Friday, March 4, 2011

Bookstores still more profitable than online selling

I hear many people talking about how much more profitable ebooks are than print. It's an easy assumption to make...after all ebooks cost virtually nothing to make (no printing, warehousing, and shipping). What I find amazing is that distributing ebooks seems to be more of a challenge. Let's look at the most recent numbers from Barnes and Noble. These are from the 3rd quarter filing ending January 2011)
  • retail stores generated $471M of gross profit on $1.46B in sales
  • bn.com generated $30M of gross profit on $319M in sales

When we take expenseses into consideration we find EBITDA (Earnings before interest, taxes, depreciation and amorization)

  • retail stores: $177.5M profit
  • bn.com: $50.5M loss

If we look over the last 3 quarters the disparity is even greater:

  • retal stores: $204.4 profit
  • bn.com $147.4M loss

CEO William Lynch expects that physical books "will remain the majority of the market for the foreseeable future." He went on to say that BN.com's rapid growth in e-book sales and of its share of the market will allow it to become profitable quicker than originally planned and that losses in fiscal 2012 will be "minimized greatly."

For those interested in the % of sales between the retail stores and bn.com it is now 13.7% which is up from 9.6% a year ago.

I think for me, this is pretty eye opening as I figured the ebook revolution was making tons of money for authors, distributors, and publishers alike. I wasn't aware until I pulled back the covers that online selling is losing money and in pretty significant amounts.

So for those predicting the end of bookstores...let's hope they hang on long enough to keep funding the online channel into profitability because if they sink we're going to lose bn.com and then Amazon may be the only substantive game in town.

If you want to see the full set of data you can here.

22 comments:

Christopher Wills said...

Interesting post as ever, but sorry I'm not convinced by your figures and I don't think you're comparing like with like.

Your figures suggest that online gross profits went from 940% (30/3.19 x 100%) to a loss of 1580% (50.5/3.19 x 100%) after including EBITDA. Is it possible you meant the gross profits were $3.19B not $3.19M?

Also I wonder if the online numbers include the costs involved in the Nook? I suggest a more accurate comparison of store book sales versus online book sales would present a totally different set of figures. I don't believe that given the overheads of high street store rents, staff pay, storing, distributing and other costs, that online book sales (with a small cost for staff and website) would come out second best to store sales. What are B&N doing with their online store to make such a huge loss? Think about it; one person could operate an online store from a shack in the mountains as long as they have a good internet connection. How can you make a loss?

Robert said...

Wow. Fascinating numbers, unexpected and counter-intuitive, but there they are.

Robin, do you think that B&N's desperate effort to compete with Amazon may be at play here? A massive web operation selling countless books has to be a huge logistical undertaking involving many people. Just ramping up such a process and keeping all the titles updated, then devising and monitoring endless promotions, has to be a formidable task. Doing all that while matching Amazon's killer prices must squeeze B&N's margins dry.

What do you think? And, bearing on some of your previous discussions, do these sobering numbers suggest anything about the financial plausibility of the Big 6 trying to mount their own competing ebook operation?

--Robert Bidinotto

Cathryn Grant said...

Interesting results, thanks for digging into this.

I'd love to know the actual market share of Kindle vs Nook (me and a million others), which I'm sure isn't helping B&N eBook profitability.

azarimba said...

Christopher Wills makes some good points, and they're all accounting related. If I get a chance later in the day, I'll come back and explain in more detail. Suffice to say that the issue does involve contribution of margin to coverage of fixed/overhead type costs. But Robin's numbers make a good point, too. There are a lot of legacy costs that the publishers can't quickly get out of, and if they have to write some of them off entirely (e.g. lease penalties for getting out of physical stores, contractual penalties for opting out of certain distribution contracts, etc.) their bottom lines will take a huge hit in terms of discontinued operations. Some of that is probably already hitting the EBITDA number Robin mentions.

J. R. Tomlin said...

Unless I am reading that incorrectly, you are judging the entire ebook industry by B&N. That seems to me to be the flaw in your analysis. They are the new kids on the block.

I don't know how Amazon's ebook sales and profitability would compare to B&N DTB sales and profitability, but that would be more a like to like comparison.

azarimba said...

I did have a look at those results of Barnes & Noble, with a view to making some sense of C. Wills' comments. A table turned out to be the best way to understand it, for me.

If you're interested, it's at:
http://azarimba.blogspot.com/2011/03/barnes-noble-q3-2011-financial-results.html

Robin Sullivan said...

Hey Crhistopher - The figures are indeed apples to apples and taken right from the B&N 3Q Results. I posted a link to the data in the main post so you can check for yourself.

I'll agree with you that it doesn't make sense (which is why I posted and was so surprised. the cost of employees and rent on brick and morter would seem to be outweigh that of a "virtual store".

Robin Sullivan said...

J.R. - I'm not saying that this has implications across the "entire industry". I clearly stated that I'm reporting only B&N numbers becaues those are the ones I found recently and was just amazed as I, like many others, assumed their estore operations were subsidzing their stores and not, as it turns out the other way around.

Robin Sullivan said...

Robert...I'm not sure what to make of these numbers - I just found them interesting...and a bit frightening.

As a software programmer myself I can't imagine how a virtual operation can be so less profitable.

