How Local Businesses Can Compete with Larger Rivals

HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. Do you ever fantasize about leaving corporate life for a creative pursuit? That’s what Kwame Spearman did. In 2020, he left New York City and his consulting job behind to take over an iconic independent bookstore in his hometown. The store was Tattered Cover Book Store in Denver, Colorado. Spearman saw an opportunity to reinvent  the local business to build a community space after the pandemic. But to do so, Tattered Cover had to meet the challenges facing independent booksellers amid technological change and  . Today, we bring you a conversation about strategies that local businesses can use to compete with online retailers, big box stores, and other rapid innovations – with Harvard Business School associate professor Ryan Raffaelli and Spearman himself.  In this episode, you’ll learn how Spearman sets wages for his employees in relation to the store’s top-line revenue and its operating expenses. You’ll also learn how he treats community engagement – not as an afterthought, but as a key part of his strategy for growth. This episode originally aired on Cold Call in September 2022. Here it is.

BRIAN KENNY: When I was young, I mean really young. I had the good fortune to spend a week each summer on the island of Nantucket, about 30 miles off the coast of Cape Cod. And every year on the day of our arrival, my mom would take me to Mitchell’s Book Corner to pick out a book from my required summer reading list. It was a high point of my vacation, and I can vividly remember the musty smell, the creaky floors and the narrow aisles with books piled from floor to ceiling. Years later, I was able to take my own children to Mitchell’s bookstore, to carry on their tradition. When Amazon became a dominant player in book sales in the late 90s, the demise of independent book sellers was all but assured, but all the financial models on earth can’t account for the gratifying, some might even say spiritual experience of meandering through your local bookstore. Today on Cold Call we’ve invited Professor Ryan Raffaeli, and case protagonist, Kwame Spearman to discuss the case entitled, “Kwame Spearman at Tattered Cover: Reinventing Brick-and-Mortar Retail.” I’m your host, Brian Kenny, and you’re listening to Cold Call on the HBR Presents network. Ryan Raffaeli’s work examines how innovations transform industries, organizational reinvention, and leading change. Kwame Spearman has a background in management, operations, and strategy, focusing on brick-and-mortar businesses. He is co-owner and CEO of Tattered Cover Bookstore and the protagonist in today’s case. Thank you both for joining me.

RYAN RAFFAELI: It’s great to be here.

KWAME SPEARMAN: Thank you for having me.

BRIAN KENNY: Kwame, we’ve got you piped in here from Denver, Colorado area. So, we appreciate you making the effort to be with… We love having the protagonist in the conversation. It just really adds so much more depth and color to the discussion when we can hear right from you what the experience is that you’re living, in relation to the case. So, why don’t we just get started? Ryan, I’m going to start with you and ask you to tell us what the central issue is in the case, and what your cold call is to start the discussion in the classroom?

RYAN RAFFAELI: So, this is a case about what does it mean for an organization to reinvent itself? And more importantly, what does it mean for a leader tasked with that mandate to reinvent him or herself? So when students walk in, the first question I ask them: would you have taken this job at Tattered Cover given everything that we think we know about as you said, the demise of the independent bookstore. And so part of the cold call forces them to think about these two central elements. The first one is, when you’re in this moment of reinvention, just how difficult it is, because reinvention means that you’ve got to think about, well, what do we keep? What do we let go? How do we manage these tensions from very different dimensions of what our customers expect of us? Maybe what we expect of ourselves, the expectations that are on us, people are watching you. And then the other component of this, when our students have to grapple with this case, they have to ask, would I have taken this job at this point in my career? Because Kwame, as you’ll see, was at a very unique point in his career on this trajectory. And he takes a big risk when deciding to take this job.

BRIAN KENNY: Ryan, you’ve been on the show before. I love your research because it’s so interesting and people can relate to it so much. We’ve talked about Faber-Castell pencils before with you. And this to me feels like it’s in a similar vein, but I wanted to know how you learned about the Tattered Cover story and why you decided to write it. How does it relate to the kinds of things you think about as a scholar?

