What if Barnes & Noble went bankrupt?

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From Nathan Bransford:

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.

. . . .

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.

. . . .

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.

. . . .

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.

. . . .

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.

. . . .

B&N’s share of the business keeps declining. They are losing share to Amazon and to independent general bookstores consistently. And bankruptcy for them is certainly not imminent. So the chances are that when the day comes that they go bankrupt, they’ll be 10% or less of most publishers’ business.

Link to the rest at Nathan Bransford

PG says not all bankruptcies are the same. Some are “successful,” at least from the standpoint of many of the stakeholders and some are “unsuccessful” and almost everybody except bankruptcy counsel and business liquidators gets a bad deal.

Managing a business organization through a bankruptcy requires real skill and if inept management lead to the bankruptcy, inept management will likely screw up the bankruptcy if it tries to remain in charge through the often lengthy business bankruptcy proceedings.

Barnes & Noble has hosted a rapidly-revolving door for top managers during the past few years and PG doubts that talented managers will be more attracted to a BN that is in bankruptcy. Any managers who can bail out of BN for other jobs are quite likely to do so.

If BN stores develop a bankruptcy vibe (see half-empty Sears stores), a great many of BN’s best customers will stop shopping there. Who’s going to bring children into a creepy-feeling bookstore when they have an Amazon app on their phone?

A lot of the knick-knack manufacturers whose products fill up the front of a Barnes & Noble store are small companies who haven’t any experience with a bankrupt customer and don’t want to spend a lot of money on their own bankruptcy lawyers. Many are likely to cut off sales completely. Others will demand payment up front and refuse to ship without it. Overnight, Barnes & Noble will transition from their biggest customer to their biggest headache.

As far as major publishers are concerned, PG predicts that the big conglomerates that own those publishers will quickly exert greater control. Bertelsmann doesn’t want losses from Penguin Random House screwing up the quarterly results any more than absolutely necessary. Verlagsgruppe Georg von Holtzbrinck will clamp down hard on Macmillan. Ditto Hachette Livre. The US managers at the Big Five will experience intense micromanagement from different time zones.

One proven cost-reduction method that these conglomerates understand is to reduce personnel costs. A few senior management types may hang on, but employees with high salaries provide the most bang for the firing buck, so decades of experience, relationships, etc., will walk out the door at the Big Five.

To be clear, PG doesn’t wish business failure on any organization and, especially, those individuals who rely on that organization for their livelihood. He doesn’t make these gloomy prognostications with any joy.

57 thoughts on “What if Barnes & Noble went bankrupt?”

  1. How exposed is B&N to a financial downturn or recession, though? Their price to earnings ratio right now is 17.79, which is high except when you consider that the S&P 500 is north of 24. Amazon is around 240.

    • If/when B&N goes under it won’t be because of a financial crisis or a stock valuation issue.
      If/when it comes their bankruptcy will mirror Borders: too little cash, too little credit, too much inventory.

      As pointed out in the OP, in the runup to an involuntary bankruptcy the BPHs will be monitoring B&N for its ability to pay for the inventory they hold. When its sales and cash reserves shrink enough that they might not be able to pay for the books on shelves, the publishers won’t want to be left holding the bag for hundreds of millions in unsold books. Remember, those books are effectively stocked on consignment but on paper they are sold on 30 day net terms (or longer). They are legally B&N property once they are delivered.

      As PG said, come bankruptcy time, those unpaid books become B&N assets to be monetized to pay all debts, not just the publishers. The publishers would end up “eating” something like 70-80% of the nominal wholesale value of the books. Worse, the books would be liquidated into the market at greatly reduced prices displacing “full” priced sales at other channels of the exact same books.

      So yes, B&N’s share of the market if and when might be down to less than 10% but the damage to the BPHs business will be much larger because of the ripple effect of the fire sale. And because B&N doesn’t as a rule stock Indie titles, the effect will be magnified on the part of the market they do “support”. The BPHs. Live by payola, die by payola.

      Under pre-Indie market conditions a B&N bailout by the big publishers (swapping debt for stock) might have been in the cards. But with the market share decline of the BPHs the cost of floating B&N would lead to a noticeable and continuing drain on their quarterlies. It is doubtful their overlords would go for it.

