Borders: for whom the bell tolls (dot.com)

In the course of the next day or two, Borders Group, Inc. is likely to file for Chapter 11 protection.   At best, this will mean the closure of hundreds of stores and the loss of thousands of jobs.   At worst, the group will be unable to finance its activities as a smaller entity, and the business will close – as happened to Best Buy’s long-time competitor Circuit City, a few years back.

One of the missteps most frequently (and justifiably) cited as a contributor to Borders’ problems was its failure to develop an online commercial platform, instead ceding its online business to Amazon.

This decision was made after a late 90s attempt to enter the online arena through http://www.borders.com was aborted, in around 2000.   Management concluded that the online business’s losses couldn’t be sustained – an expensive and under-utilised distribution facility, and a massive commitment to stockholding, which weren’t driving immediate big sales.

In the UK, we at Borders were “encouraged” to promote borders.com, despite (a) most of the books it sold being in breach of UK copyright, and (b) the associated shipping costs for any orders placed from UK being prohibitive, and (c) the merchandising banners focusing on a “red button” logo which looked like a vast Red Nose Day promotion.   At that time, we never developed a UK platform, but subsequently endorsing the move to Amazon fulfilment always stuck in one’s throat.

This sorry saga has caused me to ponder the difficulties that bricks and mortar stores have had in translating their offer to an online platform.   It was very difficult; very expensive; and there was no guarantee of success.  Most importantly, it often simply wasn’t aligned with your core disciplines.

For a company whose DNA is built on the development and operation of physical retail, creating an online consumer stream is like asking an Olympic marathon runner to succeed at Finnboat sailing at the weekends.   From a 2011 perspective, it is a simple necessity, but very difficult to do well……in 2000, it looked like a dangerous and expensive distraction.  Withdrawal and the Amazon deal were undoubtedly a massive misstep – but could the alternative (keep on pumping money in, to maintain a distant #3 position in the market) have worked any better?

As a start-up business, Amazon was capitalised by investors who wanted every last cent invested in creating a world-class online platform. They were prepared to wait years for the business to deliver real profitability, making an on-paper return on their investment from increases in stock price that consistently reflected future earnings aspirations.  Established retailers have no such latitude with the investment community, particularly in 2000, in the wake of the dot-com crash.

Amazon’s genius lay in selecting the right ” root” merchandise – books and entertainment. Because these copyright products are identical whether bought from Asda or Hatchard’s (US readers: Wal-Mart or Rizzoli), it is extremely difficult for the online retailer to add unique value to the transaction – value for the consumer comes from low price, excellent availability, and swift fulfilment.

Bluntly, it is difficult for medium-sized companies to execute two completely different disciplines to a world-class standard.   As a result, Amazon is the dominant online retailer of entertainment products, and HMV Group the UK’s dominant specialist high street retailer of those categories.

If Amazon tried to run bricks and mortar stores, the result would be laughable – they don’t have those skills, they know it, and they’ve never been tempted by the siren voices.   Unfortunately for HMV – and all those who came before them – customer preference in this sector has migrated irrevocably online, massively encouraged by downloadable digital content and new devices. (You try downloading a pair of trousers or a packet of cornflakes. Not so easy.)

So, not only are Borders, B&N and HMV competing with Amazon, they’re now competing directly with Apple and Google as well.  And, on top of that,  they’re competing with the pirated/free content – a fake Rolex is one thing, but it still has to be manufactured.   Pirated Dan Brown or Lady Gaga content?  Much, much easier.

Successful retailers have a USP.  For Amazon, the USP is simple – they’re the best at what they do.   Who else fights for this space in the UK?   Play.com; the Book Depository; the Hut; and, as content becomes disintermediated, Apple and Google.

In the US, Barnes & Noble has invested bravely and massively over the years in online bookselling, but they remain a distant second to Amazon.   Online stores from Waterstone’s, HMV, or WH Smith have inevitably felt like a necessary response to the market, rather than a core commitment.

The opportunities for online success are a significantly greater if you own the rights to the products you sell.   Bookshops and record shops don’t do this (though B&N’s Sterling operation is an example of intelligent diversification).

Borders started to lose money in 2005, and since then the story has only travelled in one direction.  This is very sad, on many levels (which we must revisit soon in our What Bookshops Do Well thread).  But, in the meantime – massive misstep, yes; wholly avoidable – I’m not so sure.

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