From The Honest Broker:
I’ve written too many negative stories about digital media platforms in recent months. I’ve started to worry. Am I turning into Dr. Doom and Mr. Gloom?
In all fairness, my predictions have proven sadly accurate. After I served up these dismal forecasts for Facebook, Spotify, Netflix, and others, their share prices took a steep dive.
I’m not sure that’s a good thing—I’d like to see digital media improve and flourish. When they falter, we all pay a price. But each of these companies is now suffering for a good reason. Their dominance led to arrogance, and they decided to impose all sorts of heavy-handed policies on users.
But I finally have good news to share. I have a positive case study—and we can learn from it.
Here’s the surprise: This company has been a failure at digital media, and has succeeded by embracing the most antiquated technology of them all: the printed book.
That’s quite an achievement. So let’s look at the turnaround at Barnes & Noble.
. . . .
But Barnes & Noble is flourishing. After a long decline, the company is profitable and growing again—and last week announced plans to open 30 new stores. In some instances, they are taking over locations where Amazon tried (and failed) to operate bookstores.
Amazon seems invincible. So the idea that Barnes & Noble can succeed where its much larger competitor failed is hard to believe. But the turnaround at B&N is real. In many instances they have already re-opened in locations where they previously shut down.
Barnes & Noble is no tech startup, and is about as un-cool as retailers get. It’s like The Gap, but for books. The company was founded in 1886, and it flourished during the 20th century. But the digital age caught the company by surprise.
For a while, Barnes & Noble tried to imitate Amazon. It ramped up online sales, and introduced its own eBook reader (the Nook), but with little success.
Even after its leading bricks-and-mortar competitor Borders shut down in 2011, B&N still couldn’t find a winning strategy. By 2018 the company was in total collapse. Barnes & Noble lost $18 million that year, and fired 1,800 full time employees—in essence shifting almost all store operations to part time staff. Around that same time, the company fired its CEO due to sexual harassment claims.
Every indicator was miserable. Same-store sales were down. Online sales were down. The share price was down more than 80%.
. . . .
It’s amazing how much difference a new boss can make.
I’ve seen that firsthand so many times. I now have a rule of thumb: “There is no substitute for good decisions at the top—and no remedy for stupid ones.”
It’s really that simple. When the CEO makes foolish blunders, all the wisdom and hard work of everyone else in the company is insufficient to compensate. You only fix these problems by starting at the top.
In the case of Barnes & Noble, the new boss was named James Daunt. And he had already turned around Waterstones, a struggling book retailing chain in Britain.
Back when he was 26, Daunt had started out running a single bookstore in London—and it was a beautiful store. He had to borrow the money to do it, but he wanted a store that was a showplace for books. And he succeeded despite breaking all the rules.
For a start, he refused to discount his books, despite intense price competition in the market. If you asked him why, he had a simple answer: “I don’t think books are overpriced.”
. . . .
This is James Daunt’s super power: He loves books.
“Staff are now in control of their own shops,” he explained. “Hopefully they’re enjoying their work more. They’re creating something very different in each store.”
This crazy strategy proved so successful at Waterstones, that returns fell almost to zero—97% of the books placed on the shelves were purchased by customers. That’s an amazing figure in the book business.
On the basis of this success, Daunt was put in charge of Barnes & Noble in August 2019. But could he really bring that dinosaur, on the brink of extinction, back to life?
The timing was awful. The COVID pandemic hurt all retailing, especially for discretionary items like books. Even worse, the Barnes & Noble stores were, in Daunt’s own words, “crucifyingly boring.”
But Daunt used the pandemic as an opportunity to “weed out the rubbish” in the stores. He asked employees in the outlets to take every book off the shelf, and re-evaluate whether it should stay. Every section of the store needed to be refreshed and made appealing.
As this example makes clear, Daunt started giving more power to the stores. But publishers complained bitterly. They now had to make more sales calls, and convince local bookbuyers—and that’s hard work. Even worse, when a new book doesn’t live up to expectations, the local workers see this immediately. Books are expected to appeal to readers—and just convincing a head buyer at headquarters was no longer enough.
Daunt also refused to dumb-down the store offerings. The key challenge, he claimed was to “create an environment that’s intellectually satisfying—and not in a snobbish way, but in the sense of feeding your mind.”
