Keeping up with the times

With massive superstores that housed more titles of Books, DVDs, and Videos than any of its competitors, Borders Group was once the second largest bookstore in America and could be found in major cities all over the world. However, despite its early strength and success, a series of unfortunate business decisions and a general failure to keep up with the times sent Borders spiraling down a path to financial ruin.

This article will summarise parts of Borders Group’s Chapter 11 Bankruptcy Case Study from The University of Tennessee, Knoxville.

The start of something big

Borders Bookstores can be traced back to 1971 when brothers Thomas and Louis Borders opened their first bookstore in Ann Arbor, Michigan. They capitalized on this advantageous location by strategically stocking a large variety of titles according to their popularity amongst the colleges in the area. By 1974, from the immediate success of their first store, the brothers relocated to an innovative 10,000 square foot two story building.  At the time, a bookstore of this size was unheard of.

Needing to manage their large inventory of books, the brothers developed an innovative inventory management system that could monitor sales trends and replenish titles as they were sold. The system was based on a card stock system, however, the company eventually turned the system into a sophisticated computer software program that also allowed them to track customers’ purchasing trends. This type of system was ahead of its time and contributed greatly to Borders’s success since it streamlined shelving costs and allowed Borders to offer a wider variety of titles at much lower costs than its rivals. Borders eventually formed the company “Book Inventory Systems” to generate revenue by selling the system to other independent book vendors.

In 1985 Borders opened its first large “superstore” model bookstore and subsequently opened five more stores. Unlike any other bookstores of the time, these featured coffee bars and lounge areas to provide customers with unique in-store experiences that set Borders apart from its competitors. Three years later in 1988 Borders brought in sales of $32.2 million and had a net income of $1.9 million, and by 1992 Borders had quadrupled in size and was valued at approximately $190 million.

Takeovers

Discount department store Kmart saw Borders as its opportunity and acquired the bookstore chain in 1992 for approximately $125 million. In its first year as a wholly owned subsidiary of Kmart, Borders’s sales were $224.8 million – a 15.8% increase from 1992. Kmart then paired Borders with Walden Books (“Walden”), Kmart’s other wholly owned subsidiary bookstore chain, and named the siblings “Borders-Walden Group.”

Two years after Kmart acquired Borders, Kmart spun off the Borders-Walden Group to form Borders Group, Inc. in August 1994. At the time, the overall sales for the Borders-Walden Group reached approximately $1.5 billion. However, the Borders-Walden merger was criticized as being unsuccessful for distracting Borders from keeping pace with its competitors, such as Barnes & Noble, which at the time was experiencing significant growth. The two siblings never successfully synergized mainly because Walden’s business model differed significantly from Borders. Walden bookstores were small mall-based stores whereas Borders stores were large superstores.

In May 1995, Borders made its initial public offering of stock to finance the spin-off from Kmart.

When the IPO was completed on June 1, 1995, Kmart’s ownership interest in Borders had been reduced to 13%. Borders thereafter eliminated Kmart’s ownership interest on August 15, 1995, when it purchased and retired the remaining shares that Kmart owned.

At the time of its initial public offering in 1995, Borders was the second largest operator of book superstores as well as the largest operator of mall-based bookstores in America. In that year, Borders unleashed another aggressive expansion strategy. The bookstores’ large sizes were a competitive advantage for Borders in the nineties when hard copy books were still in demand. Competitors could not afford to stock even “a fraction” of the thousands of titles Borders Group’s superstores housed.

In the mid-nineties, while all of its competitors and its industry were going digital, Borders turned to selling more pre-recorded Music and DVDs. In fact, Borders actually acquired several CD Superstores, including Planet Music, to increase its presence in this market. They also significantly remodeled their bookstores to feature pre-recorded Music and DVDs.

As of 1996, Borders operated 976 Walden stores. The Walden stores were not profitable for the company, which Borders blamed on “sluggish” mall-traffic. Following a restructuring plan implemented in 1993, Borders began closing underperforming Walden stores in 1995, and by January of 1997, it had closed a total of 223 Walden stores. The Walden stores did not initially utilize the inventory management software, and although Borders attempted to integrate the system into those stores, complete integration never occurred.

