My Exploits at Barnes & Noble During the Financial Crisis

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When I walked intoBarnes & Noble to interview for a job in the fall of 2007, I was far from the typical applicant. Two years before that, I'd graduated with honors from a highly respected law school. And I had spent the prior year clerking for a federal judge in a small town in Texas -- a job that every law-school graduate dreams of but only a handful are fortunate enough to get.

But there I was. And to top things off, I was nervous that I would get turned down for a position shelving books from 7 to 11 in the morning -- if my memory serves me right, it paid $7.40 an hour.

My original plan was to use the part-time position as cover to read about history until my accumulated savings ran out. However, it soon morphed into something different. Less than two years later, I was running one of only a few stores in the company that increased sales in 2009, the worst year for retail since the Great Depression.

I've decided to tell how this came to be not only because some people may find it interesting, particularly people working in the retail industry, but also because it shines a light on what it takes on the ground level to run a successful retail operation.

Shelving books for $7.40 an hour
I don't know how things work today -- I suspect it's the same -- but when I started at Barnes & Noble there were multiple four-hour shifts each morning dedicated to shelving the books that had come in the previous day. It's monotonous work, but it was perfect for my purposes because it allowed me to see the newest books that had come out while leaving the rest of the day to go back to my apartment and read any that piqued my interest.

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Not long after starting, however, it became clear to me that the store had a problem in the receiving room -- i.e., the back room where shipments are received, boxes opened, and the books sorted by subject matter onto pushcarts corresponding to specific sections of the sales floor.

The issue was that the receiving crew wasn't able to process all of the boxes that were delivered each day, leaving an ever-growing pile of unopened boxes on the floor. By the time I had gotten there, boxes were stacked 6 feet high throughout half, if not more, of the backroom -- which, it should be pointed out, was quite large.

This meant that something like 5% of the store's inventory wasn't available for sale. And to make things worse, the unavailable inventory represented the cream of the crop, so to speak, because the unpacked boxes held the newest books and the most popular "backlist" titles that needed to be replenished on the sales floor.

The reason the receivers couldn't keep up with the work was that they had adopted an inefficient process for unpacking and sorting the shipment. They positioned the 10 or so shelving carts in a circle, in the middle of which they placed the boxes to be unpacked. It was like a wagon wheel with one hub and 10 spokes. As each box was opened, they would walk each book to its respective cart.

On a usual day, the store received somewhere around 70 boxes, each of which held an average of something like 20 books. That equates to an average of 1,400 units a day. It took roughly a dozen steps to walk each unit from the middle of the circle to its respective cart and back. The net result was that the receivers were walking an average of 8.5 miles a day ferrying books from boxes to carts.

I won't belabor you with the details, but I asked the store manager to temporarily reassign me to the receiving room, where I could put a system into place that would reduce the number of steps it took to process each shipment by roughly two-thirds. This turned the tide and allowed the crew to process more boxes each day than they received, which, over time, took care of the captive inventory problem. Quite inadvertently, it also led to my being installed as the receiving manager.

"Managing" the receiving department
I always found it ironic that the person in charge of the backroom was called the receiving manager. After all, the job was less about managing people and more about opening boxes and sorting merchandise onto carts to be shelved the next day. Being the receiving manager, in other words, simply meant that I opened and sorted more boxes than anyone else in the store.

It was unglamorous work to be sure, but it positioned me to make additional operational tweaks, the first of which was to change how the store processed and merchandised "frontlist" books. These are the newest and hottest titles that are placed on tables, endcaps, and other promotional locations.

At the time, roughly 15% of the store's book sales came from four large tables located just inside the entrance. This was despite the fact that they accounted for only 2%, if not less, of the store's total square footage. It accordingly followed that if you wanted to increase sales, then these tables, along with the other prominent promotional locations, were where you'd get the most bang for your buck.

The challenge in doing so was twofold. First, you had to tailor the merchandise on these locations to appeal to the specific demographics of the store's customers, as the typical person in Northern Virginia buys different books from the typical person in the middle of Kansas. And second, you had to develop quantitative metrics that would reflect whether the particular assortment at any one point in time was in fact accomplishing this objective.

Again, I won't belabor you with the details of the systems I designed to accomplish this feat, other than to say that they resulted in markedly higher sales. Holding all else equal, the changes roughly doubled the sales volume generated from the store's most important locations.

The second operational tweak involved books on the opposite end of the spectrum -- namely, bargain books. A bookstore doesn't own the vast majority of books on the shelves. Under so-called net-90 agreements with the publishers, a bookstore ordinarily has 90 days after receiving a book to either pay the publisher for it or to ship it back.

Bargain books are an exception. After titles are republished as paperbacks, publishers are frequently stuck with a glut of unsold hardcovers that were returned pursuant to the net-90 agreements. To mitigate their loss, the publishers turn around and sell these books outright, but for pennies on the dollar, back to the bookstores from which they were returned. The bookstores then list them for a fraction of the original list price.

Because these are no longer the new and hot titles, the bargain section is generally treated as the ugly stepchild of most bookstores. Its outcast status is accentuated by the fact that, because bargain books cost less on an individual-unit basis, the entire department generally accounts for a small share of overall sales. Furthermore, because the books can't be returned to the publisher if they didn't sell, the Barnes & Noble central office strongly discouraged individual stores from ordering bargain books beyond the store's original allotment, which was set by buyers in New York City.

