Barnes & Noble Founder: It's The Stores, Stupid

One of the delicious ironies of merged-channel retail is how easy it is to lose track of the real business. When Barnes & Noble (NYSE:BKS) Chairman Leonard Riggio said on Monday (Feb. 25) that he wants to buy the chain's regular bookstores and E-Commerce operation, everyone suddenly took another look at what was presumed to be a dying brick-and-mortar business. Surprise! The stores are profitable. It's the Nook that's been bleeding the retailer dry.

The Nook was supposed to be merged-channel perfected: Buy anywhere, instant delivery, no distribution centers required. The physical stores were expected to be steamrolled by Amazon (NASDAQ:AMZN). Instead, Amazon has crushed the Nook, while B&N's stores (with no more competition from Borders) are hanging on. Welcome to Merged Channel 2.0—or possibly Merged Channel II: The Showroom Strikes Back.

Riggio, who bought the lone Manhattan Barnes & Noble store in 1971 and adopted its name for his company, said in a U.S. Securities and Exchange Commission filing that his proposed purchase "would include, among other things, Barnes & Noble Booksellers, Inc. and; and would exclude NOOK Media LLC (comprising the digital and College businesses)." At this point, there's nothing else specific about the deal; price, timing and all the details are to be negotiated.

But what is clear, even with the E-Commerce site thrown into the deal, is that this is a bet on the stores. In the age of showrooming, that seems all wrong. Any customer can walk into a B&N store, find a book she wants and promptly buy it from Amazon. It's Best Buy (NYSE:BBY), with lower shipping costs. What is Riggio thinking?

In fact, it seems that the executive Riggio hired to take the chain into digital media in 2009, William Lynch, felt the same way about the showroom stores and all but abandoned them and even the chain's old corporate headquarters. Lynch and several other executives (including the CFO) work out of the chain's dot-com headquarters a mile from the corporate offices, according to the Wall Street Journal.

For a merged-channel strategy, that's disastrous. Even for a simpler multi-channel approach, it's catastrophic to focus on a single channel—digital in this case—and forget all the advantages of other channels. In the case of brick-and-mortar stores, the biggest advantage is the one thing many chains most fear: the store as showroom.

Let's be clear: B&N hasn't ignored its stores.Let's be clear: B&N hasn't ignored its stores. In fact, it has done a pretty good job of integrating the Nook into the physical locations. The counter where customers buy a Nook is front and center when they walk in. Customers who already have a Nook can read a larger selection of E-books for free when they're in a B&N store than when they're outside.

In fact, B&N's stores have become the best remaining showroom for the Nook, which was a reasonably strong number-two among E-readers but tanked horribly when the general-purpose tablet wave hit. At Staples (NASDAQ:SPLS), Office Depot (NYSE:ODP) or Best Buy, the Nook has to compete with Amazon's Kindle, Apple's (NASDAQ:AAPL) iPad and the endless supply of Android tablets. Inside a B&N store, there's no competition.

Apple figured out the store-as-showroom advantage more than a decade ago. That's why Apple has stores. It's not just that Apple had a hard time getting retail shelf space in a crowded PC retail environment, though that was certainly a problem in Apple's pre-iPhone and iPad days. But once customers were inside an Apple store, they were in an environment that was all about Apple. Although it's hard to ban competitors' Web sites (who's going to confiscate customers' phones at the door?), a competitor's Web site has a hard time competing with a really good in-store experience.

The Nook strategy was supposed to be a miniature version of that: an E-reader that was also a retailer-controlled E-book store that could replace all that square footage. B&N's E-books are still selling, but not Nooks. The single-channel Nook strategy is a bust.

For B&N, that mainly leaves the parts of the business that Riggio wants to buy—the can't-beat-Amazon dot-com and the showroom physical stores. Arguably, the chain's only real advantage over Amazon is that it has those showroom stores—places where customers are surrounded by buying opportunities in a 3D retail environment, where associates can have access to every shred of CRM data available and also do actual person-to-person selling.

Those showrooms, done right, should be able to take away almost every reason for showrooming, and compensate for the rest. No wonder Riggio believes they're the part of the business he wants to own.

If there's a lesson in all this for other showrooming-plagued chains, it might be that too many are still really thinking as single-channel retailers—which is just as deadly if the channel is physical stores as it is if the channel is all-digital.

Or maybe it's something simpler: Dot-com competitors don't have expensive showroom stores. If you're a chain, you do—and you'd better use that advantage for everything it's worth.