Barnes & Noble predicament echoes Blockbuster

August 4, 2010

Barnes & Noble’s predicament is sounding like Blockbuster’s — meaning, unfortunately, the fading video rental chain not a successful movie. The U.S. bookseller’s cash flow is sinking and technological shifts look set to worsen that. Activist Ron Burkle may find himself in the role of Carl Icahn at Blockbuster — fighting a losing battle against larger trends.

The Barnes & Noble board’s decision to seek “strategic alternatives” is overdue. And presumably it’s what Burkle wanted, since he has been agitating for the company to lift its poison pill and has talked of proposing three directors to the board. But what exactly the bookseller can do is unclear. Founder and 29.9 percent stakeholder Leonard Riggio has said he might make a bid with other parties, and the company’s stock jumped on the news. But Barnes & Noble doesn’t appear a tempting target.

Cashflow from operations is in steady decline, having fallen more than two-thirds over the past two fiscal years. Consumers are buying books at stores like Wal-Mart and online, and price wars have intensified. Last year, cashflow was insufficient to cover capital expenditure and dividends. The pressure is getting worse.

Recall Blockbuster. Its troubles really took hold once consumers found it cheap and convenient to rent movies using online services like Netflix. Blockbuster hoped its combination of bricks and mortar and online operations would prove successful. Instead, the real estate leases and employee costs were a millstone. And Blockbuster never managed to equal Netflix’s digital service.

Now, consumers are increasingly turning to digital books. Barnes & Noble has rolled out its own electronic reader, the Nook. Unfortunately, it is less popular than Amazon’s version, the Kindle — which the online retailing giant recently updated at a lower price than earlier models. Moreover, the runaway success of Apple’s iPad suggests many people prefer multiple function tablets over dedicated readers. There’s an app for the device for buying digital books from Barnes & Noble. But the company’s offering is only one option in a competitive market.

Burkle, who has a roughly 19 percent stake in the company, hasn’t yet specified what kind of turnaround plan he would like to see. Icahn’s example at Blockbuster may prove edifying. His agitation couldn’t halt broader market trends, and gaining a seat on the board prevented him from dumping stock quickly. Burkle should be careful what he wishes for.

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