Commentary: How Barnes & Noble Misread The Web

By cutting its online offspring loose, the bookseller squandered its biggest edge-brand recognition

For a glimpse of what's ailing, just walk down the aisles of its parent's bookstores. At a typical midtown Manhattan Barnes & Noble Inc. outlet, the existence of the seems to be a dirty little secret. There's little mention of it in banners or newsletters throughout the store, and a sales clerk shrugs that "it's a separate company" when asked about the site. No wonder shopper Lisa Melora goes straight to archrival for book hunting online. "It's reliable, and I've never had to look anywhere else," she says.

That's exactly what bricks-and-mortar executives trying to move their businesses online don't want to hear. Barnes & Noble, which traces its roots to 1917, has yet to leverage its potent brand in cyberspace. Instead, the nation's largest bookseller has rigorously kept its 40%-owned Net operations separate in an attempt to tap into the investor frenzy for pure Net plays, prevent cannibalization of its existing business, and avoid charging sales tax in states where it has stores. With the Jan. 12 departure of CEO Jonathan Bulkeley, who left to pursue other projects but clearly did not want a retail chain hanging around his neck, the company can bring the two sides closer together. And that's what interim CEO Stephen Riggio, who is also vice-chairman of the chain, promises to do.

WANDERING CUSTOMERS. He has no choice. As Main Street companies venture online, a household name should be a huge advantage. Yet actually lost ground in online book sales during the last quarter, according to Harris Interactive Inc., dropping slightly to 16.7% of the market while Amazon gained more than five percentage points to get a 62.1% share. Amazon's customers are also more loyal, reports Nielsen/NetRatings, with only 17.9% of them going to over the holidays, while 47% of's customers said they also shopped at Amazon. No wonder investors have knocked stock down to $14, $4 below its May, 1999, offering price.

So what went wrong? Partly, Barnes & Noble simply got started late. By the time it jumped into the online fray in 1997, Amazon had already built a loyal following. And with little to differentiate its books from Amazon's, it was forced to compete on price. That means its online books sell for as much as 30% less than those on its store shelves.

But the biggest problem was the decision to keep the apart from its popular cousin. That freed the startup from bureaucracy and from having to charge sales tax, which would have given Amazon a huge edge. A separately traded Net venture also gave it stock options to woo cyber talent and a stab at heady valuations. Still, separating the two businesses was a big mistake, says Carrie Johnson, an analyst at Forrester Research Inc. She believes the chain should have plastered stores with ads and helped its shoppers go online. Instead, it squandered its top asset, leaving it "unable to leverage the name and get synergies."

Not that integration doesn't come at a cost. Sabotaging their established businesses is a risk for big-name retailers. Barnes & Noble may have four million customers online but it has tens of millions walking through its stores. Why promote a Web site that offers heavy discounts and no sales tax in most states to folks who might buy at full price? The answer is that if you don't, many will migrate to your online rival.

Barnes & Noble had some unique disadvantages. Still, its experience is instructive. Bricks-and-mortar stores looking to translate their brand strength online must be willing to vigorously cross-promote the two ventures, even if that means eating into their existing sales. If they don't, they risk becoming just another upstart.