Part 4 and perhaps final part
The BKS paradigm
Disclosure: I have a long position in BKS
One of the most interesting twists that I have seen in the war for the hearts and minds of investors is centered around a fascinating little guerilla war that Amazon and Barnes and Noble have been fighting. Barnes and Noble sells books at it website, barnesandnoble.com. Amazon sells at amazon.com. I think that while Amazon has been raking in the press notices and growth, Barnes and Noble is clearly winning the war.
Many analysts have valued internet retailers on the basis of sales growth, but, as I hope I have demonstrated, topline growth is a very poor metric if the bottom line is constrained. This is exactly what BKS managed to do to Amazon, while at the same time enhancing its profitability.
It pulled off this neat maneuver by buying the book wholesaler Ingram. This purchase creates a structure that is similar to to the hybrid retail model I discussed earlier, in that it leverages profits from an existing retail operation. But there are two notable differences. The website, barnesandnoble.com, sells books at comparable prices to amazon.com thus limiting amazon's ability to raise prices. But, since BKS owns the wholesaler/distributor, it can rake in huge profits because Amazon purchases some 60% of its book inventory from Ingram! So, barnesandnoble.com keeps the pricing pressure on Amazon which keeps demand high, and can rake in the profits through Ingram. Barnes and Noble is in a joint venture agreement with Bertelsman, a very large European retailer/publisher/distributor and the two will spinoff the internet company. But I think the profit will be in the parent.
How's that for a Machiavellian analysis?
I think I have shot my entire intellectual wad on this sector. I welcome discussion and criticism. What have I missed?
TTFN,
CTC |
