FOLLOW NINA
TWITTER
FACEBOOK

It has been suggested that Lenny Riggio learned "brawling" from his father. The suggestion enrages Riggio. "People always say I'm a fighter because my father was a boxer," he says. "I'm really sick and tired of all the prizefighter stuff, because it is just wrong—it's not any part of my cosmology. It's a stereotype. It makes me sick."

Title Fight

Just a year ago, book king Lenny Riggio had the category killed. Then Amazon.com knocked his Barnes & Noble flat. But this brawl's just begun. 

December 16, 1998, was not a good day for Leonard Riggio. That morning a stock analyst by the name of Henry Blodget made a disturbing announcement: He was raising his target price on Amazon.com from $150 a share to $400 a share. Normally investors don't pay much attention to target prices. But this one was different. Hitting the street in the middle of the first online holiday season, it captured the market's attention. That day, an astounding 17 million shares of Amazon changed hands. By the time the market closed on Dec. 16, the value of Amazon.com had increased by 20%, to $15 billion, and Amazon's founder, Jeff Bezos, was worth $5.7 billion, $914 million more than he had been 24 hours earlier.

That same day, sitting in his cramped, windowless conference room at Barnes & Noble's headquarters in lower Manhattan, Riggio just picked at his lunch—a skinless breast of chicken and julienne carrots—and shook his head in disbelief. Amazon, an upstart with sales of $600 million and losses that grow bigger every year, was now worth seven times more than Barnes & Noble Inc., a chain of 1,000 bookstores with sales of $3 billion. In 35 years of selling books, Riggio had never seen anything like it: "I'm sitting here, hammering away, day after day, to come up with new ideas for my stores, and then, in an instant, with just a single press release, Jeff Bezos is worth another $1 billion."

It made no sense to him. But these days, as Lenny Riggio is learning, nothing makes sense in the world of booksellers. Only one year ago Barnes & Noble Inc., the chain of bookstores Riggio founded and controls, was the undisputed master of book selling. It had more bookstores than anyone, the biggest market share, and the greatest promise for growth. And for the first time in its history, Barnes & Noble was finally earning more than it was spending. Wall Street was happy. In July 1998, Barnes & Noble's stock price hit $48, which represented a 220% increase in just 18 months. At 58, Riggio appeared to be the most important player in the book industry.

But there was still Jeff Bezos to contend with. Suzanne Zak, head of a money management group called Zak Capital, then a large Barnes & Noble shareholder, remembers the very day she began to take Bezos seriously. On July 24, 1998, she attended a meeting hosted by Amazon.com for analysts and money managers. "Initially, like a lot of people, we were skeptical of Amazon," she explains. "But at that meeting, listening to Bezos, a light bulb went off. I said, 'We're going to have a problem here.' " Within a few months, Zak had dumped all 400,000 of her Barnes & Noble shares. She was not alone. Investor Leon Cooperman—one of Barnes & Noble's biggest shareholders—reduced his position too. Fidelity, the biggest mutual fund company in America, unloaded millions of shares. Before long, from a high of $48, Barnes & Noble had tumbled to the mid-20s. "Len Riggio is a lunatic—and I mean that in a good way: He's pathologically competitive," says Zak. 'The trouble is, the guys at Amazon are too."

Riggio, one of the most formidable entrepreneurs in America, is no match for the Internet. Even though he had launched barnesandnoble.com, his Website, back in March 1997, it was not enough. At that point, Amazon had been online for only 20 months, but in Internet years 20 months is a lifetime. Like traditional retailers everywhere, Riggio is learning one big thing: that in this new economy, there is a double standard. His Internet competitors get to play by different rules.

"Typically, entrepreneurs of my generation tend to be risk mitigators. Typically, we're not into building a house of cards; we're into building a business on solid foundations," he told me last December. "Now you have to take off in some direction where you don't know how solid the foundation is."

