WHY BARNES & NOBLE MAY CRUSH AMAZON SELLING BOOKS ONLINE WAS A NEAT CONCEPT. THE NATION'S LEADING BOOKSTORE IS TURNING IT INTO A CUTTHROAT BUSINESS. WHAT'S A POOR STARTUP TO DO?
(FORTUNE Magazine) – No company has done more to show how the Web overturns conventional assumptions about distribution than Amazon.com. After just two years, this Web pioneer (www.amazon.com) is selling $110-million-a-year worth of books. Investors are impressed: Amazon's shares went public in March and trade at levels that give the company a market capitalization of some $670 million.
The Amazon model is beguilingly attractive: Expensive inventory and bricks-and-mortar warehouses are not needed by the New Age retailer. All one needs, it would seem, is a Website to present the face that greets customers and takes their orders. Other parties handle the capital-intensive aspects of stocking inventory.
Maybe low barriers to entry are a mixed blessing, however: The big guys can just as easily join the fun. Barnes & Noble, the nation's leading bookseller, opened its own online bookshop (at www.barnesandnoble.com) three months ago and has swiftly exposed the tenuousness of Amazon's head start. It turns out that figuring out the sexy new stuff, like Web pages and online order taking, is a lot less difficult than figuring out such drudgery as how to cost-effectively finance, stock, and move the physical stuff, the books.
Anything Amazon.com can do on the Internet, so, too, can Barnes & Noble. "There was a mystique about how difficult it was to get started on the Web," says Steven Riggio, chief operating officer of Barnes & Noble, "but it's quickly fading." Hiring hot designers from Silicon Valley, B&N now offers a Web shopfront that's just as inviting and useful as Amazon's, with easy-to-use subject indexes, online author events every day, book forums, book reviews, and other features. Both Amazon and Barnes & Noble can get any book in print--eventually (so, too, can the smallest bookseller). And both have deals with heavily trafficked Websites--including Yahoo (Amazon) and the New York Times Book Review (B&N)--that send customers their way.
Once you look beyond the Website you begin to see why, in this battle at least, the odds favor the $3-billion-a-year Goliath. The one area in which B&N and Amazon are most easily distinguishable is in how speedily the two can serve their customers, and in that contest, the edge goes to the bookseller with the most books physically on hand. Amazon stocks just a limited number of bestsellers (the company won't disclose how many) but for the most part obtains books from wholesalers or publishers after receiving an order.
B&N, on the other hand, generates such volume in its real-world stores that it has become, effectively, its own giant wholesaler. It deals directly with publishers, cuts out the middlemen, and stocks its central warehouse in New Jersey with 400,000 frequently ordered titles. Consequently, observes Craig Bibb, a Paine Webber analyst, "Barnes & Noble crushes Amazon in speedy delivery."
Barnes & Noble can also afford to give readers books at bargain prices. Since it sells more books than anyone else, it gets the best prices from publishers. Barnes & Noble launched its site with 30% discounts on all hardcovers. Amazon was forced to match the cuts. And the pricing wars have just begun. CUC International, which offers bargains on many goods in return for an annual subscription, recently announced 40% discounts for members at its own online bookstore (www.books.com). Borders, the nation's No. 2 bookseller, is readying its own online service. All this is very bad news for Amazon, which, unlike B&N, cannot afford to run its site as a promotional vehicle for conventional stores. (After all, it has no such stores.) Amazon lost $6.7 million in its last fiscal quarter and admits that profitability is nowhere in sight.
Jeff Bezos, Amazon's endearingly candid founder, agrees that Barnesandnoble.com can duplicate what Amazon has done. The question, he says, is, "Can Amazon.com establish a world-class brand name before Barnesandnoble.com buys, builds, acquires, or learns the competencies they need to be excellent online retailers?" Bezos is expanding the number of titles Amazon stocks. And he is trying to improve delivery time by working closely with wholesalers. While both moves seem promising, both mean that Amazon must pay exactly the kind of tithe it proudly swore it could avoid when it got into the business of selling online.
Barnes & Noble has its own problems. After expanding furiously, it is cutting back on the number of megabookstores it will open in the future. And selling books more cheaply online than it does in stores may eventually cannibalize business and annoy customers. But B&N's fate doesn't rest on its Website. Amazon's does.