Today, Explained - How Barnes & Noble survived

Episode Date: December 19, 2023

The bookseller has gone from big-box villain to company on the brink of bankruptcy to bright spot in the mostly dismal retail space. The Verge’s Nilay Patel and author Brendan Ballou explain the unlikely story of its apparent turnaround. This episode was produced by Isabel Angell, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Patrick Boyd, and hosted by Noel King. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

Hey guys, did you hear that a Barnes & Noble is opening in Northwest D.C.? Oh, also one in Conroe? And another in Panama City Beach? Plus Roxbury and Paramus and Cincinnati and Cheyenne and Flower Mound and Gainesville and Marina Del Rey and Burlingame? And four in Dallas? If you have even a passing interest in the American economy or in books, one of the most stunning stories this holiday shopping season

is the rebirth of a bookstore chain. Barnes & Noble went from shop around the corner to big box bad guy gobbling up the competition as portrayed on screen in You've Got Mail. You can discover a lot of things if you really knew me. If I really knew you, I know what I would find instead of a brain, a cash register, instead of a heart, a bottom line.

And then came the internet, and Barnes & Noble very nearly died. Now from Doylestown to Meridian to the Eastview Mall in Victor, Barnes & Noble is back, and how? And how? That's coming up on Today Explained. Get groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit

superstore.ca to get started. What do you think today explained us? I don't know. Have you seen You've Got Mail? I have seen You've Got Mail. Do you like it? I think You've Got Mail is like a perfect example of what The Verge is all about, which is that technology dominates the culture, whether you like it or not. So they made an entire blockbuster rom-com movie about AOL. Like fundamentally, that movie is about an AOL notification sound. You've got mail.

And I think that is amazing. Nilay Patel is the editor-in-chief of The Verge, and he hosts The Decoder podcast. The entire story of Barnes & Noble is a story of growth through acquisitions. So there was a Barnes, there was a Noble. They joined forces in the late 1800s. Their flagship store in New York has been operating since 1932 in New York City. And, you know, it was a bookstore. And then what happened is they just started voraciously acquiring other bookstores. First in New York, and then in the 90s they acquired B. Dalton,

which was like the ultimate mall bookstore. And they became this gigantic force in books. Do you have any books on electrical wiring? Sorry. Have you tried Barnes & Noble? Barnes & Noble. Of course. Of course. And it all started with, you know, two guys joining forces. But it's been acquisitions and mergers the whole way through. They just gobbled up other bookstores, other brands, and then we get into their You've Got Mail era where it's like, okay, Barnes & Noble is the behemoth, the Goliath.

No one can beat them. They're kind of the bad guy. And then, for people whose memories kind of cut off in 1999, as maybe mine does, what actually happened to Barnes & Noble? The internet. I think pretty directly the internet happened. So, Barnes & Noble was built to become that Goliath, to become that villain in a pre-internet age. They did it, right? They did become the villain in You've Got Mail. They were eating all the small bookshops and small bookstores really couldn't compete with their selection, with their

prices. It was impossible to compete with a company of that size, unless you have the internet and Amazon can show up and offer unlimited selection. It's not scary. And it's very, very fast. Amazon.com discounts so many books that even with the shipping, you end up saving money. It's fun. It's vast. It piques my interest. This is the thesis of Amazon, is that we will have everything. And because we are a virtual storefront, we don't have to pay to have one copy of everything everywhere. And so Amazon kind of begins to decimate Barnes & Noble's business.

And Barnes & Noble reacts by first copying Amazon. Barnesandnoble.com. If we don't have your book, nobody does. They launch an ill-fated competitor to the Kindle called the Nook, which is an e-reader. Ah, I remember. Experience the only e-book reader in the bookstore you've grown up with. Nook by Barnes and Noble. They are not a technology company. It's a bad product. And then they do not understand that Amazon doesn't have all these marginal storage and shipping costs. And they try to put one of everything in the Barnes & Noble store. So Barnes & Noble starts stocking hand sanitizer and gadgets, and the store loses its identity. And eventually, the costs become too high, and Barnes & Noble starts to fail.

Barnes & Noble is saying they expect they're going to close one-third of their stores within the next decade because everything is moving online. At that time, Barnes & Noble was a public company and its stock was cratering. Okay, so Barnes & Noble is a public company. If you're a shareholder of Barnes & Noble, you're freaking out. Something has to change. What changes? So what happens is what happens to a lot of distressed companies lately. A private equity company called Elliott Management shows up and tells shareholders, hey, we'll just buy this company from you.

