Borders Books Victim of Recession, Wholesalers, Internet

Borders Group Inc. announced on March 20 that it will suspend its monthly dividend and explore "strategic alternatives" - including the sale of the company - in order to "maximize shareholder value," according to a statement released to PR Newswire.

Hit by a slowdown in consumer demand and stiff competition from wholesalers and online retailers, the company's fourth-quarter profits were less than analysts expected, resulting in a net loss of US$157.4 million for fiscal 2007.

Borders management "determined that additional capital was required to execute our operating plan" for 2008, but "the current credit environment has made many of these alternatives prohibitively expensive or entirely unavailable," said Borders Group Chief Executive Officer George Jones in the press release.

To help finance its operating plan, Borders secured an agreement from its largest shareholder, Pershing Square Capital Management, to lend it $42.5 million. Borders may also sell some of its international businesses to Pershing.

Known to most consumers as Borders Books, the Ann Arbor, Michigan-based company is the second-largest bookstore chain in the United States, after Barnes & Noble Inc. Borders employs 30,000 workers and owns 1,100 brick-and-mortar outlets across the globe.

Selling not only books but movies and music as well, Borders has had a difficult time competing with wholesalers such as Costco and Sam's Club. Wal-mart - which also buys books and movies in bulk and sells them for prices far below most of its brick-and-mortar competitors - has also eaten into Borders' sales.

The Internet has battered the bookstore chain as well. Music downloading services such as iTunes have taken away from sales of CDs, while Web sites like BN.com (Barnes & Noble's online store), Walmart.com and Costco.com all have forced Borders to cut prices.

In 2001 Borders abandoned its own online retailing efforts and partnered with Amazon.com to sell its books over the Internet. This may have helped the bottom line for a while, but margins in this business are slim, and it wasn't long before Borders began hemorrhaging cash. The profit it earned in the three-month period ended Feb. 2 is its first in seven quarters, according to Bloomberg News.

A Book-Lovers' Experience with Borders

My own experience with Borders Books probably reflects that of many book buyers. An avid reader and collector of books, I was fortunate enough to live in Madison, Wisconsin, for a time - a college town with bookstores galore.

Up until the 1990s there were no super-sized bookstores in town. Most booksellers had small stores on State Street, with a few around the Capitol building and one or two in the suburbs. The biggest was University Bookstore, which sold mostly new books, except for some over-priced used textbooks (which struggling college students had no choice but to buy). There were also Walden Books and Dalton Booksellers stores at East Towne and West Towne malls.

Then Borders Books opened a store on University Avenue. It wasn't anywhere near downtown, but people flocked to it. It offered books at prices below those at University Bookstore and the other chains, and its selection was the biggest in town. I would always go there first to buy a new book.

The infatuation with Borders lasted a few years, then two things happened: First, Amazon.com made book-buying on the Internet easy and cheap. Second, Barnes & Noble opened a huge bookstore in Madison, its biggest store ever at the time.

It was a "big-box" store if ever there was one (at least three times the size of the Borders outlet), but Madisonians - including vociferous opponents of other big-box chain stores - practically mobbed the place. I shopped there too, of course, and loved it.

The Barnes & Noble store is behind West Towne Mall, on the yuppyish side of town (whereas the east side is more blue collar) and it includes one of the mainstays of Midwestern life: a coffee shop. Not only that, but it's also very spacious and features large, soft chairs to lounge in.

Needless to say, the book selection was amazing, gigantic. You could browse for hours, and many do. Some literally sit and read for hours. But that's not what drew me back to the place. I frequent the Barnes & Noble for it's other unique feature: it's used books section.

I've never seen this in any other new-book retail outlet. The back fourth of the store is devoted to used books, and here the selection is wide and the prices reasonable: everything from tattered $1 paperbacks to half-price coffee-table tomes. You can come to the store and sell them your own used books, if you want.

For me this was a god-send. When I wasn't working I spent much of my free time browsing used-book stores I couldn't afford new-book prices - and most of these establishments were small, cramped places full of dusty shelves that were crammed to overflowing. It was often difficult to find the books you wanted and, because the inventory was relatively small, prices were not that good.

"So what happened to the Borders store?" you're probably wondering.

I stopped going there. I visited it once or twice to compare prices with Barnes & Noble, but when I found that Borders usually charged more, I no longer bothered.

The Borders store is still there - I drive by it every time I visit Madison - but I don't think it's making much money. Barnes & Noble is always bustling with customers, but the last time I went into the Borders store (a couple years ago) it was almost empty.

I now live in New Jersey and the best bookstore in the area is - you guessed it - Barnes & Noble. I don't even know where the nearest Borders is, or if there even is one around here. Most book buyers are probably doing what I do: buying books off the Internet or going to Barnes & Noble.