RYAN RAFFAELI: Well, this is a part of a much larger research program that I’ve been looking at now for the last decade or so about how organizations and industries reinvent themselves in the face of technological change or shifts to a business model often through a new competitor. And what originally attracted me to trying to understand this puzzle of the independent bookstore industry is that, for years they saw a decline and yet around 2010, they started to see an uptick in their numbers. And so with a doctoral student, Ryan Noe, over the last year or so, we’ve been trying to understand and put some theoretical teeth around this to say, what is it about independent bookstores that’s allowed them not only to survive, but thrive.

BRIAN KENNY: Kwame let me turn to you for a minute. You heard my intro about Mitchell’s Book Corner. It’s a true story. I loved that place, and anytime I get a chance to go back to it, I do, tell us a little bit about Tattered Cover and what it means to you?

KWAME SPEARMAN: Tattered Cover is your quintessential independent bookstore. And, what I mean by that is imagine walking into a building and that building is filled with books. That building smells like books, and you’re greeted by a staff who can so easily share their love of books. Tattered Cover’s been around for about 51 years and what’s been so amazing is it’s kept its original purpose, which is we have a duty for our customers to help them find the right book.

BRIAN KENNY: Yeah. And your background, if we look at it, just take it at face value didn’t seem like the background that one would go into this line of work with. Tell us a little bit about your background and why you decided to make this move?

KWAME SPEARMAN: Tattered Cover has principally always been in Denver, Colorado. And I’m a proud Denver, Colorado native. But I went to the east coast for college at Columbia. I got very involved in student council and politics generally, that took me to law school, where I then came back to Colorado to work on Congressman to soon be Senator Udall’s campaign in 2008. But with the world changing and the 2009 recession upon me, I found myself at Harvard Business School. After that I worked at Bain for about four and a half years, and then had two stints, one at B. Good. And the most recently before Tattered Cover, I worked for a company called Knotel, which is basically was one 10th, the size of WeWork. But most importantly, I think I was at a point in my life in which I was searching for purpose. And so, what’s fascinating about my background is when the Tattered Cover situation came up, I was starting to experience, I’ve done all of these amazing things, but what’s the connecting thread? What brings this all together? And Tattered Cover’s a huge opportunity for them.

BRIAN KENNY: Yeah. And I think that whole sense of purpose is something we’re hearing more and more about people are, maybe it’s driven by the pandemic. I don’t know, Ryan, you probably have a perspective on this, but I just feel like it’s in the air a lot more than it used to be.

RYAN RAFFAELI: I think people are looking for ways to connect and they’re looking through it not only through how they’re experiencing themselves at home, but also in this new way of working.

BRIAN KENNY: Yeah. Tell us for people who aren’t familiar with the landscape of book selling and book retailing, tell us what that landscape looks like and where a place like the Tattered Cover fits in.

RYAN RAFFAELI: So, this is where the story I think gets so fascinating. I call this, if you go back in time, you got to go back to the 80s because I call this the catalog of competitors. One thing you learn if you’ve studied or understand independent book selling is this is one resilient group. See, in the 80s, what you have is you have the emergence of probably remember the B. Dalton and the Walden Books. This was the rise of the mall chain, right? And at this point, one of these was opening almost every week across the United States. So, there you are, if you’re an independent book seller, you see this threat coming at you, then the 90s you have yet another challenge, which is the rise of the big box. So, you have Barnes & Noble, Borders now coming in and this expansion is now taking over. So, now you’re being hit on multiple dimensions. And if this isn’t enough in 1995, you have the introduction of this thing called amazon.com, which claims to be the bookstore to the world. And by 2007, you have yet another shock to this entire ecosystem, which is the rise of the e-reader. So, you had the Kindle, the Nook, all these coming out, and the corollary to this is at the same time, if you think about what happened in the music industry, right? You had streaming music, or the iPod coming out. And so, at this point, many people thought that not only was the independent book seller about to die, but also the printed book itself. And by 2009, the organization that tracks this, the American Booksellers Association, they track all the independent book sellers. They tell us that’s the low point in terms of the number of book sellers in the United States. And yet something happens in 2010, where they start breaking the odds. And this is where I got really fascinated. And there starts to be this uptick in their numbers. And so, I’ve been tracking this for the decade since.