We'll pay a premium over the existing stock price. You can cut your losses. You can get out and we'll fix the company and we'll take it public again once we've fixed it. Elliott hired a CEO named James Daunt, who has, by all accounts, completely revitalized Barnes & Noble. The guy hired as CEO by the private equity company. You talked to him earlier this year for Decoder. Who is James Daunt? I think this is the smartest thing that Elliott did.

James is an independent bookstore owner. And I'm a bookseller. I love bookstores. I think bookstores have a real importance within communities and a value in their own right. And therefore, keeping them alive and prospering was really important. Usually private equity companies show up and they hire financial guys. They hire business people. They hire M&A experts, McKinsey types.

James owns his own bookstore. And then he was also the CEO of a larger chain of bookstores in the UK called Waterstones. And he won't let his store become part of Waterstones. He wants to know what it's like to be an independent bookseller. Evidently, my first and true love is my own bookstores. So you compete with yourself? I compete with myself. James's point is, look, Amazon exists.

Amazon is a bigger problem for books than Barnes & Noble ever was. So we have to provide much better services, we have to provide much better selection, and the role Barnes & Noble can play in the entire ecosystem is having enough purchasing volume and storage capacity and retail and distribution relationships that independent bookstores can also use. The reality for booksellers is that you need all of the infrastructure, independent booksellers, that is. You need the infrastructure from publishers, all the distribution and the reps, and focus on physical bookstores to survive. And that's really only there because there's this great huge chain. Waterston's in the UK, Barnes & Noble in the United States. So no, as an independent, one looks at now, looks at these big chains as a friend, not an enemy. His entire approach is to just let the bookstores be local bookstores.

And this has worked because they are now more engaged in their communities, they're stocking books that their communities want, and people in those communities are coming to Barnes & Noble locations as what you might call third places. They're coming to hang out, talk about books, have a community around books, and then buy books, which is pretty important if you're a bookshop. All right, so he's a Tom Hanks, he's a Meg Ryan, we like both of them. What steps does he take? Is it all rosy? It's not all rosy, but I think change is very hard. So if you have this big company that was built to compete with Amazon, that was trying to do everything, and you want to make it a smaller,

different company, you have no choice but to cut costs and make it a different company. And James cuts a lot of costs. Make no mistake. He shows up and says, why do I have gigantic central and says, why do I have gigantic central purchasing functions? Why do I have expensive real estate in New York City for executives and office staff? Why do I have an entire division of this company that is effectively selling space in the stores to publishers? And the biggest decision that he makes is he cuts that revenue line where publishers were paying to have prime placement in the stores. And he says, no, I've got to turn that back to the individual bookstore managers, the individual bookstore teams, and they get to pick what is prominently displayed in the store and what is not, and we will not take that money.

And so he's got to cut all of that down. From a head office perspective, there's nothing personal when you have one of these sort of great huge ructions. It's not saying, you know, no, you're useless. Off you go. I think you're a bad bookseller, bad buyer, bad merchant, bad whatever. We're saying, look, guys, we're simply stopping doing a very significant amount of what we used to do. You can see a vision there beyond we have to cut costs and increase revenue. The vision is I need to empower these individual bookstore teams. And I think that has made the bitter pill of the cuts and the changes

easier for the entire company to swallow and certainly easier for Barnes & Noble's customers to swallow. All right. So four years later, how well are the changes working? And if it's no longer a public company, normally we'd look at the stock price, right? And we'd say, oh, they're doing great or they're doing badly. How well are the changes working? How do we know whether they're working well or not? By all accounts, they are working well, right? And you can see that Barnes & Noble is expanding.

They're expanding their locations. They are renovating some of their stores. What about sales? We don't know because we don't have access to financials, granular sales data. It's just hard to know. The company isn't saying. What we do know is that publishing is doing really well and the things that were supposed to kill it are actually accelerating momentum in publishing. So TikTok is the great enemy of all media, but BookTok is accelerating sales of books all over the place. Let's talk about some of my instant buy authors, a.k.a. authors who have not once let me down. One thing that truly haunts me is the fact that I will never be able to read everything I want to read.

