...brick-and-mortar book stores ...: Part 2 -- The online store

As I had discussed in Part 1, Barnes & Noble and Borders need to consider three initiatives to compete against Amazon (in addition to shutting down unprofitable retail stores and reducing employee count):

• Create a more credible online option to compete against Amazon
• Use brick-and-mortar as a competitive advantage
• Align inventory to demand

In this post, I shall focus on how B&N and Borders can create a more credible online option to compete against Amazon:

• Collaborative filtering: CF algorithms produce personal recommendations by computing the similarity between your preference and that of other people. Amazon produces CF recommendations for the search history and the purchases of a user. Borders.com does not have CF recommendations whereas BN.com has CF recommendations for items in the shopping cart only. Some unique things about Amazon.com:

1. It tracks the IP address/ cookie on the computer so that a user revisiting a site instantly gets recommendations based on previous searches on the site
2. Amazon suggests what people buy after viewing a certain item. This is called sequence analysis.
   
3. It offers auto-fill for search words when a user types a search item e.g., typing "snowball" offers "snowball warren buffett" as the first auto-fill option

• Pricing of online offers: I compared the prices on a couple of bestsellers and a couple of new releases.
  

1. The pricing on Amazon is lower than that of bn.com by 5% (for BN members). The BN membership price is usually lower than the Borders.com price. In this competitive business, it goes without saying that bn.com and borders.com need to lower prices.
   
2. Also an often overlooked aspect is the presentation of 'used' book prices alongside new book prices. By doing that Amazon caters to the price-sensitive user who doesn't mind buying used books.

• Wider variety of offerings: Amazon.com has a wider variety of offerings especially for long tail titles among technical books (a simple check for SAS textbooks yielded 121 results on bn.com and 9272 results on Amazon.com) and for children's books ("Elmo" yields 492 titles on bn.com and 13,985 titles on Amazon).
  

• Online used books strategy: Clearly a part of Amazon's variety advantage is its role as an exchange of used books.BN buys used books and sells it themselves. This could be a risky strategy and may not be attractive to sellers either. BN also has an authorized seller program, which is attractive for large volume sellers. Borders has an alliance with Alibris for used books. However Borders 'Marketplace' has a separate sign-on and is not integrated with Borders.com, which is a bummer. (also sellers having to pay more to sell on Borders.com than on alibris.com, which is clearly a hindrance). Amazon's fee structure is much lower than that of Alibris for small volume sellers (<40 items). BN and Borders should take a Go/ No-Go decision based on profitability.
  

So much about online operations... My next post in this series will be about how Barnes & Noble and Borders can improve their brick& mortar operations.

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...