It doesn't really impact my musings about the big-six bypassing B&N and Amazon such that if people want their titles they would have to go to them directly.

rdlecoeur said...

mmm...corporate accounting. What these figures do not tell you is how much of brick & mortar sales are soft toys, games, stationery etc. Also we cannot say for certain where the development costs for the Nook are. For all we know .com pays for the development and the stores record the sales and profit for the Nook.
The only conclusion you can draw from these figures is that B&N sold some stuff and had some costs attached to it and as long as they made some profit they'll still be around next quarter.
Off Topic.
A belated WELL DONE & congratulations on your forthcoming publishing deal.
It must have been a hard decision for team Sullivan & I wish you continued success.

Robin Sullivan said...

thanks rdlecoeur...I'm pretty sure that from a pure financial perspective we'll lose $'s but the hope is we'll gain readers and that's good enough for us. Most importantly, however, is for me I'll now be able to know from the inside every aspect of publishing (self, small press, big-six) and that is some insight that I'm really forward to understanding more about from a first hand perspective.

Robert said...

I think "rdlecoeur" is almost certainly right. I'd bet that all the costs for R&D, roll-out, and advertising of the Nook have probably been put on the books of the online side of the business, BN.com. After all, it would make no obvious accounting sense to attribute the costs of this gizmo, which is only for online book purchases, to the bookstore side of Barnes & Noble's balance sheet.

Simultaneously, though, the bookstores are selling it. I therefore assume that in the company's accounting, the bookstores would be credited with all the ginormous profits arising from those sales.

Unless we actually know for sure exactly how B&N is attributing the costs and profits on the Nook, the figures they're reporting may be giving us a false impression: that their online business is a big loser, and that their bookstore division is healthier than it may be. If the bookstore profits include lots of Nooks, then the stores are ultimately selling the device that will put them out of business.

wannabuy said...

B&N is spending quite a bit to 'jump start' online books. I do not consider there current spending indicative of the costs once the market is 'mature.' Then again, once the market is mature, the sales will be at least 6X today's sales! :)

I hope the experiment with a big6 publisher works out. Hopefully their timeline is *fast*!

Neil

azarimba said...

rdlecoeur wrote, "For all we know .com pays for the [Nook] development [costs] and the stores record the sales and profit for the Nook."

Not exactly. A primary principle of accounting is matching of costs and revenues. Where ever a Nook is sold, those revenues would be matched (in cost of sales, the expenses before that Gross Margin number) with the cost to B&N to make that Nook. Some development costs would be included in that cost number, though it is possible that some of the development costs would have been written off (expensed, probably to general selling and admin) in past accounting periods if they didn't meet the criteria for capitalizing them and writing them off against the revenues from sales of Nooks in future periods.

From Quarterly filings, it's really hard to get a good picture of the company's situation where something like development of a brand new product is concerned. There may be more information available from recordings of past conference calls with analysts, if those happen to be available (perhaps on B&N's corporate website).

KevinMc said...

I think what's being missed here is that B&N *is* aware of the writing on the wall. They closed a net of about 7% of their regular retail stores last year (52 more stores closed than opened). And they're investing *extremely* heavily in building their digital platform. That's operating expenses tossed directly into the B&N.com pile. Not the Nook's development, but their website, PubIt program, advertising to bring their web sales up, advertising to boost ebook sales, etc. All B&N.com expenses.

In fact they just last month announced they were cancelling quarterly dividend payments in order to put that $60 million into their digital sales platform. It's all investment which, while it is obviously not paying off dollar for dollar just yet, is setting them up with the infrastructure to survive the changeover to digital.

Shevi said...

I don't believe there's any reason to think we're going to lose BN.com. While brick-and-mortar stores may slowly disappear (they're already starting to), BN.com and Nook will remain profitable. Barnes & Noble will probably just change their focus, if they haven't already.

Robin Sullivan said...

I wouldn't characterize my comments as saying B&N.com is doomed for death. My point really is/was that it was not as strong as I thought it was. There is no doubt that Momma B&N sees this as their future and they are putting millions into it to see that it becomes a bigger "player" than it already is. I just thought they were further along then what some of this appears to indicate.

Peter said...

Why is it so suprising that online sales operations are expensive?

Look up pictures of an Amazon fulfillment center- they are MASSIVE and very, very expensive in terms of overhead. And they hire a lot of people to work there. And that's just to sort the books people have ordered- shipping (and in many cases printing-on-demand) the books adds further to the cost.

But I think for consumers- out of site is out of mind. I only saw the webpage, and the box at my door, therefore online catalogs have no expenses. Magical internet elves must make the delivery.

Sure YOU can sell something on e-bay and just stick it in the mailbox for 45 cents. But that's like saying brick-and-mortar retailers have no overhead because they could just do yard sales.

And that's the line of thinking that caused the dot-com crash.

Peter said...

@Chris

In the example you quoted:

The salary of the person, the cost of the shack, and the cost of the internet connection would all have to be considered overhead, if that were a business.

And how many books do you think that one person could ship in a day? Keeping in mind that three-quarters of the books sold on-line are sold at a loss, just to "keep up with the Joneses".

That's why online book-selling is so unprofitable.

Peter said...

Sorry about the double comment, I didn't realize the first one went through.

Anonymous said...

Why should this be a surprise? Online print book sales operate on razor thin margins. Combine this with B&N's massive investment in digital and I'm surprised losses are this low.

Tidbit from http://www.fonerbooks.com/booksale.htm

"I haven't tried doing the math, but it's entirely possible that Amazon, as a store selling new products, runs in the red, and the whole operation is subsidized by their verision of eBay."

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