Barnes & Noble is no longer founded upon a rock. Just a few weeks after I had lunch with Riggio, Amazon.com proudly announced its sales for the 1998 holiday season: In the five weeks leading up to Dec. 31, 1998, Amazon had shipped more goods than it had during the entire year of 1997. It also announced that during the holiday season, its online store had attracted one million new customers. Meanwhile, barnesandnoble.com had brought in just 320,000 new customers. Wired magazine wrote recently, and harshly: "Barnesandnoble.com has become a textbook case of near disaster." Wired also took a swipe at Riggio's mustache.

Last month, shaking Riggio's foundations yet again, Amazon.com started offering 50% off all bestsellers. Amazon's announcement enraged Riggio, coming as it did just one week before barnesandnoble.com was to be spun off in an initial public offering. Like many people on Wall Street, Riggio interpreted the move as an effort to undermine his planned IPO. He told reporters: "[Amazon] changed their prices in the middle of a public offering for barnesandnoble.com, and that speaks for itself."

Barnes & Noble was forced to match Amazon's 50% online discounts. Yet neither bookseller can afford the discount, which amounts to selling books at cost. But this is war, and in the Internet economy, profits don't appear to matter; pulling in customers, or taking them away from the enemy, is what really counts. No one seems to notice that Barnes & Noble's share of the U.S. book market is 15%, while Amazon's is just 2%. All that matters to Wall Street, apparently, is that Amazon.com has 8.4 million registered customers, while barnesandnoble.com has only 1.7 million; that Amazon sells 75% of all books ordered online, while Barnes & Noble sells just 15%.

On May 24, the IPO of barnesandnoble.com went off as planned, but not smoothly. On its first day of trading, the stock climbed only 27%—a failure in the world of Internet IPOs, where stocks routinely close at two or three times their offering price. The market value of barnesandnoble.com is now $3.2 billion—60% more than Barnes & Noble but still far less than Amazon's value of $18 billion.

So severely has Barnes & Noble's foundation been damaged that there's a new expression making the rounds—"getting Amazoned," which means to be knocked out by an Internet competitor. And more and more, it seems, many traditional retailers are about to get Amazoned. In other words, what Riggio's company is going through may well be a sign of things to come for big retailers such as Wal-Mart and Staples and Albertson's and Toys 'R' Us. Perhaps it is not possible to be both a traditional, bricks-and-mortar retailer and successful online as well. Who knows? Last December, in a moment of candor, or exhaustion, Riggio confessed to me, "I don't know where it is I'm trying to go—or indeed if I can get there."

In the months since, Riggio seems to have found a new footing. "I'm not saying that retail is the greatest thing in the world. How could anyone with a brain say that?" he says now. "But I can tell you that it is absolutely no time to push the panic button." He insists he has a comeback strategy, though he won't divulge it. "I have so much I'd like to say that I can't say. It's a very competitive marketplace. What I can tell you is that we have the resources to do many, many entrepreneurial things."

Rumor has it that Riggio may buy one of his competitors—Borders Group perhaps. His response: "That is really, really far-fetched. I can assure you that is nothing but a rumor!" And what about the rumor that Riggio might take Barnes & Noble private in a leveraged buyout? "That isn't even in my wildest dreams," he responds firmly.

When Amazon.com went live (that is, opened online) in July 1995, no one paid much attention—least of all Lenny Riggio. Barnes & Noble's 1995 annual report doesn't mention the Internet; instead, it boasts about investing heavily in bricks and mortar, building 97 new superstores that year. At that time, the real, brutal competition was with Borders Group, the bookstore chain based in Ann Arbor, Mich. Barnes & Noble dismissed Borders' executives as "guys who sold meat," a reference to Borders' chairman, who once ran Hickory Farms. Borders, on the other hand, portrayed Barnes & Noble's management as a bunch of philistines. One Borders ad read, "Unlike faceless chains run by guys with bad ties, Borders is run by real book and music people."