Five out of five, a bajillion out of five. It is so good. It is perfect. Everything about it, it's like the best book ever. Which is fascinating. If you think about what's supposed to happen, which is one, the kids stop reading because they're on TikTok all day. And two, the Internet makes local physical retailers completely obsolete. All right. In the second half of the show, Nilay, we're going to talk about private equity and why it's so controversial. But in your interview with him, you really pushed Daunt on the mechanics of how he took over at the behest of this private equity firm. Right. So, you know, my rude retelling of this is the cutthroat version. You bring in a CEO from a different country who also is the CEO of

another giant bookstore, and he says, I'm going to cut costs and I'm going to change the way a company runs. And what people naturally think is, oh, we're going to do more mergers. This is the history of Barnes & Noble, right? We're going to merge Barnes & Noble and Waterstones. Maybe we'll eat your own independent bookstore. And his response to this was, no, that's not what we were doing. And I sat around talking to book people, to bookstore managers, and the people working in the stores saying, you have to be in charge. And I fundamentally think, having done many, many episodes of Decoder, that the most powerful thing a CEO can do is actually tell the people they work for that they are in charge and accountable for what happens, as opposed to being sort of imperial and saying, I've got to cut costs,

I'm just making decisions. And you can listen to the episode, James says, people push back on this. They said, this is hard. We just want to sell books. And he said, well, there won't be a company if you don't figure out how to sell books to your community. And that is the difference between, I think, his approach at Barnes & Noble and every other private equity story that I think you can tell. So you are kind of in love with him? I think I love a British accent. I think that's real. Anyone's convincing if you have a good British accent? I love a nerd.

And I think what you can get out of James is that at his core, he's a nerd for books. And I'm happy for companies to exist that are run by people who are passionate about what they do and excited to make better experiences for other people. I think a lot of companies aren't. I think a lot of companies are passionate about making money or dominating their competitors. And what you get out of James, if you listen to this episode, is the man really cares about people reading books. And if you can build a business around that, that's pretty good. That's Nilay Patel. Coming up, acquisitions and mergers.

Somewhere over the rainbow The sky is on the moon I wanted it to be you. I wanted it to be you so bad. Support for Today Explained comes from Aura. Aura believes that sharing pictures is a great way to keep up with family, and Aura says it's never been easier thanks to their digital picture frames. They were named the number one digital photo frame by Wirecutter. Aura frames make it easy to share unlimited photos and videos

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help, they can stop the extreme Project 2025 agenda. Join the ACLU at aclu.org today. Do you mind? I bet you read that book every year. I bet you just love that. Day Explained. Brendan Ballew is author of the book Plunder, Private Equity's Plan to Pillage America. Brendan is also a federal prosecutor who wants us to know that he is speaking here in a personal capacity and not on behalf of his employer. However, it was his day job that got him interested in private equity in the first place. So I became interested in private equity while working at the Justice Department Antitrust Division, where so many acquisitions were going on that appeared to be by businesses that I had

never heard of. The buyers for Toys R Us were a trio of investors, KKR, Bain, and Bernado. Firms like Carlyle and Blackstone and KKR, firms that maybe your listeners have heard of, but if you're like me, probably not. These are private equity firms. And as I started to dig into them, I learned that they were buying up huge swaths of American industry. Private equity firms have been acquiring physicians' practices and medical operations at an increasing rate over the last decade. Large corporations and private equity firms are buying up veterinary offices. Investment groups, some outside New Hampshire, are buying New Hampshire manufactured home parks. Okay, so what is private equity? How does it work? So private equity is something probably all of your listeners have heard of,

but maybe feel, if you're like me, a little guilty for not knowing exactly what it does. But the business model is very simple. Private equity firms use a little bit of their own money, some investor money, and a whole lot of borrowed money to buy up businesses. They then try to make financial or operational changes to these businesses with the aim of selling them for a profit a few years later. So it's a very simple idea, but for reasons that I'm sure we'll talk about, it often leads to bad consequences for those businesses, for their consumers, and for their employees. Okay, so let's talk about, it often leads to bad consequences for those businesses, for their consumers, and for their employees. Okay, so let's talk about how it works when it's working.