      I’m not about to take the time to scope out their recent financials but I’m pretty sure their cash to inventory ratio is getting pretty low. Lots of stores with lots of shelves…

      • Felix, is there any possibility that the publishers might start stocking BN’s shelves on consignment on paper as well as in effect, to protect themselves going forward?

        • The funny thing is if they did that they couldn’t book them as sales at launch. Which would make the quarterlies look awful during the transition. Wouldn’t help their “bestseller” listings, either.

          (And they wouldn’t have an excuse for withholding royalties against returns.)

          The exposure is significant: B&N is still selling $4B a year in merchandise. At a very rough guess, each quarter they hold maybe $500M worth of inventory. And that is just the stuff they *sell*. Add in returns and the deep backlist “decor” and it can get painful.

  2. “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.”

    I had to drill into the article because I just had to understand what the hell he was talking about here. “other than pure commercial intent” appears to mean “not dealing with the same cost overhead”.

    It’s a strange phrasing either way. I’m an indie author, and I am certainly interested in making money.

    • Probably he’s assuming that one could only sell books as cheaply as most indies do at a loss (because it would be at a loss to a trad publisher), and therefore they must be doing it out of vanity or pure enjoyment of sharing one’s story. Such a sentiment really shows a woefully poor understanding of the topic he’s writing about.

    • Last Saturday in San Diego there was held the first annual Festival of Books. About 10,000 people turned out. More than 50 local authors, and many other vendors, were featured.

      At the festival I learned about a local writers group and went to its meeting last night. It soon became clear that almost none of the attendees–some of whom had published several books–had any real expectation of, or even a desire for, a profit. They just wanted to get their books in print. (Few of them seemed interested in ebooks.)

      Perhaps such people are growing in number and are the ones delivering books “to the market with motivations other than pure commercial intent.”

        • Also sounds like the kind of coastal wanna-be authors who get their ‘facts’ on indie publishing from the NYTimes and HuffPo as opposed to TPV.

      • Just the type of people vanity publishers like to target. That’s too bad, though it’s not hard to believe that such people are growing in number. One theory might be that the decreasing numbers of authors getting tradpub deals and the still pervasive negative attitudes about self-publishing, combined with people who don’t bother to do any research into any of it, has created an environment that leads more people into that frame of mind.

        • That’s too bad, though it’s not hard to believe that such people are growing in number.

          Agree. The slush pile has been signalling this for years. It was the most robust and reliable part of the industry.

          In most markets, failure to sell drives suppliers out of the market. Then a balance emerges between supply and demand.

          But, the suppliers leave because they can’t fund their operations when revenue can’t cover costs. They go do something else.

          However, we don’t see that with books. Authors keep pumping out product when nobody wants it. I attribute this to 1) their costs are not monetary, but time and energy, 2) they have nothing else to do with the time and energy that would make an acceptable return, and 3) they receive what economists call an intangible return. They like doing it like others like playing softball.

          The intangible return is a powerful force, and there is little reason to expect it to fade. KDP has reinforced it.

          Much of KDP can be considered part of the slush pile. (Time and effort expended with little or no monetary return.)

          So, this group will continue to grow, continue to put downward pressure on prices, and continue to take satisfaction in their intangible rewards. It’s all individual tastes and preferences. And I continue to play softball.

          • There have been storytellers always, and the payments weren’t always in cash.

            Yes, many are in it for the money, but many who write do it because they feel the ‘need’ to. Those people may also like money, but they will also be thrilled by a reader telling them how much they enjoyed the story.

            How many here are ‘not’ making a living ‘writing’? How many of us have another job that pays the bills? How many others do you know that are wasting their time writing?

            And yet they write. Foolish – right? Wasting all that time and effort in something that most likely won’t put any food on the table. Idiots.

            And yet they write. There were stories on the first BBS site I logged in to. There were stories on the web that weren’t tied to any publisher and free to read. And if you sent an email to the writer you quite often got a reply thanking you for having read their work.