If that sounds a little savage, there's a reason: The book business is unforgiving. Growth is slow; profit margins are thin; the product being sold is a commodity, neither better nor worse no matter who's selling it. Since 1995 the number of adult trade books sold in the U.S. has increased by less than 1%, according to the Book Industry Study Group. Last year the number actually dropped—by 3%. Depending on who's doing the counting, the numbers change marginally, but this much is clear: Book selling is not a hot growth business. Explains one analyst (who, like others, asked to remain nameless for fear of provoking Riggio's wrath): "Len Riggio will say his superstores have expanded the market [for books]. That's just not true. This business is all about cannibalization."

And Riggio knows how to cannibalize. Barnes & Noble's share of book sales has climbed from 7% in 1992 to 15% today. If you look only at bookstores—that is, if you exclude sales of books at places like Wal-Mart or through book clubs—Barnes & Noble's share of the business has gone from around one-tenth to one-quarter, largely at the expense of independent bookstores. Since 1991 membership in the American Booksellers Association, which represents independents, has fallen from 5,200 to 3,300.

Now Riggio has to play defense. Since the 1970s, Barnes & Noble's slogan has been "The world's biggest bookstore." Shamelessly Amazon started calling itself "Earth's biggest bookstore." Barnes & Noble sued. "[Amazon] isn't a bookstore at all," argued its lawsuit. "It's a book broker." Amazon countersued. (The companies settled.) Then, last year, keeping up the attack, an advertisement for Amazon displayed a bar chart comparing its stock of book titles with that of Barnes & Noble's. The bar representing Amazon soared off the page. Whereupon Barnes & Noble charged, "Who's kidding who?"

The real question, of course, is, Who's cannibalizing whom? Danielle Turnof Fox, an analyst who covers book retailing for J.P. Morgan, says, "Early on, we thought that online sales could be incremental. But now the industry data suggest that online sales are coming at the expense of someone else's market share." Right now that someone else appears to be Barnes & Noble. Analysts had expected Barnes & Noble to add 50 new stores last year and another 55 this year; instead, just 37 were added in 1998, with another 30 promised for 1999. A few months ago Barnes & Noble announced that this year its stores will earn less than predicted. Rather than growing by 25% a year, Barnes & Noble earnings are now expected to grow by 10% to 15% a year.

Cutting back on store expansion wasn't Riggio's only response to the new challenge from Amazon. Last November, Barnes & Noble agreed to buy Ingram Book Group, the country's biggest book distributor, for $600 million. By owning Ingram, Barnes & Noble could get rid of the middleman, squeezing a little more profit out of its book sales. Plus, with 11 distribution centers across the country, Ingram might allow barnesandnoble.com to get books to customers more quickly than Amazon does.

But the deal has yet to go through: It is facing intense scrutiny from antitrust regulators. The transaction was expected to close by the end of 1998. Now, six months later, there's still no word. It's yet another reason Barnes & Noble stock is 40% off last summer's high.

It would be a mistake, however, to write off Lenny Riggio. He hasn't lost a fight yet, as those who know him keep reminding you. They also let you know that Riggio is one of the smartest businessmen they've ever met. To quote Robert Haft, founder of Crown Books: "I competed against him for 17 years. He's incredibly intuitive, smart, and aggressive." Kristine Terrill, who until 1997 was president of Barnes & Noble's B. Dalton division, says: "He is a genius." Peter Farago, who, as president of Farago & Partners Advertising, worked with Riggio for more than a decade, agrees: "He's a brilliant son of a bitch."

And he's a fighter. In fact, Lenny Riggio's father, Stephen Sr., was a professional boxer—the only boxer to have beaten middleweight champ Rocky Graziano twice. Between 1940 and 1948, when Lenny was a child, Steve Riggio was in 75 fights; he won 60 and lost 14, and one was a draw. It has been suggested that Lenny Riggio learned "brawling" from his father. The suggestion enrages Riggio. "People always say I'm a fighter because my father was a boxer," he says. "I'm really sick and tired of all the prizefighter stuff, because it is just wrong—it's not any part of my cosmology. It's a stereotype. It makes me sick." What he did learn from his father, he says, was how to be nimbler than his opponents. "Boxing is the art of self-defense," Riggio Sr. wrote in a 1982 letter to The New York Times, just before he died. "You hit your opponent more times than he hits you, you come out a winner."

