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BIZ BLOG - What's Up With Borders?

Going Down?
Don Salata

The quick answer to this article's title?  Not the stock price.  So is now the time to buy, with a stock price hovering at less than $1 (prior to a an anticipated reverse stock split)?  That question has a short answer, too.  No.

After years of declining sales and profits, job cuts, store-closings, management turnover, and several rounds of refinancing, including a revised agreement with their primary shareholder/lender, the future does not look bright for Borders Group, their store and corporate office employees, and their prospects for survival.

Here's why.  Borders will have difficulty surviving on its own, and will have even more difficulty finding a buyer.  Here's a quick exploration of the reasons for each.

Why Borders Can't Survive:

1 - The economy.  Book sales are down.  Library visitation and patronage is up.  Americans are discovering that it is easy - real easy - to reduce or eliminate money spent on books with a free read of virtually any book they desire at the library.  Even when the economy improves, people with new-found frugality will continue this pleasant habit of visiting their local library.

2 - Facing the music.  Borders once garnered much of its sales from music. But sales of  physical media - CD's, and DVD's - have tanked, and won't recover, and Borders never could compete on price with Walmart and online competition.

3 - Amazon.  Amazon is the 900-pound gorilla in the book business, and Borders is now the 98 pound weakling.  With more and more people adopting online purchase habits, Borders made a huge strategic error by virtually turning over its online business to Amazon (they actually directed their website traffic to Amazon!) a few years ago.  More than any other strategic decision, this move was akin to shopping for a cemetery plot by Borders (since departed, may they rest in peace) executives.  Borders will never effectively compete with Amazon in terms of selection and price, and increasingly, even in its offering of the preferred shopping experience.

Why Borders Can't Find a Buyer

As a short preamble here, and some speculation on my part, Borders is being kept alive by its capital partner, Pershing Square, in its hopes that a buyer for Borders will be found.  This would also be the only prudent logic behind any speculative investment in Borders stock.  I think it won't happen - here's why:

1- Who would buy it (at any price, much less a premium over current stock-price levels)?  A quick analysis eliminates what may seem to be the obvious potential buyers.  Would Amazon buy it, to establish a bricks and mortar presence, as some sort of fulfillment operation for their online sales?  It's perhaps an intriguing possibility, but Amazon would not need a retail operation of Borders current size and scope, or a desire to take on their costly locations and rents, to make that kind of move, and they would have no benefit to retaining the Borders name, which is the "brand premium" investors would expect.  Would Barnes & Noble buy them?  No, for much of the same reasons as above.  They have their own struggles, and purchasing Borders would lead to too much difficult-to-unwind redundancy in their operation.

2 - Who wants to be in their business?  Borders is a bricks and mortar retail establishment.  That means expensive rents, with a need to pass overhead and local store marketing (which Borders doesn't do enough of) costs  on to consumers, a significant price difference that is increasingly unpopular with consumers.  In an attempt to address this, although evidence is largely anecdotal, Borders is decreasing its inventory of titles - not carrying what is thought to be slow-moving inventory - as a necessary means to control costs, which invariably drives more traffic to Amazon or the library.  In short, with a business model that leads to difficulty competing on both selection and price, Borders is in a business no one wants to be in, and there is no way for them, or their hoped-for potential buyer, to manage into an effective business model that retains a large number of physical store locations.

To summarize, it would seem unwise to bet on the long term viability of Borders as an ongoing retail store concern.  It's another example of how the fast-changing landscape of retail business, and to a certain extent, the changing preference for how people read and obtain information, is leading to the demise of plodding, old-school retailers and businesses.  The bottom line for Borders?  They made a strategic bet against the retail power of the internet, and lost.

Don Salata, MBA, is the President of Go-Biz, a marketing strategy firm, and is a frequent contributor to .iTownOnline on a variety of business topics.  Contact Don through your response to this article.

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