That’s an extraordinary thing to hear from a corporate CEO. Daunt wanted to run a bookstore that was “intellectually satisfying” and “feeds your mind.” The first time I heard an interview with him, I decided I trusted James Daunt. I wanted him to succeed. But the odds seemed stacked against him.
. . . .
The turnaround has delivered remarkable results. Barnes & Noble opened 16 new bookstores in 2022, and now will double that pace of openings in 2023. In a year of collapsing digital platforms, this 136-year-old purveyor of print media is enjoying boom times.
Of course, there’s a lesson here. And it’s not just for books. You could also apply it to music, newspapers, films, and a host of other media.
But I almost hate to say it, because the lesson is so simple.
If you want to sell music, you must love those songs. If you want to succeed in journalism, you must love those newspapers. If you want to succeed in movies, you must love the cinema.
. . . .
But here’s the problem. If you don’t really love the music (or books or newspapers or cinema or whatever), those cash flow projections turn out to be wrong. That’s because creative fields like music and writing live and die based on creativity, not financial statements and branding deals.
Link to the rest at The Honest Broker and thanks to J. for the tip.
As PG has said previously, he doesn’t believe the happy talk floating around the publishing world about Barnes & Noble and its superhero, James Daunt.
We don’t have real numbers to back up the public relations campaign. Barnes & Noble’s owner, Elliott Management Corp. has kept that sort of information locked up tight.
PG happened upon another investment of Elliott – litigation finance.
Basically, a deep pocketed organization subsidizes a lawsuit, often a class-action suit against a large corporation, in exchange for 30-50% of the amount awarded. That’s litigation finance. This arrangement takes a lot of risk out of the lawsuit for plaintiffs’ counsel because they know they’ll get paid a significant amount by the outside investor even if the clients they’re representing don’t get anything.
Typically, this type of litigation is handled by a law firm on a contingency fee basis. The firm earns nothing unless it wins the lawsuit and its clients are paid for their injuries/losses. The firm receives its money by delivering a good result for the injured parties.
Perhaps PG is old-fashioned, but he’s always thought that, after the attorneys are paid for their work, the injured party or parties should receive the remainder of the money awarded by a court after a trial or received via a negotiated settlement to avoid trial.
I am cautiously optimistic about B&N. But my long-ago experience working in chain retail suggests that emphasizing the “cautiously” part. There is constant tension between the home office and the field. Hiring good local managers and letting them manage can be an excellent strategy for a company in its early growth phase. A good local manager knows the local market better than the home office ever can, even with detailed sales data.
My go-to story is how, some thirty or so years ago, I helped open a new Walmart, from empty building to functioning store. So how was the initial merchandise set determined? Walmart in the 1970s and 80s was very big on local autonomy. This and superior inventory management technology were the keys to its early success. By the time I got there, the company had largely moved past this. So the initial set was determined by matching it with a “sister store” whose circumstances the home office imagined to be similar. In this case, the new store was in the high desert of California, the sister store in the low desert. I am sure these look the same from Arkansas. So explaining that filling the garden center with lawn mowers made no sense in a area where essentially no one had a lawn? That was a long-fought battle. Then there was the high wall filled with glass gallon bottles of juice, in earthquake country.
This was a company that had centralized inventory decisions. And there are reasonable arguments for this, as, for example, it also centralized buying negotiations. But lawn mowers in sand country is an inevitable outcome. The thing is, let the local manager make decisions and some will turn out to be wrong. The central office buyers are in the same building as the senior executives. They will always have local failures they can point to, and they are right there to make sure that the point is made.
The upshot is that the natural progression is for buying decisions to gradually become centralized. Daunt is trying to reverse this. It seems to be working in the short term. What about when they have a few bad quarters in a row? That will be the acid test for how this plays out in the medium term. In the long term, I expect that the home office will retake control, but in the long term we are all dead.
Or, how they adjust to local population, interest, and economic changes?
Do they keep up with the winds of change or “it worked last year!”
There was a time sparkly vampires were hot sellers…
R. – I agree about Walmart.
Once any organization gets too large, it’s a big job for a visionary leader to keep middle management from screwing things up.
Sam Walton did an amazing job of keeping Walmart on track while he was still running the show, but his successors have lost that ability.