Lenny Riggio was born on Mott Street, in Manhattan's crowded Little Italy. When he was 4, his family moved to Bensonhurst, at that time an Italian working-class neighborhood in Brooklyn. After retiring from boxing, his father drove a cab. His mother was a dressmaker. As a student at Brooklyn Technical High, Lenny Riggio played baseball. Until he cracked his elbow, he dreamed of becoming a pro. At only 5 feet 7 inches, he took to playing basketball instead. "I grew up on a block where 400 guys stood around on the same corner," he told New York magazine in 1977. "You had to do something to stand out...have a nickname, something."

Riggio didn't seem to have much. Too poor to attend college full-time, he attended night school at New York University, studying metallurgical engineering before switching to the school of commerce. During the day he worked as a clerk at the NYU bookstore. One day, just as if he were acting out a great American novel, or writing one, it occurred to Riggio that he could do a better job than his boss. So in 1965, full of confidence, he dropped out of college and opened SBX (Student Book Exchange) just around the corner from the NYU bookstore. By the time he was 30, Lenny Riggio owned five campus bookstores in New York City. That same year, 1971, he bought an unprofitable seller of textbooks on Fifth Avenue and 18th Street called Barnes & Noble (named after Charles Montgomery Barnes, a seller of secondhand books who founded the company in 1873 in Wheaton, Ill., and G. Clifford Noble, who became a partner with Barnes' son).

Until Riggio came along, selling books was a fusty, monkish pursuit. Riggio changed that. In 1974 he opened the Barnes & Noble Sales Annex in New York City, loading tables with remaindered books, providing shopping carts, installing wood benches, and giving away free copies of The New York Times Book Review. Handwritten signs read BOOKS FOR A BUCK! Taking a page from mass merchants like Wal-Mart, Riggio advertised aggressively. His slogan: "If you paid full price, you didn't get it at Barnes & Noble." The well-mannered competition was appalled. But Riggio knew that retailing was changing. "We feel we're the picture of bookstores to come—there's no question about that," he told a reporter in the late 1970s. "The days of list-price book selling are numbered."

In 1986, using junk bonds for financing, Barnes & Noble, then a chain of 37 bookstores (plus 142 college stores), bought B. Dalton, a chain of 800 bookstores. Suddenly Lenny Riggio was the biggest bookseller in the country. Over the next few years Riggio bought one small chain of bookstores after another, among them Scribner's, Bookstop, and Doubleday Book Stores.

Then, abruptly, in the early 1990s he abandoned his mall-based strategy and started building superstores. They were to be gathering places, and so he equipped them with comfortable chairs, served Starbucks coffee, and kept the doors open until 11 P.M. Riggio wasn't just selling books; he was building a big brand. Nike had celebrity athletes to sell its shoes; Barnes & Noble had celebrity authors. Barnes & Noble designed shopping bags, bookmarks, and advertisements with illustrations of Ernest Hemingway and Virginia Woolf.

The superstore concept wasn't his; Borders was the first to build gigantic stores that carried 100,000 titles or more. But Riggio moved faster and more nimbly. "He went into battle mode: He saw what was going on, he bet his company on the concept, and it worked," recalls Bobby Haft, who was then running Crown Books. "In the beginning, you had publishing executives who didn't believe [in superstores]. Len went out and built them anyway. And then they all said, 'Ah, yes. Of course! That's it!'"

Now, once again, Lenny Riggio is in battle mode. What is his strategy? Back in December 1998, when I had lunch with Riggio, he told me this: "I want to transform this enterprise from what it is into something that is totally different. I mean, totally different."

