How can brick-and-mortar book stores compete?: Part 1

Last week, Borders and Barnes & Noble declared their third quarter results. Both companies reported a net loss at an operating level. Both companies are shutting some unprofitable book stores and trying to rein in costs to become profitable.

I am a big fan of both Borders and Barnes & Noble, and cannot help thinking: How can these companies use analytics to survive the onslaught of Amazon.com?

I analyzed the Q3 numbers of B&N, Borders and Amazon, and here's what I found:

• Online sales account for less than 10% of Barnes & Noble sales and less than 2% of Borders' sales. Of course they account for 100% of Amazon.com's sales.
  
• Amazon is growing much faster than B&N and Borders. In Q3, these companies had comparable sales growth of 19%, -6% and -12% respectively. Note that Amazon numbers are for Media sales (Books, DVD, music). Amazon Media sales for international markets grew faster at 24% compared to US sales at 15%.
  
• Amazon runs an operating profit whereas its competitors run a loss. The key difference is in SG&A cost and depreciation. Surprisingly B&N has a lower COGS (cost of goods sold) than Amazon. Amazon has a higher operating margin in its international operations. Borders has a higher operating loss margin in small-format Walden US stores (-14.4%) and a lower operating loss margin in international stores (-5.3%).
• A large format book retail store requires sales of $20 per sq.ft per month to turn an operational profit. B&N is currently registering $18 per sq.ft per month and Borders US is selling only $14 per sq ft per month in its large stores. A Walden's (small format) store requires sales of more than $30 per sq. ft per month to have an operational profit. Currently Walden's US has sales of $17 per sq ft per month only. Thus there is an urgent need to increase sales per sq ft
• Amazon has much lower inventory than B&N and Borders (as shown below). Borders is carrying more than 5 months of inventory whereas B&N is carrying more than 4 months of inventory. I feel that book stores need to better align inventory with demand.

Here are my suggestions (which I will detail in subsequent posts):

• B&N and Borders need to create a more credible online option to compete against Amazon.
  

1. I recommend usage of collaborative filtering to offer instant book recommendations to online buyers. Also bn.com and borders.com can improve in terms of linking past browsing behavior to book recommendations online
2. Barnes & Noble needs to consider matching amazon.com on pricing (given it's lower Cost of Goods). E.g., I recently found that the Buffett biography : The Snowball is priced at least 5% lower on Amazon.com
3. Many customers feel that Amazon has a wider selection of technical and children's books titles than other online book stores. Catering to the long tail may be essential to competing with Amazon.
   

• Use brick-and-mortar as a competitive advantage:

1. Offer the option to buy online and pickup at a store within a few hours
2. Let loyal book buyers work for you by organizing 'low-cost' book discussions/reading sessions especially for children, niche interest segments
3. Offer bundled offers in the store, based on basket analysis of previous purchases
4. Consider installing digital displays in the store showing reader reviews and suggesting complementary reading recommendations (based on collaborative filtering).

• Align inventory to demand

1. Use statistical models based on demographic profiles of localities and historical title sales to better allocate inventory to stores.
2. Dynamically trans-ship best-seller inventory between stores based on matching with demand patterns (since most demand for best-sellers occurs in the first week after release)
   

More later...

My thoughts on Nielsen's "Top 10 Retailer Mistakes on Black Friday"

Nielsen published an article earlier this week on "Top 10 Retailer Mistakes on Black Friday".
According to Nielsen, the mistakes include:

• Sticking to traditional categories
  
• Not having a retailing objective
  
• Not measuring your objectives
  
• Leaving a bad first impression with new shoppers
  
• Missing loyalty opportunities
  
• Sticking to Friday morning
  
• Not having door-buster merchandise in stock
  
• No sense of urgency
  
• Shallow discounts on door-busters
  
• Not scouting the competition

While I agree with most of these points, I do have some disagreements:

1. It may be a bad idea for retailers to try out new categories. I think it is OK for an electronics retailer to offer free soda and chips during Black Friday, but selling these items is a very different proposition.
2. Most retailers do have sales objectives (by category) for Black Friday. I think what they also need to have are gross margin objectives. Given the hectic pace of Black Friday, it is often not possible to have targets for 'new customer footfalls'.
3. Retailers need to be careful about passing discounts to the most loyal customers. Many of them are willing to shop with the retailer without the discount. On the other hand, many Black Friday shoppers are active discount seekers.

Here's wishing all of you a happy Thanksgiving