BRIAN KENNY: So, what do you think some of the indicators are that have allowed them to not just turn the corner, but to really now start to come back and thrive in a way that they maybe didn’t before?

RYAN RAFFAELI: I think there are three core ingredients to this resurgence. So, the first thing is that they were eager and able to understand this notion and importance of community. So, in many local geographies, it was the independent book seller that really helped spur the shop local movement, the Small Business Saturday, all these things that we now know today. And they were at the forefront of not only helping consumers understand the importance of shopping local in terms of money invested back into the community, but also bringing other independent retailers along on that journey. So, there’s this notion of helping the consumer understand that you do have a choice when you’re buying something. There’s also a set of practices. So, just to give you some context, I’ve been now over the last decade in 28 states, I’ve interviewed over 250 book sellers and coded every article in the New York Times, Wall Street Journal, USA Today, to try to understand what’s going on here. And Tattered Cover, I think is a classic example of the types of practices that have been put in place. So, the other thing that they’re doing is they’re curating a set of titles that are not just the things that an algorithm can spit out for you. Actually, they’re very tailored to understanding the unique taste functions of the reader in each local geography. And in addition to that, what they’re doing is they’re convening a lot of people in these actual physical spaces. So, some of these bookstores that I visited and interviewed their owners, they’re hosting five, 600 events a year to bring people in. And so when you think about this notion of community, curation, convening, I think of these three things as being core, to being able to differentiate themselves from the value proposition of the one click on Amazon.

BRIAN KENNY: Yeah. And what I find really fascinating about that is that we hear so much these days about AI and machine learning and retailers are trying to gather as much data as they can so that they can serve you up, whatever it is they think you’re going to need even before you need it, but they’ve still failed to capture the essence of what something like Tattered Cover has done, which feels to me, Kwame I’m going to just say it feels to me like this is a place with a soul, and people relate to it as they would relate to a friend, they feel a loyalty to it in some respects. Is that fair to say?

KWAME SPEARMAN: I think it’s 100% fair to say. Tattered Cover is an experience. And I think one of the things that has allowed independent bookstores to not only survive, but thrive is that experiential nature of going in and having a curated list in front of you, interacting with book sellers who absolutely love reading and just experiencing that in an environment with others who feel the same way, that’s a unique thing. And, I think in particular, coming out of the pandemic in which we felt so isolated and so disconnected, independent bookstores have that opportunity to once again claim that crown and to be a place in which people can have open dialogues and discussions together.

BRIAN KENNY: Yeah. And it also has a rich history. You talked about the fact that it’s been around since the 1950s. Can you give us a little bit of a sense of what some of that history is and how it’s cemented itself within the community?

KWAME SPEARMAN: Sure. Tattered Cover was the original independent bookstore. And let me explain what I mean by that. Before Tattered Cover came to prominence, the notion was when you walked in a bookstore, if you had touched it, you bought it. And Tattered Cover turned that on its head, Joyce Meskis who wasn’t the founder, but ran the business for 40 years and really made Tattered Cover what it is today. She fundamentally believed that Tattered Cover should be a place in which people could lounge, people could browse, and people could feel comfortable. So, she’d encourage customers take two, three, four books off the shelf, sit down, start reading them. If you like two, that’s great. Put the other two back and purchase the two that you love. If you don’t like any, and you just wanted to read for an afternoon, that’s okay as well. And, that changed the game. And, it really started building the foundation of what we’re talking about from this experience of wanting to go and be a part of an independent bookstore. In addition, Joyce also became an advocate for First Amendment protections. Tattered Cover was sued by the state of Colorado for refusing to give buying history of a book seller who the government thought was a threat to the United States. And Joyce took that all the way to the Colorado State Supreme court and she won that.

