Borders' dilemma
By every rational standard, US book retailer Borders Group has done very well. It started as a local bookstore in Ann Arbor in 1971 and has aggressively expanded to become the #2 bookstore chain the US, after Barnes & Noble. It has retail locations in all 50 states, and over 1,200 stores, including over 500 superstores. The company also has over 600 Waldenbooks stores (bought in 1995), as well as Borders Express stores, located in malls, as well as a small UK chain called Books etc.
In the US, Barnes & Noble and Borders together from a seemingly dominant duopoly. They have driven, and continue to drive, a vast number of independent book stores out of business. As we have documented before, these two companies tyrannize the book publishers who have grown dependent on them, with slow pays and peremptory demands. They have the privilege of being able to return unsold inventory and dictate promotional fees.
Borders, once well known for its knowledgeable employees, now manages an army of (based on my recent experience) low-cost and unhelpful clerks. Books are commanding less and less space as DVDs, CDs, calendars, and cappuccinos take over more and more floor space.
Borders has serious problems. On over $4 billion in gross income last year, its net was just over $100 million last year, down from an only slightly better performance the year before. (By the way, Barnes & Noble is hardly better, with $150 in profits off of $5 billion in sales).
In part this is because of squeeze from the mass-market retailers; Wal-Mart, Costco, Target. These chains stock only a limited number of very popular books and sell them with deep discounts. They can sell them at or near costs, using them to draw in customers. And because they buy in even bigger quantities than the book chains, they get even bigger discounts. In return, Borders and Barnes & Noble are forced to discount their most popular books even further in order to compete.
And for more specialized books, online services like Amazon have a big advantage. And user books, sold online, are eating into new book sales, a big problem for the book chains and publishers alike.
A recent Wall Street Journal article ("Getting a Read on Borders", 5/28/07) documents the company's troubles. With a new CEO, Borders is now planning to sell off underperforming assets (many of its Waldenbooks locations and its overseas operations). It is relaunching its Web site. Until now it has partner with Amazon, in part so it can extend its customer loyalty program and make it easier to order books from the store for home delivery. These factors may help Borders margins, but the negative trends are accelerating perhaps even faster.
Rumors are strong that private investor may want to merge Borders and Barnes & Noble, with a belief that the antitrust hurdles can be overcome.
The book publishing industry, as we noted before, is a crazy one. But the Borders example is indicative of a common trend. The attainment of a tight oligopoly, even duopoly status, is no guarantee of long-term prosperity. At the pinnacle, the chance for organic growth I limited, and the temptation to expand (horizontally or vertically) is full of risks. No soon is a market segment mastered when new competitors come out of nowhere, due to technical advances (Amazon) or the encroachment of once-distinct market segments (Wal-Mart). That what happened to record stores, video rental outlets, and electronic game stores, and it seems to be happening with bookstores.
12:18:39 PM 
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