But there were two aspects of this approach that seemingly everyone failed to grasp. First, because the bargain section was generally in a state of disrepair, it would take a relatively small amount of effort to increase its sales. And second, though more importantly, if one ignored the admonition against aggressively ordering and merchandising bargain books, they could be used as a proverbial loss-leader to attract traffic to the store.

My strategy, in turn, was simple: In addition to ironing out some merchandising issues, I spent about 30 minutes every week perusing the inventory of bargain books in the company's massive distribution centers. I would identify the titles that I believed would resonate with our customers, clean out the distribution centers of those titles, and then, borrowing a tactic from Sam Walton, I "stacked them high and let them fly." Which they did, generating double-digit sales increases for the department compared with the year-ago period.

Building a salesforce
It was obvious by this point that I had a knack for retail in terms of both merchandising and operations. On top of that, not only had the receiving and bargain departments become the best-run areas of the store, but I had by then also trained someone to take my place as the receiving manager. That meant I was available to assume a broader role over the entire store, which I soon did as an assistant store manager -- unless I'm mistaken, this happened in the latter half of 2008.

Coincidentally, it was also around this time that I happened upon Paco Underhill's book Why We Buy: The Science of Shopping. This is probably the best book ever written about the retail business. Underhill's insight is that the entire focus of a retail store should be on maximizing the conversion rate, which is the percentage of a store's visitors that buy something, as opposed to browsing and then leaving without making a purchase.

As Underhill explains:

Conversion rate measures what you make of what you have -- it shows how well (or how poorly) the entire enterprise is functioning where it counts most: in the store. Conversion rate is to retail what batting average is to baseball -- without knowing it, you can say that somebody had a hundred hits last season, but you don't know whether he had three hundred at-bats or a thousand. Without conversion rate, you don't know if you're Mickey Mantle or Mickey Mouse.

After spending a few weeks thinking about how Underhill's theories could be applied in the context of a bookstore, I came to the conclusion that there were two levers one could pull to increase conversion.

The first was to improve the accuracy and organization of the inventory. A big-box bookstore is little more than a thinly staffed warehouse that's open to the public. The one I worked in stocked something like a quarter-million unique items. If a customer came in looking for one of these items but you couldn't find it, which happened regularly, then you missed out on a sale and your conversion rate suffered.

This is obvious and straightforward in theory but difficult to implement in practice. The primary constraint is time. There's only so much manpower you can legitimately allocate away from customer service and toward so-called zone maintenance, which consists of systematically weeding through every item in the store to make sure it's accurately reflected in inventory and located precisely where it's supposed to be. In fact, the Barnes & Noble corporate office told each store exactly how many man hours could be spent each week doing this -- a figure I promptly doubled and made up for elsewhere.

The net result was that the store was soon able to locate a considerably larger percentage of items customers requested than every other store in our area. I know this because it was around the same time that Barnes & Noble started allowing customers to order items at home that could then be picked up in the store. When an item couldn't be found, the bookseller at the customer-services desk checked a box on the computer that triggered a message to the customer saying as much. This data was then aggregated and pushed back down to the stores. Following the changes, the store consistently found upwards of 98% of the items requested, while nearby stores tended to be in the high 80% to low 90% range. That was a big boost and helped to offset the additional expenses of perfecting the inventory.

My second strategy for increasing the conversion rate was to improve the quality and quantity of customer service when the store was busiest. To use Underhill's terminology, the objective was to maximize the interception rate, which is the percentage of customers who have some contact with an employee. "The more shopper-employee contacts that take place, the greater the average sale," says Underhill. "Talking with an employee has a way of drawing a customer closer."

While this is also an obvious point, it is similarly difficult to implement. People don't work at bookstores because they love customers. They work at bookstores because they love books. And while there are certainly exceptions, most people who love books and thus read a lot are, almost by definition, introverts. It accordingly came to pass that I turned over upwards of three-quarters of the staff, replacing them with salespeople as opposed to readers.

Watching it all come together
It was at this point, roughly at the beginning of the fourth quarter of 2009, that everything came together. The inventory was accurate, organized, and seamlessly flowing into the back door and out the front. The merchandising was without peer in terms of aesthetics and profitability. And the staff, most of whom had been hired over the previous six months, was consistently and proactively engaging the majority of customers who walked in the front door.

On top of this, because our year-to-date sales were higher than the prior year, and also because we were operating so efficiently, the store had accumulated a surplus of approximately 2,000 unused payroll hours going into the fourth quarter. I can't emphasize enough how important this was. Those additional hours meant that the store's sales staff would be roughly twice the size of our competitors during the most important month of the year, between Thanksgiving and Christmas. And that meant that we could not only sell more product, but that we could also do it while minimizing the wait time at the register, which is the single most important factor in customer satisfaction.

It's hard to describe the immense sense of accomplishment one gets from seeing something like this unfold. Indeed, it is no exaggeration to say that the store was decimating any semblance of competition. Borders was imploding, and companywide same-store sales at Barnes & Noble ended the fiscal year down by 5% for the second time in a row. Additionally, the store's employees, most of whom I had recruited and hired, were genuinely proud of the collective achievement. It isn't every day that one can say one grew a business -- and particularly a retail business -- at the trough of the worst economic downturn since the Great Depression.

The one disappointment was that the store manager, who had become a close friend of mine, could not share in the exultation. Halfway through the final quarter of the year, he was forced to take a medical leave of absence after nearly dying from a long-festering viral infection. That development left me alone at the helm in both theory and in fact. Suffice it to say that it was a bittersweet ending to an incredible two-year run.

The article My Exploits at Barnes & Noble During the Financial Crisis originally appeared on Fool.com.

John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of Barnes & Noble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.