BRIAN KENNY: Wow!

KWAME SPEARMAN: So, the combination of really being the birth of what we think about from an experiential independent bookstore, and coupled with having such a strong passion for First Amendment rights and what that meant, particularly in the 80s and 90s and early 2000s, really brought Tattered Cover to where it’s one of the most recognizable, independent bookstores in the country.

BRIAN KENNY: So, I can definitely see how this relates back to your notion of wanting to bring purpose back into your work, but you must have seen a business model here that you thought could also work and could grow and scale. Tell us a little bit about the business model and why you saw this as a good business opportunity?

KWAME SPEARMAN: I think there’s a generational shift that’s occurring. One of the books I’m reading right now is, The Man Who Broke Capitalism, which is about Jack Welch. And what’s fascinating about that book is if you go prior to the 80s, there was this notion that the best CEOs with the CEOs who actually paid the most taxes or the CEOs who provided the best lifestyle for their employees. I think that’s happening right now. Tattered Cover is principally a for-profit business, but it’s a for-profit business that we’re doing an incredibly good job if we’re operating off two to five percent margins. And so, the biggest element of this for me before going into the technicals is a good business opportunity, reflects many things. And fundamentally, this was a business that we could save, that was com that was providing such a community good, that that made the opportunity too good to pass. As far as making the numbers work, and this is why I’m so proud to have gone to HBS, we saw a very clear strategy. We knew that coming out of the pandemic community was going to be paramount and people were looking for experiences, right? Just this notion of me going to Target and buying socks, those days are over, get those delivered, why would you waste your time doing that? But the notion of me going into a Target to find a curated good, that I can only get by going in person, or by going to Target to experience something, a group setting a conversation, independent bookstores are the best vehicle for that. And by using a competitive advantage that we have to get more foot traffic, to get more awareness, we can make the model work. It’s foundational that people want to continue going out and participating in the world. And retailers that can figure that out, I think are going to be just fine. We’re just lucky enough to have it in our DNA. And so, it’s really just getting back and making the numbers work and welcoming customers back in.

BRIAN KENNY: Yeah. Ryan, I think this relates to a lot of the other things that you’ve studied too, but I’m wondering, they must be doing something different than they were doing prior to the Amazon disruption. I’m hearing you talk about convening and some of the things that they’re doing to build community, but those things don’t necessarily generate revenue. When you’re reinventing a business like this, how do you have to think differently to change the model in a way that allows you to sustain and grow?

RYAN RAFFAELI: One of the things that I’ve looked at across multiple industries that have been able to reinvent, and in some cases after seeing a period of decline reemerge, is there’s a process of redefinition that has to happen. And so, for the consumer, it’s not enough that the product itself has utility because then that’s a pure transaction. And I can buy the book in this case on Amazon. But this process of reinvention is one that often is attached to the idea of helping the consumers attach different values to the experience or the product that extend beyond just the use value of the product itself. So, for example, there’s a reason that people still buy mechanical watches today, even though they’re less accurate than battery powered watches, is because it’s attached to the art of watch-making. There’s a reason that people are listening to vinyl today in a way that 20 years ago, everybody thought this was a dead technology. It’s often attached to this notion of what we call identity-marking, this idea that when we use the product or experience the service, it’s also helping us reinforce how we view who we are, but also telling others about who we are. And in this case with bookstores, I think this notion of shopping local is core to their ingredients of reinvention because this belief that you can actually reinvest and feel like through your shopping options, that choice that you’re making is reinvesting back in the community. That’s been very powerful for them and it’s allowed them, one of the things people don’t realize about the bookstore industry is that publishers set the price and they put the price on that book. So, if you’re somebody like Kwame, you can’t raise that price. It’s there, you might be able to lower it, which we’ve seen Amazon and others do, but in that case, they’ll, they’ll be a loss leader in the category to keep you on the platform. And so that creates a different challenge for somebody like Kwame. In fact, it’s even a higher bar because if you’re walking into that store, you know you’re paying for the most part full price for that book. So that means that experience has to be even better than the price that you’re willing to pay for the book relative to the one-click on Amazon.

