Can Borders avoid liquidation?
For Ann Arbor, a smaller Borders is better than no Borders at all.
But the 40-year-old bookstore chain — which employs 550 workers at its Ann Arbor headquarters and 106 at three stores in Washtenaw County — will have to convince its creditors and a bankruptcy judge that a smaller Borders can achieve profitability.
Customers walk out of the Borders store on Lohr Road after the company filed for bankruptcy this morning. The Lohr Road store is not expected to close.
Angela Cesere | AnnArbor.com
But it also raises the very realistic chance that the company will not be able to identify a sustainable business model, an outcome that could result in its liquidation.
“I don’t hold much hope out for the successful reorganization of Borders,” said Jim McTevia, a turnaround consultant with Bingham Farms-based McTevia & Associates. "They’re going to try to restructure and reorganize the company, but that is not going to solve the problem they have in dealing with the problems in the industry.”
Borders’ biggest short-term problem is its 640 store leases, which cost about $1 billion a year. Bankruptcy can help fix that. The company will be able to exit leases on 200 unprofitable stores, which are collectively losing about $2 million a week, according to bankruptcy documents. (The list of stores expected to close includes the Arborland Center location on Washtenaw Avenue in Ann Arbor.)
But bankruptcy will not change the fundamentals of the industry. Borders’ revenue fell about $1 billion over the last two years for a reason.
Amazon.com is still the dominant player in book sales, rival Barnes & Noble is still a better managed chain, consumers are still buying cheap mass-market books from Walmart and Target, and Borders is still not succeeding in the emerging electronic books market.
Borders Group coverage
“I do not think there is a market for a lot of physical booksellers in the country anymore,” McTevia said.
Perhaps, though, Borders can chart a path to profitability by reinvigorating customer service, rejuvenating its remaining stores and reconnecting with customers who have become disenchanted with the chain in recent years.
The company was able to convince GE Capital to provide $505 million in debtor-in-possession financing, which will help the firm continue to operate during the bankruptcy process.
University of Michigan bankruptcy law professor John Pottow, who correctly predicted in early January that Borders was headed toward a likely bankruptcy filing, said he is cautiously optimistic that Borders will survive.
“It’s as good as any company filing for bankruptcy can be,” Pottow said. “It’s like saying to you, ‘You’ve got a good cancer.’”
He added: “They’ve signaled to the market strongly that they’ve got a real good plan. They’re going to hack off a limb to save the rest of the body.”
Nonetheless, Borders must boost its online sales and figure out a way to capitalize on e-books as soon as possible.
The company is still haunted by a deal in which it outsourced its online sales to Amazon from 2001 to 2008 - a relationship now viewed as a potentially fatal mistake. By the time Borders launched its own website in 2008, Amazon was the market king.
Cutting into Amazon’s sales will be extremely difficult. In the third quarter of 2010, online sales made up about 2.7 percent of Borders’ revenue. In other words, the impact of Borders’ online business on its sales performance is negligible.
Meanwhile, generating additional income from e-books will be very difficult without a Borders-branded e-reader. With barely any cash reserves, the company had no way to develop its own e-reader while Amazon was launching the Kindle, Barnes & Noble released the Nook and Apple unveiled the iPad.
Without an e-reader, Borders opted to contract with Toronto-based Kobo Inc. to develop its own e-book store in hopes of securing 17 percent of the market by mid-2011. The company now sells e-books that can be read on most mobile devices after users download a free software application.
Bungling the emergence of web commerce was a key factor in ultimately driving Borders into disrepair.
But failing to get e-books right may determine whether a smaller Borders can ever be viable.
Contact AnnArbor.com's Nathan Bomey at (734) 623-2587 or nathanbomey@annarbor.com. You can also follow him on Twitter or subscribe to AnnArbor.com's newsletters.
Comments
BookGirl
Thu, Feb 17, 2011 : 12:15 p.m.
@Nathan, that in-store experience is key for certain. I still enjoy my experience at Borders but understand the need for further improvement. In fact, I am more influenced by experience and convenience than I am by pricing (although pricing does impact my book purchasing decisions - especially when it comes to buying hard cover books). For me, places like Target and Wal-mart don't really compete on pricing (or selection) either. But, they do provide convenience. I am there for other things - and WOW! Books are there too. So, I buy books when I am there. Borders does need to solidify their e-Book strategy. I agree. I also firmly believe that Borders (and other book retailers) need to think about how they will build a customer base of the future - helping to make sure that today's youth become book buyers of the future (another reason, perhaps, why an e-book strategy is key). Brick and Mortar retailers do not necessarily always have less purchasing power than Amazon. But, they do have the expense associated with running a physical store. That limits their ability to offer discounts as deep as Amazon. Another reason to make certain the in-store experience is outstanding.
Macabre Sunset
Thu, Feb 17, 2011 : 5:07 a.m.