            I’m a nobody, a couple stories here and there. You can read them for free or ‘help support the writer’ by picking them up on Amazon, either will ‘please’ me.

            • Exactly.

              When economists can’t explain a behavior in monetary terms, they have to look for other benefits people get. Lots of writers receive benefit everyday because of the satisfaction they take in their activity, and for them, that is sufficient.

              Concluding these people are acting irrationally takes every shallow look at the situation. It also explains the attraction of vanity presses.

              But the most interesting aspect is the interaction of those who are satisfied with intangibles and those who are satisfied with money.

              Both groups contribute to the total supply of books. Increased supply is a downward pressure on prices. The intangible people get their reward, but their incremental supply increase reduces the return for the money people.

              We might say the most powerful competition the money people get comes from the intangible people.

    • This may be too simple, but I think “not overtly trying to [make a] profit” just means “not high priced.”

    • He might be referring to political books that are thinly disguised influence peddling. The number of such books isn’t large but the money spent on them is increasing “exponentially”.

      • That’s what I was thinking of, Felix. And some of the non-fiction that pushes certain political agendas for various groups (those books everyone wants to be seen carrying around or having on their desks, but that no one reads much of.)

      • Plus, some non-fiction books are published as part of the marketing of a product, service or person.

        Consultants write books to give to prospective clients to demonstrate the competence of the consultant. At least some prospective clients might not know or care that a CreateSpace book is purely self-published.

  3. What I found amusing is his expectation that Amazon is going for 1000 bookstores in three years. Wishful thinking.

    • And if that happened, his thought that “That could mean buying a major house would make sense for them [Amazon]…”.

      It is difficult to envision any scenario where it would make financial sense for Amazon to buy all the baggage of one of the major houses. Cherry pick contracts? OK. Pick off big authors that are now facing the new vulnerabilities of a B&N-less world. Sure. But other than the authors’ rights the major houses have licensed, there’s not really anything there that is likely to be of interest to Amazon and a whole lot of unnecessary expense, hassle and fail.

      • “other than the authors’ rights the major houses have licensed”

        That alone might be enough to make it worth considering for them. If they did that, they’d get a whole catalog of “vetted” books which they could then republish as Amazon exclusives, probably including several authors with large, established fan bases. I could see that being something they’d at least think worth considering.

        • @ Shawna

          B&N going BK and the Big 5 going BK are two separate possible occurances, with the the latter quite improbable, IMHO. They are, after all, minor arms of huge multinationals who would have a variety of other options to avoid eating it financially.

          But if a B5 were to go belly-up and its author lists/contracts were acquired by Zon, it would probably be the best thing to ever happen to those authors. Accurate royalties accounting, prompt payments, no returns reserve holdbacks, efficient pbook and ebook publishing, etc.

          The only bugaboo would be payments going through an agent, instead of directly to the author! But perhaps that could be renegotiated.

          • Except those authors would have traded a higher percentage of the take and their rights for wider exposure, only to now see their books limited to a single retailer anyway, which wasn’t the deal they thought they were making at the time. Yes, Amazon is a huge retailer, but the reason I’ve heard from some big tradpub authors in recent years is, “Yeah, I could make more money self-publishing, but I want to reach more readers, and traditional publishing is better for that.” Since a tradpub author and an indie author have more or less the same reach on Amazon (not accounting for algorithms), and an indie author who chooses to go wide can reach other markets whereas an Amazon imprint author can’t, any authors who used that reasoning in deciding to go tradpub instead of indie would find that they’ve given up concessions in return for nothing, through a deal that they had no part in making or giving approval on. Which would really suck for them, no matter whether other people thought they were getting a good deal out of it or not.

            (And I was directly replying only to the comment I quoted, not to anything having to do with B&N’s possible bankruptcy, so I didn’t really need to be told that they’re different things.)

            • I don’t think anyone here at TPV would disagree that going indie is the best way to go. Because it is. For a lot of reasons.

              But for authors — even the biggies — who’ve signed life+70 contracts, having Amazon buy their contracts would probably be the best of all possible outcomes. Certainly better than some cold-blooded, reptilian, avaricious, third party buying a BK publisher and acquiring their publishing contracts.

