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BORDERS REPLOTS STRATEGY WITH NEW SUPERSTORES

By Dees Stribling

Each year Americans buy fewer books, and not even Oprah Winfrey has been able to reverse the trend, despite the millions of books she persuades people to buy. Such is the climate in which Borders Group, the second-largest bookstore chain in the U.S., is out to reinvent itself.

When Borders announced financial results in March, it also unveiled some ambitions: to roll out a new store prototype next year, to boost its Internet profile, to trim away some of its specialty stores and to de-emphasize overseas expansion and focus on domestic growth.

Orchestrating all of this is the new CEO, George L. Jones, a 30-year retail veteran who joined Borders last summer from Saks Department Store Group. “We haven’t played as offensively as we could have,” said Jones. “Instead of focusing on driving sales, we’ve focused on expense-cutting, which is more defensive. The goal of reinventing Borders will be to increase sales and regain market share. There’s no solution for Borders that doesn’t involve increasing our same-store sales.”

The numbers seem to portend a struggle. Borders posted a $151.3 million net loss for fiscal 2006 (ended Feb. 3, 2007), versus a net gain of $101 million the year before. Companywide sales for the year edged up 0.8 percent to $4.06 billion.

In the company’s superstore division, the cornerstone of its operations, fourth-quarter comparable-store sales fell 2.8 percent from a year earlier. For the full year, comps were down 2.2 percent from the previous year. The Waldenbooks division’s numbers were even more discouraging: a 6.2 percent comp-store sales slump for the quarter and a 7.5 percent decrease for the year.

The outlook for bookselling is generally unfavorable. Book reading declined by roughly 7 percent between 1992 and 2002, according to a report by the National Endowment for the Arts titled Reading at Risk. Studies done more recently only confirm this.

Beyond the reading decline, book sales are flat. According to the Census Bureau, Americans bought some $16.589 billion worth of books last year, down slightly from $16.596 billion the year before and $16.757 billion in 2004.

Moreover, even among people who still buy and read, the physical bookstore is by no means the automatic first choice. Last year marks the first time that Amazon.com outsold Borders in books and music, for instance.

The centerpiece of Borders’ revival efforts will be those new domestic superstores. The company plans to roll out 12 to 15 of these next year, and, if all goes according to plan, there could be more of them in the future. Borders will also retrofit all its older stores accordingly.

Though the company is being a little coy about revealing all the details of the prototype, Jones did confirm that the new stores will be about the same size as the existing ones. Thus, this is more a design and merchandising shift than a real estate play. “Our existing superstores are about 22,000 square feet,” he said. “If our new concept stores were 45,000 or 50,000 square feet, what would we do with the existing 500 stores? We have to make the reinvention work for those stores as well, since they’re the heart of our business.”

The company will be making no dramatic site-selection shifts. The new superstores will continue in the current site-selection mix: freestanding locations and shopping-center-oriented ones (the latter in many cases function as lifestyle center anchors).

Jones says some of the new strategies are “basic retail 101,” involving store presentation. A typical Borders customer spends about an hour per visit, he says. “But the average transaction size is only about $25,” said Jones. “How is it that we don’t sell any more? Some of it is simply a matter of things that other retailers do that Borders hasn’t done well.”

One example is endcaps, he says, the displays at the ends of aisles. “Borders and, for that matter, most booksellers have been underutilizing their endcaps,” said Jones. “They tend to be a jumble of products instead of a cohesive statement that draws in a customer. Other retailers work hard to make you see those sales points, and we will as well.”

There will also be other new fixtures to inspire impulse sales. “We have 126 million customer transactions a year at our superstores,” Jones said. “Hypothetically, if each customer spent $1 more, that would represent a 4 percent comp-store sales increase.”

Such merchandising changes will probably not mean a vast array of new kinds of merchandise, however. “We might add some categories, but we still see our future as primarily a bookseller,” he said.

In 2001 Borders contracted to have Amazon.com run its online operations, which had been losing money, as many Internet-based businesses were doing at the time. Starting next year, though, Borders will take back its own Internet efforts and compete directly with Amazon, Barnes & Noble and others.

“Our stores will be more integrated with the Internet,” Jones said, though the exact relationship of the physical and virtual Borders efforts has yet to be hammered out. Such digital products as e-books and MP3s, will probably be part of the picture, as will personal publishing services. “We want to be able to give the customers what they want in whatever format they want it, and so downloading will be an important component,” he said. “But whatever it is, we’ll be at the forefront.”

The Waldenbooks units, typically 3,000-square-foot in-line stores inside malls, will continue to be part of the company, though the disposition of about 160 of the weaker links in that particular chain is now under way. “Some locations are simply too expensive for that kind of book and CD store,” said Peter Lynch, a principal in the Los Angeles office of New York City-based DJM Realty, which Borders has tasked with the disposition of the stores. “And it isn’t what customers want in that size space. The future of bookstores is in supercenters.”

Borders plans to change some its ancillary offerings as well, such as continuing the conversions, begun a few years ago, of its brand of in-store cafés into Seattle’s Best units — a direct counter to Barnes & Noble’s collaboration with Starbucks. Borders will also continue its international expansion, generally by franchising, as it already has in Malaysia and the United Arab Emirates with considerable success, Jones says.

Expert opinion has thus far been receptive to Borders’ reinvention plans, though, considering the macro factors, it has also been cautious. “Borders’ strategic plan, emphasizing its focus on its core US operations, ramping up its Web business, and its intent to divest and cut investments in its two underperforming segments, appears quite sound,” wrote Credit Suisse research analyst Gary Balter soon after the company announced its plans. “Our expectations for the near term are low, however, as heavy investments, relatively weak industry trends, and competitive industry pricing will likely continue to weigh on results.”

Analyst Nancy Hoch, of JPMorgan, generally agrees, lauding the overall reinvention plan, though calling the sluggish fourth quarter a “vivid reminder of the head winds facing the core business.”

Noting the frequency with which retail industries evolve into duopolies, analysts Donald Trott and Timothy Allen of Jefferies & Co. posited that “it could be that we end up with two dominant large-selection retailers as well: Amazon and Barnes & Noble. Borders management apparently thinks otherwise and has moved to the offensive. In another two or three years, we should know if they are right.”

Jones stresses that the big picture is actually favorable to Borders’ reinvention. “The existing superstores are not broken,” he said. “In fact, they’re the healthiest segment of our business. But there’s an opportunity to increase their productivity, and we intend to take it.”