In late May, the first stage of this transformation was complete: Barnes & Noble sold 18% of barnesandnoble.com to the public (the remainder is owned equally by Barnes & Noble Inc. and German media conglomerate Bertelsmann AG). So far, barnesandnoble.com, with sales of $62 million last year, has been no match for Amazon.com—but again, there's nobody better than Riggio when it comes to expropriating a competitor's good idea. Just ask Louis Borders, who with his brother Thomas founded Borders in 1971 (and sold it to Kmart in 1992). "We had 25 stores when he came in," recalls Louis Borders. "Then he opened a store that looked very much like ours—it was amazing. Now he's doing the same thing with Amazon. He's not a copycat; he's a great entrepreneur."

Riggio has other things working in his favor. For one, Amazon seems to be losing interest in books. It is becoming the Wal-Mart of the Internet, selling not only books but music, videos, gifts, and greeting cards; holding auctions; and offering links to online drugstores and pet supplies. Riggio sees opportunity here. As Amazon broadens its scope, barnesandnoble.com's narrow focus—its commitment to books—could be a competitive advantage. In other words, if barnesandnoble.com positions itself as a community of book lovers, it may be able to beat Amazon in the field of books (irony of ironies to out-of-business independent booksellers).

"I think if we are focused on being the best at what we do, we will earn a larger market share," barnesandnoble.com's CEO, Jonathan Bulkeley, recently told the Motley Fool, a financial Website (barnesandnoble.com was launched by Len's brother Stephen, now Barnes & Nobles's vice chairman). "[Amazon] was first to market, and they grabbed market share first, but there are millions and millions and millions of people who've never bought a book online or a CD [online] and who will be coming online to do [so] within the next 12 to 36 months." To those people, the Barnes & Noble name is powerful; it stands for books.

And what of Barnes & Noble stores? What will become of them now that growth is slowing? "Hey, we're doing really nicely right now," Riggio told me the day before this story went to press. "Are we afraid? No! Are we concerned? Uh, well ..." Riggio went on: "All I can say is, look at the record of what we have done. We have met every single five-year plan we have ever submitted to the banks, to the public, to our shareholders."

Riggio acknowledges that eventually the Internet will capture between 2% and 5% of his stores' sales. That may sound like a small matter, but in the languorous book market, 1% here and there is a big deal indeed. Riggio states plainly that one way or another, he intends to make up any loss to the Internet. Increasingly Barnes & Noble stores are selling impulse items that carry higher margins than books—things like reading glasses, miniature night-lights, and Godiva chocolates. Barnes & Noble already sells music; Riggio suggests that DVDs—movies on CD—might be next. Then there are digital books. Last year Barnes & Noble bought 20% of tiny NuvoMedia, maker of the Rocket eBook, a hand-held gadget that looks like a Palm Pilot and holds up to 4,000 pages of words and images. Barnesandnoble.com now sells Rocket eBooks ($499) and a growing number of RocketEditions, electronic books that can be digitally downloaded.

A decade ago Riggio foresaw the decline of the great American mall; therefore, he began closing his mall-based B. Dalton stores and opening Barnes & Noble superstores instead. It is not inconceivable that a decade from now his superstores, too, will be relics. But that's probably far too drastic an assessment. Surely there will always be a place for bookstores made of brick and mortar—and Barnes & Noble is the biggest bookstore chain in the country.

For that reason, money manager William Harnisch, whose Forstmann-Leff Associates owns 14% of Barnes & Noble, argues that the bookseller's true value is $45 a share, about 60% higher than its current price. He also argues that Lenny Riggio is undervalued. "This guy Len, he's really something. This guy knows how to make money. The problem is, he doesn't look like an investment banker, so he doesn't get credit. He's way underappreciated."

Peter Farago, who has known Riggio since the early days of Barnes & Noble, agrees: "Look, Lenny's going to be just fine. He's got a killer instinct. When it's clear what has to be done, get out of the way. The guns of Navarone get trained on whatever has to be taken out."