resources by focusing on both the eBook distribution platform market and the devices market as this would only enable Amazon strengthen its platform leadership position.

Strategy is about making choices and allocating limited resources and not straddling. So forget going after Kindle device, it is a  red herring. B&N’s strategy should be to become another platform option for publishers and authors who would not want to see just one strong player in the eBook market.