The beginning of the end

In the late nineties, Borders decided to enter the overseas book market.  In 1997, it acquired Books Etc, which was a London-based book retailer that had 23 stores that each averaged between 2,000 to 5,000 square feet, and they also opened a Borders store in Singapore.  The next year, Borders acquired a 19.9% strategic investment in Paperchase Products Limited, a stationary and art materials retailer based in the UK. By July of 2004, Borders had increased its ownership interest in Paperchase to 97%. Border’s international presence peaked in 1997 when it operated 41 stores in the UK, 20 in Australia, three in Puerto Rico, two in New Zealand, one in Singapore, and one in Ireland.

In May 1998, Borders, through its subsidiary, Borders Online, Inc, launched its e-commerce site Borders.com. However, Borders struggled significantly with Borders.com and made the fatal decision to outsource its e-commerce operations to Amazon.com, Inc. (Amazon.com) in August of 2001. Borders seriously underestimated the growth potential of online book shopping and only received referral fees from Amazon.

Borders recklessly continued to ignore the transformation of the book industry. They kept expanding their physical store footprint into the new millennium. However, these aggressive expansion efforts came to a screeching halt in 2005 when Borders, after suffering significant losses, finally acknowledged that the retail book industry was no longer viable and that consumers generally preferred electronic formats of movies, books, and music over hard copies. People would go to Borders to find a book, and then they would go to Amazon to buy it. As a result of its failure to adapt to these market changes, 2006 was the last year that Borders made a profit.

In 2007, realizing that it had fatally underestimated the Internet’s impact on the industry, Borders frantically sought to fix its previous mistakes by turning its focus to its recently-launched Borders Rewards Loyalty Program and planned re-launch of Borders.com. However, by the time Borders.com was re-launched, approximately a decade had passed since e-commerce transformed the industry. Because it had outsourced its website to Amazon.com for approximately seven years, Borders lacked the requisite expertise to operate a successful website. Borders did, however, find success in its customer loyalty programs in which 12 million new members joined from 2009 to 2011. Borders Rewards Plus, which required customers to pay for membership to receive additional discounts, had approximately 42.4 million enrollees as of 2011. Unfortunately, recognizing that things were still not improving, Borders put itself up for sale in 2008, but there were no interested buyers. In 2009 and 2010 Borders closed a total of 264 stores, essentially eliminated their international presence.

Borders Group’s troubles were also evident by its disturbingly high turnover of CEOs – the company had five different CEOs in five years. Executives were recruited from the supermarket and department store industries, and therefore lacked experience in book retailing. Mike Edwards, who joined the in 2009 and served as CEO of Borders from 2010 to 2011, suggested that Borders Group’s most critical mistakes were “opening too many stores and making them too big, expanding internationally, buying back stock and failing to get the Internet right.”

Borders made a last ditch effort catch up with the times by launching an eBook store. However, they never developed their own eBook device like its competitors. They sold e-books for devices like the Kobo and Cruz which not many people had ever heard of. By 2010, Borders Group’s market share in the book retail industry was 8.1% while its competitors Amazon.com and Barnes & Noble held 22.5% and 17.3%, respectively. Borders Group’s stock prices plummeted. The stock, that hit its all-time high of $44.88 in 1998, had become a penny stock and was delisted by the NYSE in 2011 for its failure to rise above an average monthly price of $1.00 in six months. By the end of 2010, Borders operated a total of 642 stores, a drastic reduction from the 1,329 stores it operated in 2005.

On February 16, 2011, Borders applied for Chapter 11 bankruptcy protection and began liquidating 226 of its stores in the United States. Despite a purchase offer from the private-equity firm Najafi Companies, Borders was not able to find a buyer acceptable to its creditors before its July 17 bidding deadline, and therefore began liquidating its remaining retail outlets on July 22, with the last remaining stores closing their doors on Sunday, September 18, 2011. The Chapter 11 bankruptcy case (reorganization of their debt) was ultimately converted to Chapter 7 (liquidation of their debt). Rival bookseller Barnes & Noble acquired Borders’ trademarks and customer list, and the once most innovative bookstore in the world no longer existed.

You can read the full case study here.

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