        • I don’t get the feeling that Amazon is all that interested in the backlist. They have their new book imprints, but there are other publishers who are actively repackaging backlist books and selling them, mostly on Amazon. Open Road Media and WildSide press are two I keep running into. If Amazon were interested in that sort of thing I think they would already be doing it.

          • “If Amazon were interested in that sort of thing I think they would already be doing it.”

            I think that would largely depend on whose backlists they were talking about. C-list authors with small fanbases? No, probably not. But if they got the chance to acquire a few A-list authors’ backlists at a good price? Might be more tempting.

      • I’m not sure Amazon would *want* the big names. Not at the terms those folks have become accustomed to.
        Those folks don’t get “industry-standard” contracts. They get terms north of 50%. Upfront.

        A more likely scenario would be for them to buy a small publisher and use it to “self-publish”.

        • Yes, if the big authors have terms that protect them, then this scenario would be unlikely. But I doubt 100% of “name” authors have good protections like that. Like some of the newer ones maybe. It would all depend on the specifics.

          I could definitely see the big authors buying or forming a publishing company to sell their own books. Plenty of indies do it. Some big name authors are kind of partly doing a bit of that anyway (I’m thinking of J.K. Rowling and Pottermore). That’s really the kind of thing that would make the most sense, I think, if they could get their rights back and get out of traditional publishing thinking, even without any of these big companies going bankrupt.

      • Actually, Amazon already did this at least once, a few years ago, with Dorchester authors. If I recall, Dorch was going bankrupt, leaving authors in the lurch. Amazon offered them new contracts (a friend of mine was in this group; I believe it was Amazon’s Montlake that grabbed her books). They repackaged them and marketed them and breathed new life into dead books and gave the authors every bit of the royalties Dorchester owed them.

    • He may be figuring that they’ll shoehorn a book section into every Whole Foods location, although that still only gets you to about 500.

    • One thousand stores stocking the same five thousand books selected by monitoring page reads? Seems like a pretty good idea.

      They don’t need no stinkin’ big names. They got the data. They make big names.

  4. “What if Barnes & Noble went bankrupt?”

    Life would go on. Writers would still write. Books would still be sold. Indie authors would prosper.

    But the Big 5 would have to regroup and renovate their ways of doing business…

    Or not! 🙂

  5. However, B&N’s share of the business keeps declining. They are losing share to Amazon and to independent general bookstores consistently.

    Blog entry 02/01/2017

    This is clearly revealed through Data Guy’s consolidated picture of print book sales (only) in 2015 and 2016. In fact, the year-to-year change over those two years showed that the percentage of sales delivered through B&N, Walmart/Target, and “other” (smaller chains, airport stores, non-bookstores) all fell. The celebrated independent bookstores held their own, at a pretty paltry 6 percent of the sales.

    In February Mike indicated that independent bookstore sales were essentially static. Has something changed in the last seven months?

  6. I wonder if now isn’t the time when the big publishing houses should buy out Barnes & Noble so they have somewhere to place their books while the brick and mortar buildings are still around.

    • It would take $550M to buy it.
      Assuming no premium to pry it from Riggio.
      For comparison, the 5 BPHs combined net around $1B a year.

      Note that the valuation is about one quarter of sales. Take out the “consignment” inventory and there is no value left.

      Either way it is going to hurt the bottom line. And since it will continue to degrade they’ll have to cover the annual loses out of pocket if they buy it.

    • Retailers reflect consumer tastes and preferences.

      If a firm has to buy a retailer because other retailers don’t want to carry its products, it’s time to evaluate the whole business model. Something has gone very wrong.

  7. I remember back in the day when B&N used to mean something. Now when I go in to shop, usually with a gift card that a family member has given me, it takes me quite awhile to find some worthwhile to purchase, longer if I want to buy an actual book (I believe the last book I’d purchased from B&N was a good quality non-fiction book). There really isn’t anything at my local B&N that jumps out and says “buy me”…unless I’m a schlub who wants to spend hours at the coffee/bakery sipping my latte and being cheap.

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