KWAME SPEARMAN: Just to add to everything Ryan is saying, it forces a conversation of – and this is something, actually, I learned from Ryan – is, “who are you, and what do you do?” And the, “what you do,” I think has been clear for as long as independent book sellers have been in existence, we sell books, but the, “who are you?” is the conversation that we’re having right now. And can we be a vehicle that comes in and fills this massive void of isolation, of discontent, of polarization that we’re seeing across all of our communities right now. And, my hunch is that independent bookstores will once again reemerge from the pandemic with that focus in mind, and that will provide the experience or utility that we’ve been talking about.

BRIAN KENNY: Yeah. Tell us about some of the challenges that you’ve encountered along the way. What’s happened that you weren’t expecting?

KWAME SPEARMAN: We’re dealing with the situation where if you look at cities, the cost of living is exorbitant. Now we’re dealing with massive increases in inflation, and we are an incredibly low margin business. And so how do you create a dynamic in which one, you’re able to keep compensation to where your employees feel like they can have a livable wage and two, how are you handling some of the broader sociological conversations that we’re having? Right. So, what’s interesting is for Tattered Cover, who’s always defended the right to freedom of speech. Well, what if that speech is a direct attack on someone’s identity? Is that book a book that we actually want to have on our shelves in 2022? How do we think about that? How do we respond to our customers? How do we respond to our employees? And so those are tensions that I don’t want to say that they were unforeseen, but they are incredibly critical and hard to deal with quite frankly.

BRIAN KENNY: Yeah. And I think we’re hearing about business leaders from all sectors, large, small organizations, doesn’t matter. Everybody’s trying to figure out how to react and respond and lead in this kind of an environment. It’s difficult all the way around. So, I think that’s a great point. I’ve got a question that I actually think applies to both of you, and I’m going to start with Kwame, I’d love to hear about what your plans are for growth for the business. I know you’ve opened some additional sites and just what you think the future looks like, and the flip side to that Ryan for you is, how big can they grow before they lose their indie status? When do they become, Barnes & Noble? And is that a desirable place to go? So, Kwame maybe you can start.

KWAME SPEARMAN: It’s very clever you’re making me answer this first. And the Ryan’s going to come in and say if I’m right or wrong. I think what we’re trying to capture right now is a level of hyper-localism. If you look at how we’re thinking about globalization from the most macro point of view, and really starting to look inward and say, what can we do in the communities that are around us? Tattered Cover is trying to ride that wave. So, historically we’ve had incredibly big box stores that are 15, 20, 25,000 square feet. And they served as a destination. And where we’re trying to evolve is really to be in town centers. So, we can go to the center of communities and we can have stores that better reflect those communities. And so those stores are 6,000, 7,000, 8,000 square feet. They’ve got a wide selection of books, but they’ve also got things that cater to the community, things like food and beverage, right? So, the ability to sit down with the glass of wine and have a discussion amongst your peers, amongst authors, amongst members in the community. And we think that there’s a lot of room for growth there. If you look at what’s happening with neighborhoods and the ability of people to remotely work, this notion of going to one central area or a downtown, that’s being blown up right now. And so that gives us an opportunity to really find ourselves in these new hyper-neighborhoods that are emerging across the country right now.

BRIAN KENNY: I mean, that sounds great, Ryan, is does that allow them to keep their cool indie status?

