Online sales are capturing an ever-increasing share of the book business.
Consumers increasingly use online searches to check out products they buy offline. But that is not true of book sales....since online book discounters eliminate the need for comparison shopping at brick and mortar book stores. As a result, traditional retailers are spending more on search ads. The estimated average price advertisers paid for a search ad on Google rose 2.5% during the fourth quarter of 2006 from the third quarter or roughly a 10% annualized increase.
For Borders and Barnes & Noble, the new online competition is putting immense stress on their brick and mortar stores' business. After the dot-com bust, Borders transferred its online business to Amazon.com in 2001. Amazon was to operate a new Borders website, keeping all the revenue generated aside from a commission paid to Borders.
Borders was founded by two brothers, Tom and Louis Borders, in 1971 in Ann Arbor, MI. Eventually, that business was acquired in 1992 by Kmart Corp, which married Borders to its Waldenbooks unit. Three years later, Kmart took the two book chains public as the Borders Group. Kmart is no longer a shareholder of the Ann Arbor based company.
But business trends have proved Borders' strategy wrong. While sales at U.S. bookstores have sagged (down 2.9% last year), online book sales have soared. Online retailers in 2006 accounted for 13% of the overall book market, up from 2% in 1998, according to R.R. Bowker LLC, which tracks the book industry.
Borders has been hit hard. The retailer warned in January that fiscal-fourth-quarter earnings would be below its previous forecast of between $1.80 and $2 a share. Borders is expected to announce restructuring plans in the near future. Since hedge fund Pershing Square Capital Management took large stakes in Borders and Barnes & Noble last year, a merger of the two book chains is a possibility.
Goldman Sachs analysts are skeptical about a buyout of either company, due in part to their soft earning growth. Goldman thinks a merger makes more sense. While a combination will face antitrust scrutiny, in today's global economy that didn't stop appliance rivals Whirlpool and Maytag from linking up last year. So there's precedent to suggest that a Barnes & Noble and Borders merger could win approval.
Source: The Wall Street Journal, March 22, 2007
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