Let's say you're in the retail business and sales haven't been so great lately. In fact, things are rocky enough that you've had to tell Wall Street of lower expectations for the coming year, even though you know you have a huge product you're going to begin to sell this summer. (You know it's going to be huge, because it's the latest version of something that has been very successful for you in the past.) So what do you do?
Why, cut prices on this most popular product and stage a(nother) price war, of course.
While counterintuitive, that's exactly what Barnes & Noble and other big book retailers like Amazon and Borders have acknowledged that they're going to do when the last installment of the insanely successful Harry Potter series comes out in July. It's an old theory come 'round again: if you let customers know that you'll be selling this must-have book at a super-low price, you may not make much on the book itself, but you will drive traffic to your store, where—you hope—consumers will ante up for other titles and other ancillary products.
Logical or no, this strategy has been at the heart of bookselling for a decade. (Whether you think it's good or bad for business depends largely on whether you're a big chain retailer working the economies of scale, or an independent that can't, of course, afford to sell at such deep discounts. It's at the heart, for many small stores, of the problem in the industry. But if the chains instituted the discounting aggressively at first—to squeeze the little guy—the strategy today seems a bit more defensive. It's almost biblical: with big-box stores like Wal-Mart and Target and Costco now selling books at deep discounts—unabashedly making them loss leaders for their nonbook products—the "regular" retailers, even the big ones, are having done to them what they did to others; it's their turn to get squeezed by those economies of scale.
On the one hand, this all makes sense. Bookselling always was, is and should be a business; the marketplace is not supposed to be a nurturing kindergarten classroom and whatever, over the long run, helps sell books should be considered a good idea. On the other, discounting is a dangerous strategy —when it doesn't work, it really doesn't work. Even B&N admitted last week that unit sales haven't made up the difference in revenue lost by discounting and other special offers. And in order to bolster profits, the chain is consolidating some distribution centers.
Nobody's crying for B&N, of course, because for all this, they're still optimistic (and profitable) enough to announce that they plan to open 30 to 40 more stores in the coming year. But even that may be ominous: How long can they, or any other bookseller, continue to expand when profits and unit sales are sluggish.
Call me paranoid, but I worry that after a few more years of this, the retailing landscape could look even bleaker than it does today.
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