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It's a plot twist that might make any book lover smile. After a decade of feasting on folksy independent booksellers, mega-chains Barnes & Noble (BKS, news, msgs) and Borders Group (BGP, news, msgs) are now doing it to each other.
The smaller shops couldn't compete with the giants' lower prices. Now, the two big-box booksellers are fighting each other in a bloody price war.
At the same time, they're taking flak from even-bigger retail giants Wal-Mart Stores (WMT, news, msgs) and Costco Wholesale (COST, news, msgs), which do a brisk business in discounted best-sellers, and from online rival Amazon.com (AMZN, news, msgs).
Even the experts don't know how this tale will end. Wall Street analysts have mostly stepped to the sidelines with "neutral" ratings on the mega-bookstores.
But if I had to write the ending today, I'd say Barnes & Noble, with 800 stores in 50 states, will prevail. It has the financial strength. And it will win over book lovers, if not the purists who mourn the local shops, with its own brand of community created through in-store cafes, visits from authors and kids' sections that invite families to plop on the floor and stay awhile.
"What other store can you go into and feel comfortable sitting on the ground?" asks Abhay Deshpande, a portfolio manager at First Eagle Funds, which owns shares of the bookseller. "The idea is to make it a comfort zone. They want you to stay because they think eventually you will make a purchase. If you can make shopping a delightful experience, then it improves the value of your franchise."
Here's look inside the bookstore battle.
No sympathy
The giants likely won't get a lot of sympathy from the ranks of book aficionados. For their take, rent the 1998 film "You've Got Mail," in which Tom Hanks portrays a manager at a predatory New York City mega-store that's strangling an independent neighborhood competitor called The Shop Around the Corner.That plot line has played out all across the country as big-box book retailers have pushed aside independents. Purists aren't happy about that.
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"Those places were charming and wonderful, and the people who ran them were quirky and unique. They would hand-sell the books they personally loved in a way that is harder to do in a chain store," laments Shel Horowitz, an industry veteran and the author of "Grassroots Marketing for Authors and Publishers."
The market share of independent bookshops has fallen to 25% from 35% in the past five years, estimates Deshpande. That's not a great development for anyone who likes books from lesser-known authors and small publishers, the kind independent shops are more likely to stock.
"Barnes & Noble is really complicit in pushing the industry to emphasize blockbusters and best-sellers," says indie author April Hamilton, who has successfully self-published two novels using tools provided by Amazon.com. Horowitz says Barnes & Noble has contributed to "homogenizing America's tastes."
The tale takes a twist
But in an ironic twist, the mega-bookstores have now turned on each other, and the focus on blockbusters has made it easier for larger retailers like Wal-Mart and Costco to compete.The results have been ugly for bookstore investors. Barnes & Noble's operating profit margins sank by 20% last year to 4.5%. Its stock fell 30% in the past year as the price wars intensified, to trade recently around $30 a share.
Borders has been wounded even more severely. It was facing serious financial troubles before Pershing Square Capital, its largest stockholder, rescued it with a capital infusion this month. That may only prolong the price wars, which some industry insiders describe as the most damaging they have ever seen.
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"I do not expect the promotional environment is going to all of a sudden just miraculously change," said George Jones, Borders' chief executive officer, in a call recently with investors.
Meanwhile, a recession and high gas prices are cutting into consumer spending. And unlike last year, the industry doesn't have a Harry Potter book to magically boost sales. "We believe that the recessionary pressures in this uncertain economic environment will make 2008 an especially challenging retail year," Barnes & Noble finance chief Joseph Lombardi told investors recently.
Wall Street expects a gloomy chapter. Deutsche Bank Securities analyst Dave Weiner recently reiterated a "hold" rating on Barnes & Noble stock and cut his price target to just $31 a share, citing the tough competition.
Continued: A 'town hall' feeling
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