Barnes & Noble landlords fret

  • Article by: DON JACOBSON
  • Updated: August 15, 2010 - 4:04 PM

A buyer for the book retailer could write a horror story for mall owners in a fragile retail economy.

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News last week that giant book retailer Barnes & Noble is putting itself up for sale sent tremors through a commercial real estate industry that's already struggling with record-high vacancy rates.

As a "bricks-and-mortar" business in a bookselling world that's rapidly adopting digital downloads, fears are creeping in that a new Barnes & Noble owner would seek to shed or downsize the leases of many of its 700-plus stores nationwide. And some pundits are speculating B&N and other mall-based bookselling chains ultimately could go the way of video rental and record stores decimated by digital downloading.

The nervousness is understandable in the wake of recent events in the bookselling space. B&N's main competitor, Borders Books, last year announced the closings of 200 of its smaller-format Waldenbooks outlets. B&N itself early this year shut down the last remnants of an iconic Minnesota brand, B. Dalton Booksellers, which in the 1980s numbered 800 stores.

Borders this year instituted layoffs after it saw holiday-season sales plunge 13.7 percent and is reportedly struggling to avoid bankruptcy as it tries to compete with online bookseller Amazon.com and deals with a $360 million loan that matures next year.

Before announcing it was seeking a buyer, B&N management predicted only a few store closings this year and forecast flat or slightly higher sales in fiscal 2011, helped along, they said, by consolidation in the book business and high expectations for its own digital book reader, the Nook.

But then the company announced that sales from Nov. 1, 2009, to Jan. 2, 2010, were down 5 percent to $1.1 billion, with same-store sales off 5.1 percent. A Barnes & Noble buyout player seeking to revitalize the chain's slumping financial situation would almost certainly seek to make cuts in its two biggest cost centers -- labor and real estate leases, landlrds fear.

Barnes & Noble has 15 Twin Cities locations, as well as two stores in Rochester and other outlets in Duluth, Mankato and St. Cloud, with the average store size about 26,000 square feet -- a substantial footprint.

The potential downsizing of Barnes & Noble's presence in the Twin Cities would be "a big deal, because of the number of stores," said Andrea Christenson, a vice president and retail broker with Cassidy Turley in Minneapolis.

"This is another blow to landlords and will leave them with large, hard-to-lease spaces. The smaller stores in high-traffic centers could lease quickly, but the larger-footprint stores could take a long time to lease because of the lack of tenants looking for large space," she said.

According to its latest annual report, the chain had 719 leases active nationwide as of May 1, typically with terms of between 10 and 15 years. About 110 of the leases will expire next year, 115 more in 2012 and an additional 104 in 2013.

Who will buy B&N?

Under a new ownership regime, the bookseller could use the opportunities presented by the lease expirations to implement a new strategy that deemphasizes bricks-and-mortar in favor of its digital business, retail experts say.

"I would think landlords would be very motivated to do what it takes to keep a Barnes & Noble in that situation, especially when you consider that they generate a lot of traffic and they pay their rent," Christenson said. "Their locations are good, but replacing them would be difficult."

One issue in finding new users for such spaces, she said, would be exclusivity agreements, in which existing tenants in a retail property have language in their leases banning direct competitors. Veteran Twin Cities retail consultant Jim McComb of the McComb Group Ltd., however, doubts that Barnes & Noble and other mall-based booksellers will go the way of video store chains such as Blockbuster that have closed hundreds of stores due to competition from computer downloads and mail order.

Much will depend, he said, on who emerges as a buyer for Barnes & Noble and how they go about dealing with the digital competition, although he admits there are plenty of precedents in which buyout firms have taken publicly traded retailers private and the proceeded to dismantle them.

"I don't think the comparison with Blockbuster is totally accurate because Blockbuster was dealing with a product that was digital from Day One, whereas in the book industry, not everything out there is in a digital format and probably never will be," he said.

Barnes & Noble, he said, is on the right track by putting emphasis on its Nook e-reader and will be able to compete with Amazon, adding, "There will always be a role for bookstores, but in this environment, stores that are not profitable will be slimmed down."

The bookseller, McComb said, is important to a lot of Twin Cities retail centers where they provide a much-needed customer draw.

"If they go dark, it would have an impact on these centers, no doubt about it," he said.

Don Jacobson is a St. Paul-based freelance writer.

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