I think the best case scenario for private equity is that it brings professional management and operational skills to a business, necessary capital, and a needed focus to execute on a given strategy. And that by doing that quickly in a matter of years and then flipping the company, they can sort of energize businesses in a way that sort of slurotic, slow-moving public companies or, you know, intergenerational family companies might not be able to. That's the argument in favor of private equity, at least. Have private equity firms always been around? Are they a new development? You know, it's a great question. So, you know, there's always been something a little bit like private equity in the idea of buying up businesses with a little bit of debt and then trying to

change them and sell them. I'd say that the idea of private equity, or what's otherwise sometimes called the leveraged buyout, really began in the 1970s. And if I can get in the weeds here just a little bit. Oh, you love the weeds. What happened here is the Carter administration reinterpreted a law called ERISA, which regulates pension funds and retirement plans and so forth,

and said that for the first time, pension funds could start investing in riskier assets. And those assets included what were called leverage buyouts. The idea that you buy up a business with debt and then sell it for a profit a few years later. So it created a new market for this kind of business strategy. You couple that with changes in the capital gains rate and a long period of low interest rates, and suddenly this idea of buying companies with debt becomes possible in a way that it wasn't before. I'd say to get back to your original question, when did this take off? I think probably the shining first example would be Gibson greeting cards. President Nixon's former Treasury Secretary, William Simon, along with a few other investors, put up $1 million on their own, borrowed $79 million, bought Gibson greeting cards, and flipped it just 16 months later.

Simon himself made, I think, something like $60 million on a less than $350,000 investment in under two years. David Rubenstein, who went on to found the Carlyle Group, said something to the effect of, I didn't know what a leverage buyout was before that deal, but it sure sounded a lot better than practicing law. And he went on to found one of the largest private equity firms in the world. Why is private equity, I mean, the title of your book is Plunder. Why is private equity bad in your view? I think that there are three basic problems. One is that private equity firms invest typically just for a few short years, three or five or maybe seven years. And what that means is you tend to take a fairly short-term perspective on the businesses you buy. It discourages you from investing in research and development, in R&D, in your own employees,

and so forth. So I think that's the first problem. The second one is that firms often load up companies with a lot of debt, as we were just talking about, and extract a lot of fees, things like transaction fees or management fees, which are paid for by the companies they buy for the privilege of being owned by the private equity firm. And then the third problem, and I think this is maybe the most important, but is the least understood, at least in the general public and by many folks covering the industry, is that private equity firms are very good at insulating themselves from legal liability for the consequences of their portfolio company's actions. And so what that

means is private equity firms can essentially control the operations of their businesses, but when something goes wrong, when a patient dies, when a customer is defrauded, when an employee is discriminated against, it's going to be very, very hard to hold the private equity firm responsible. And so what that means is if you combine all those problems, short-term thinking, reliance on debt and fees, insulation from liability, you have a business model where private equity firms can capture all the benefits when things go well, but can essentially walk away when things go poorly. So you've just laid out all of the reasons that private equity might not be the best way to do business. But does it actually affect people? So when we look at the statistics, private equity firms, when they buy businesses, those businesses are 10 times as likely to go bankrupt as similar businesses that aren't bought by PE firms.

When private equity firms got interested in retail, they were responsible for an estimated 600,000 job losses over a 10-year period when the industry as a whole was gaining jobs. And in nursing homes, another industry that PE firms are particularly interested in, private equity ownership is responsible for an estimated 20,000 premature deaths over a 15-year period. You want your doctor to be the advocate for you. And if they have this business interest over their shoulder, they may not be able to make the best decision for you. In the first half of our show, Brendan, we talked about Barnes & Noble

and how it seems like a private equity firm came in, turned a failing bookseller around using some very smart tactics. When you look at a story like Barnes & Noble that appears to be successful, do you think there's something else going on behind the scenes? Or do you think in some cases, private equity really does work? Oh, absolutely. I don't want to overstate my case here and say that every private equity acquisition is going to end in disaster.

I certainly think that there have been stories where private equity firms have made investments that resulted in successful companies. And they have been rightly touted. I think the analogy here is a little bit like the Ford Pintos of the 1970s. You know, these cars that, you know, if hit were reliable to explode. It wasn't that every Ford Pinto exploded that made it unsafe at any speed. It's that enough of them exploded that it was a dangerous car. I think it's a similar thing here, which is because of our laws and regulations, the incentives we've got around private equity, it tends to lead to more dangerous outcomes for businesses. And so if we can go back

to those original problems that we were talking about, investing for the short term, reliance on debt and fees, insulation from liability, if we can change those incentives through regulations at the federal, state, and local level, we can turn private equity firms into a much more productive part of our economy. And Americans love regulation. And usually private equity, these big firms, they have to do what we think is right. So I think you've solved it. Brendan Ballou. The book is Plunder, and there is some interesting stuff in there about private equity actually liking regulation, Brendan points out. Isabel Angel produced and Matt Collette edited today's show. Laura Bullard fact-checked it, and Patrick Boyd engineered it. I'm Noelle King. This has been Today Explained. you