They need to answer the following question: Why should I go to your store when I can save money without leaving the comfort of my own home? If their answer actually includes either the word "bear" or the word "build", something's rotten in the state of Borders.
Nathan Bomey
Thu, Feb 17, 2011 : 4:51 a.m.
@BookGirl Absolutely, you're right: Pricing is a challenge that confronts all physical book stores, including Barnes & Noble, as you mention. Yes, Borders has to pay publishers a higher price for books than Amazon, Walmart and Target, because those companies have higher overall sales volume and significant purchasing power. Borders still won't be able to compete with those companies on price after it emerges from bankruptcy -- which means the company must improve the in-store experience, capitalize on e-books, etc.
Kai Petainen
Thu, Feb 17, 2011 : 3:11 a.m.
The downfall of Borders, perhaps, could have been predicted long ago by looking at EPS and insider selling. From January 2004 to April 2006, many insiders sold the stock. In July of 2004, a majority stake in Paperchase Products was bought for an undisclosed amount. Insiders sold before and after that sale. Then in April of 2006, Borders had their first negative EPS results and things went downhill from there. For those insiders that sold their stock, their timing was 'beautiful'. A graph of Borders, overlapped with a graph of insider selling will become a powerful educational tool. As for 'where are they now?' Some insiders are in private businesses, but one of them, Cedric 'Rick' Vanzura, is the EVP and Chief Admin Officer for Panera Bread (PNRA). And yes, on Aug. 5, 2010 I see a trade made for $75.92. Yes, PNRA has insider selling.
Kai Petainen
Thu, Feb 17, 2011 : 3:09 a.m.
The downfall of Borders, perhaps, could have been predicted long ago by looking at EPS and insider selling. Borders should teach the investor two valuable lessons: 1. Never fall in love with a stock, just because you live nearby. 2. Pay attention to insider selling. It's quite common for investors to fall in love with stocks. They develop behavioral biases and those biases can be swayed by their proximity to the company. I love Ann Arbor, but just because I love this area, it does not mean that I have to love a stock in this area. I may love the company, but I don't have to love the stock.
BookGirl
Thu, Feb 17, 2011 : 2:45 a.m.
Nathan perhaps pricing is being underrepresented by the rest of the media because they understand something that you don't....Borders doesn't establish pricing, publishers do. Borders (and other book retailers) determine discounts, but they don't set prices. It is difficult for all brick and mortar book retailers (Borders, B&N, indies, etc.) to compete with the deep discounts offered by online retailers like Amazon. Competitive pricing is not a Borders exclusive challenge.
Booradley
Thu, Feb 17, 2011 : 2:31 a.m.
There are plenty of areas that need a bookstore. I see too many places where Borders and Barnes and Noble are practically within a few miles and competing for the same crowd. I live in an area that has increased 12% in population in the last year but yet have to drive through 40 miles of traffic to get to the closest halfway decent bookstore. I'd also like to see Borders bring back the selections they originally sold. Every book store carries the usual stuff. Borders was unique because they sold hard to find titles. Books have become expensive so reduced prices are helpful.
John B.
Thu, Feb 17, 2011 : 1:31 a.m.
I would have to reluctantly say at this point that 'it doesn't look real good' for the future. I hope they can buy a few years of time with DIP financing and restructuring / debt jettisoning, but even that may be wishful thinking.... If I worked there, I'd be hoarding my cash as much as possible (if possible) and looking for a near-term exit strategy. That's the real tragedy - the pain to all of the rank-and-file employees that will lose jobs soon, and then probably later as well....
Nathan Bomey
Thu, Feb 17, 2011 : 1:30 a.m.
A lot of insightful comments. Another key element that I think is being underrepresented in the media is simple price. Borders can't offer a competitive price on books. And in a tough economy, many people are making decisions solely based on price.
John B.
Thu, Feb 17, 2011 : 1:39 a.m.
I agree. The Walmart-ization of America, as they say. Very sad.
15crown00
Thu, Feb 17, 2011 : 1:27 a.m.
usually when u do stupid things sooner or later u pay for your actions .Borders Did and They Are.
John B.
Thu, Feb 17, 2011 : 1:32 a.m.
How many businesses did you say you've owned? I forget.... Oh yeah, zero.
Sallyxyz
Thu, Feb 17, 2011 : 12:54 a.m.
Some good comments here. I also think that Borders became a destination for the wrong reasons. The Arborland store in recent years had a large group of people who used to dominate the cafe area chairs all day, sometimes all evening, and read magazines, buying little and trashing the area. The downtown store had the same problem. Lots of hangers on, some homeless, who would stake out a comfy chair, stay for many hours, sometimes all day or all evening, and buy little or nothing. This does not encourage the serious shoppers, who might like to sit down for a few minutes and look at a book they are seriously considering to buy. Serious shoppers enjoy a clean, brightly lit store with lively and dynamic selections, a clean place to sit for a brief period of time, and clean restrooms. (The restrooms at Arborland and downtown were not kept clean on a regular basis.) Borders also added too much non-book merchandise, the staff were not friendly or helpful in some instances, the reward card rules kept changing, and as time went on, the inventory and interesting book displays decreased. Downtown also allowed customers to bring in their pet dogs, which I personally did not like, as the dogs would sniff and bother other customers, etc. Not everyone is a "dog person" and I personally don't agree that pets should be allowed inside retail establishments (seeing eye dogs are not pets and should be allowed to accompany sight impaired individuals into stores). I loved Borders when it was thriving, and am sad to see it come to this point in its evolution.
