What if Barnes & Noble went bankrupt?

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From Nathan Bransford (in 2017):

I should emphasize from the start of this post that as of this writing there are no signs that Barnes & Noble is close to bankruptcy.

And yet in publishing circles, the prospect of Barnes & Noble going the way of Borders is sort of like a doomsday conversation that is impossible to resist. It’s the rare business lunch that does not at least reference this nightmare scenario.

But what would really happen if Barnes & Noble bit the dust?

I turned to publishing sage Mike Shatzkin, who has been involved in the book business for decades and has advised some of the biggest players in the publishing industry. Mike is currently working on a book about publishing with Robert Riger for Oxford University Press.

Nathan: Barnes & Noble has an uncertain future as a print bookseller, as its revenues decline and it transitions toward diversifying its products toward games and toys. It didn’t take long for B&N to go from being the bad guy in You’ve Got Mail to the equivalent of the little shop on the corner everyone is rooting for. What impact is this going to have on publishers?

Mike: These three sentences open up a world of things for publishers to be thinking about.

There are two big shifts taking place in the book business that are not favorable for Barnes & Noble.

1. More and more printed books are being purchased online and fewer and fewer are being purchased in stores. The takeaway: sales of books in stores in total are likely going down.

2. More and more book titles are being delivered to the market with motivations other than pure commercial intent and fewer and fewer are being delivered by publishers trying to make a profit from publishing books. The takeaway: sales of books issued by those not overtly trying to profit will steal markets and mindshare and reduce margins for the publishers trying to run businesses.

The movement away from brick-and-mortar stores is an obvious challenge for B&N, but the weakening of commercial publishing is too. Non-commercial publishers — authors or entities that do books as an ancillary activity — will not take the financial risks necessary to put books on bookstore shelves. And the very real risks involved in putting books on store shelves are going to be on the minds of the publishers whenever adverse news about B&N’s financial health surfaces.

But the big publishers are only slightly less dependent on Barnes & Noble’s success than B&N’s shareholders themselves. All of the big publishers were built around their ability to “put books on shelves”. That’s what they can do that authors can’t do for themselves and, up until now, Amazon couldn’t do for them either. Although big publishers sell bestsellers that are on mass merchants shelves as well as bookstore shelves, Barnes & Noble remains the one stop for bookstore exposure which handles most of the output of the big publishers. B&N delivers as many retail locations as the indies do and, for the most part, more sales.

. . . .

What would the landscape look like if B&N exited the book business entirely or, god forbid, went bankrupt?

Without Barnes & Noble, the business models of most of the publishers we know are severely challenged.

Although publishers would almost certainly have some warning about either a bankruptcy or an exit from the book business — neither would happen “suddenly” without at least a bit more “gradually” than we’ve yet seen — the absence of B&N would be a painful blow to the core business model of trade publishing. For about 100 years, the core proposition for mainstream publishers doing fiction and non-fiction for consumers has been “we put books on shelves”. That’s the proposition to the authors, as well as the service to consumers.

Putting books on bookstore shelves requires capital, knowhow, and organization. It is also the one function publishers perform that an author really can’t do for herself. Even the self-published authors who have made a print option available through print-on-demand — and both Amazon and Ingram enable that on what is almost entirely a marginal cost basis — don’t attempt to put speculative inventory on store shelves. The best they do is make their books available through established channels (Ingram) for special order on a customer request.

So were it to happen that the chain that supplies probably about ⅔ of the available shelf space for most titles were to disappear, the business model itself would be broken. The incentive for authors to shift to a self-publishing model, where they get a lot more per copy for ebooks and specially ordered POD books, would strengthen. And it would be pretty compelling in any case where the author brand was powerful or the author did most of the marketing of the book.

So publishers would be hurt at the revenue end and the IP supply end of their chain, which is the entry and the exit.

But the “financial risk” of losing B&N is one thing; there is also the financial risk and cash outlay involved in selling to B&N in the first place, namely that inventory has to be supplied to be paid for well after it is delivered. And return privileges have to be offered that involve taking back unsold books and attendant costs to accepting those returns, among which is — quite often — taking back inventory that will not be resold at full price.

Allowing bookstores and wholesalers to return unsold merchandise is one of the key and standard features of most publishers’ trading terms. It is so ingrained in the trade that booksellers would order without it only in extremely exceptional circumstances. For most books, it would be a non-starter for a store to take a book they couldn’t return if it didn’t sell.

The financial risk associated with returns is the main reason that indie authors don’t even attempt to get their books into bookstores. And it will suddenly be very much on publishers’ minds if B&N looks like it is hitting the financial rocks.

Were a bankruptcy to occur, the stock in B&N, even the books that were not yet paid for, would be owned by the company in receivership and the the amounts owed to the publishers would be in a queue for payment along with what is owed to other creditors.

Link to the rest at Nathan Bransford

PG notes that when veterans in the book business keep talking about a particular major player going bankrupt, it’s not a good sign. As mentioned, the above-excerpted conversation happened in August of 2017.