RYAN RAFFAELI: Well, I think you have to put this in perspective. So, if you go back to the low in 2019, there were roughly about 1,650 bookstores. Right before the pandemic, there were just over 2,500. Last year, which was surprising to me, 200 new bookstores opened, independent bookstores. Now the question becomes, well, how sustainable is this in terms of how big to grow? I think that there are two key things that you have to keep in mind if you’re an independent bookstore around, where do you focus. And the first one is around core audiences. And so I think this notion of not losing touch of your core reader, there’s something about the core reader that comes to an independent bookstore, that’s quite powerful for the literary community. And that is that these are often people who are setting the trends of reading habits of many others, because they’re reading far more than others, and they’re often influencing others to then buy specific books. And this is important because the indie has deep relationships with these individuals and the challenge for an independent bookstore because of the margins that Kwame’s talking about, is there is a trend to take on what they call sidelines. So other types of products that are higher margin gift items, other things, and while that is something that certainly helps with the margins, there’s also this risk of, if you take on too much of that, do you lose this authenticity with that core reading community? And so, is there’s this balance that any bookstore owner is trying to manage on top of this living wage, right? They’re trying to pay these book sellers who are doing quite extraordinary work, a fair wage. The other thing is there’s a second audience here that I think is core to their ongoing survival, and that is their relationship with the author community. So, what a lot of people don’t realize is you talk to these authors and they see giving a talk at a bookstore as like the greatest honor for them. I mean, that is coming home. Because for many of them, it was the independent bookstore that helped them become who they were, and this relationship between indies, and because these book sellers are readers themselves, they are often identifying the up and coming next authors and recommending them to this voracious reader group. So, there’s this interesting relationship between these book sellers who are deeply committed to their craft. Readers, who know they can go there and find these gems. And these authors who are then seeing that this is the place where that can happen.

BRIAN KENNY: Yeah. This has been a fabulous conversation. The case is so interesting and it raises so many important issues. I can’t let you go without asking you both one more question. So, Kwame, I’ll start with you. Very simply, I’m wondering what are you thinking about when you are thinking about the future?

KWAME SPEARMAN: I’m thinking about how we can continue to exist in a market that is unforgiving to retailers. We really have to do our best to convince members of our community to continue supporting local. Something that I talk about all the time is, local businesses are like the bees of any economy. You really don’t see how devastating it is until they aren’t around anymore. And local businesses are also a community choice. You choose to have them by shopping there. At the same time that there are some realities that are creeping in. I want everyone to read. I want people have the opportunity to purchase books. And, if we’re entering into a recession that once again, dwindles down, parts of the market who could be shopping at my bookstore. And so, it’s really tying together this notion that we’ve got a rising cost base as Ryan noted, in many ways, we’ve got a ceiling on how we think about top line revenue. How do you make those mechanics work? And, how do you do it, maintaining your authenticity? My belief is we’ve just got to become one on one with the community that’s around us, to where they almost feel as invested in our business as we are, but that tension can keep you up for many hours of the night.

BRIAN KENNY: Oh, no doubt. No doubt. And Ryan, I’ll let you have the last word here. If there’s one thing you want our listeners to remember about the Tattered Cover case, what is it?

RYAN RAFFAELI: This is a story of hope. I think we need more of these stories. If you look at independent bookstores, they in many ways are a reflection of our culture. And I think they remind us of who we are. I mean, I go back to those original documents that Alexis de Tocqueville wrote when he first came to the US, in the 1800s and wrote about American culture. What he found was so interesting was he said, there’s this fierce individualism amongst this country, these people in this country, yet at the same time, they are deeply tied to community institutions and on face value, that seems almost like a paradox or contradictory, but I actually think it’s that tension that we need to remember and hold onto today.

BRIAN KENNY: Ryan, Kwame, thank you both for joining me on Cold Call.

KWAME SPEARMAN: Thank you very much.

RYAN RAFFAELI: It’s great to be here.

HANNAH BATES: You just heard Harvard Business School associate professor Ryan Raffaelli and Kwame Spearman, co-owner of the Tattered Cover bookstore in Denver Colorado in conversation with Brian Kenny on Cold Call.  We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of the Harvard Business Review – if you want more podcasts, articles, case studies, books, and videos like this, find it all at HBR.org. This episode was produced by Anne Saini and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.