Kai Petainen
Thu, Feb 17, 2011 : 4:27 a.m.
i believe they added a bunch of the non-book stuff due to their majority stake in paperchase. <a href="http://www.paperchase.co.uk/" rel='nofollow'>http://www.paperchase.co.uk/</a> of which, insiders sold more shares after the deal.
psaume23
Thu, Feb 17, 2011 : 12:42 a.m.
Townie1 is right on by saying that Borders needs "an inventory that supports a delightful browsing experience. It doesn't have to be Amazon's inventory. It just has to be enough to compel a customer to return once a month or so. Then provide a helpful staff, a great cup of coffee and a clean bathroom. Maybe an author appearance, a book group or a musical performance." That is a good description of my family's experience with the Borders on Liberty Street, at least until around three years ago. It was a place my kids remember as a place they could go sit in the children's book section, and where later, they saw singers such as Jewel as well as authors, actors, and directors. The service was and still is great, and the coffee shop upstairs is a nice place to sit for a while. The problem for all bookstores is not only the e-book, but more so with the popularity of Amazon, because it is not only easy and convenient to buy a book (and CD and DVD), but it is usually cheaper and the inventory is greater.
Somewhat Concerned
Wed, Feb 16, 2011 : 11:24 p.m.
It might survive 12 months. Its bad locations are not its only problem. It has management that doesn't understand retailing. If you go into a store in any city that isn't Ann Arbor, you are likely to receive lousy service, find filthy restrooms, and if it's a big city, the expensive (and high profit books) are locked in security devices that prevent you from browsing the book to see if it's worth buying. (For some reason, Barnes & Noble stores in the same cities didn't have to do that.) Even before the company stopped paying book suppliers, its selection was weak, and the stores' answer was that you can order anything on line. That's true, and we didn't need Borders and its inferior website to do that. We needed Borders to have books on their shelves for us to browse through and buy on the spot. Bankruptcy won't cure all that ails Borders. It will give it time to rack up another round of debt and then go into liquidation. It is an Ann Arbor company, but it's not a smart Ann Arbor company.
John B.
Thu, Feb 17, 2011 : 1:36 a.m.
FWIW, it hasn't been an "Ann Arbor company" for decades.... That said, I have to reluctantly agree with much of what you say.
tommy_t
Wed, Feb 16, 2011 : 9:48 p.m.
nop
rreidannarbor
Wed, Feb 16, 2011 : 8:44 p.m.
The death watch begins I'm afraid. There was a missed window of opportunity to fully ramp up and diversify into the e-commerce model years ago as a compliment to their brick and mortar infrastructure. Just as Net Flicks sent Blockbuster flying to the mat, so it goes with Borders it appears. It is sad and shows how fast customer's buying behaviors change in a technology rich world. The Groupon concept grew in lightning fast time and Google offered (and Groupon refused) $6 billion for it. "The times, they are a changin".
Macabre Sunset
Wed, Feb 16, 2011 : 8:24 p.m.
I get the feeling Borders has positioned itself to compete with Wal-Mart, and that's a losing proposition in the long run. It can't compete with Amazon, though I worry what will happen with Amazon prices if all the B&Ms go out of business. Shopping needs to be an experience if it can't be an economic decision. Don't just stuff thousands of mass-market books in a tiny space. Tell me why I should be reading a particular book. Think like a clothes retailer and present each of a smaller inventory of books. Most of the books in a bookstore do not deserve even the three inches of shelf space they consume. This is what Amazon lacks - a true guide to the shelves. Partner with Bookmarks magazine and present.
townie1
Wed, Feb 16, 2011 : 8:16 p.m.
What Borders needs to do for the bricks and mortar portion to survive is to provide a compelling bookstore experience. Pure and simple. IMHO, that means carrying an inventory that supports a delightful browsing experience. It doesn't have to be Amazon's inventory. It just has to be enough to compel a customer to return once a month or so. Then provide a helpful staff, a great cup of coffee and a clean bathroom. Maybe an author appearance, a book group or a musical performance. People don't go to bookstores because of an online component or an eBook, and the latter can't support the bricks and mortar infrastructure. I don't think Borders has the relationships with publishers (small and large) anymore, nor the money to restock the stores, nor the loyal customer base, nor the "cool" factor it once had, nor most importantly a managment team that values any of the above sufficiently to make it happen. So, very, very sadly, I don't think Borders can avoid liquidation.