Bloomberg News

Borders’ Bezos Champagne Toast Marked Start of Chain’s Demise

July 19, 2011

July 19 (Bloomberg) -- Borders Group Inc.’s almost certain liquidation may have begun with a toast a decade ago celebrating its decision to pay Amazon.com Inc. to run its website.

At an August, 2001 party near Borders’ headquarters in Ann Arbor, Michigan, then-Chief Executive Officer Gregory Josefowicz brandished a bottle of champagne and said Amazon founder Jeffrey Bezos had sent a case to show his gratitude.

“I remember thinking this is the weirdest thing that we’re drinking champagne bought by Jeff Bezos, and it was the last thing we wanted to do,” Manish Vyas, who was then a manager at Borders’ online unit, said in a telephone interview this week. “It ended up being a customer-harvesting vehicle for Amazon.”

The book-selling industry would undergo a revolution. Amazon’s online store was already giving consumers an excuse to avoid physical locations. Then in 2007, Amazon introduced its Kindle e-reader, followed by Barnes & Noble Inc.’s Nook two years later and Apple Inc.’s iPad tablet in 2010.

Borders never recovered its momentum, posting five straight years of losses totaling more than $900 million. In February the chain sought bankruptcy protection. After finding no bidders that creditors would approve, the company agreed to sell its assets to liquidators.

If the bankruptcy court approves the deal at a hearing on July 21, liquidators led by Hilco Merchant Resources and Gordon Brothers Retail Partners LLC, will start winding down the operations as early as July 22.

‘Headwinds’

“We were all working hard towards a different outcome, but the headwinds we have been facing for quite some time, including the rapidly changing book industry, e-reader revolution and turbulent economy, have brought us to where we are now,” Borders President Mike Edwards said in a statement yesterday.

Tom and Louis Borders founded Borders with one location in Ann Arbor in 1971. By 1992, Kmart had acquired the chain of 21 stores for about $190 million and combined the retailer with its Waldenbooks unit. In 1995, Kmart renamed the unit Borders Group Inc. and spun it off with an initial public offering.

The era of book superstores had arrived. Before long Borders and Barnes & Noble locations had spread across the U.S., putting pressure on independent book sellers and providing gathering places where customers browsed and sipped coffee.

Barnes & Noble founder Leonard Riggio called the superstores American piazzas and their cultural impact reached a zenith with the 1998 romantic comedy, “You’ve Got Mail,” which featured Tom Hanks playing a bookstore magnate to Meg Ryan’s indie shop owner.

‘Divorced’

When Borders cut the deal with Amazon back in 2001, the chain was determined to keep up with its larger rival, Barnes & Noble, which was rapidly opening stores. Borders doubled its big-box locations from 200 in 1996 to 400 by 2002.

While the Amazon partnership wouldn’t make the Borders website profitable, it would allow the company to focus on the superstore customer, Josefowicz said in an interview with Bloomberg News at the time.

“Borders divorced themselves from the online customer by allowing Amazon to close the sale,” said Michael Norris, an analyst for Simba Information Inc., a Stamford, Connecticut- based research consultant. “I’m convinced that’s the moment things went bad for them.”

Meanwhile, the brick-and-mortar business became increasingly difficult. Selling CDs and DVDs had become an important part of Borders’ business, generating $600 million in sales, or 17 percent of total revenue, by fiscal 2006. Three years later CD and DVD sales had dropped by 38 percent as downloading services such as Apple’s iTunes took market share and more consumers shopped online.

Bestsellers

The book business didn’t get any easier either. As the superstores rose in number, so did the number of mass-market retailer such as Wal-Mart Stores Inc. and Target Corp. selling bestsellers, which are essential to luring customers to physical bookstores.

Amazon grabbed more market share after debuting its Kindle e-reader in 2007. Borders meanwhile took three years to take back its website and didn’t debut it until 2008, 13 years after Amazon sold its first book over the Internet and just in time for the worst recession in 70 years.

By then Borders, wracked with annual losses, had little money to spend on a strategy for digital books. The chain outsourced the problem by investing in Kobo Inc., a Toronto- based e-reader company. A year ago, Borders launched an e-book store powered by Kobo and started selling Kobo e-readers in its stores the following month.

‘Friends’

At its height in 2005, Borders had more than 1,200 bookstores as far away as Singapore, 15,000 employees and sales of $4 billion. In the coming weeks, the company expects to close its remaining 399 stores and dismiss 10,700 employees.

For Joe Taylor, who says he drops about $1,000 a year at the Borders in Davenport, Iowa, the chain’s demise is personal.

“I’ll more than miss the store; the employees there are friends,” said Taylor, 56, of nearby Hampton, Illinois, who drops by sometimes just for a cup of coffee. “I’m deeply invested in Borders as one of their customers and I’ll miss it greatly. I’m preparing myself for losing it.”

For Related news and information: Consumer & Retail headlines: RTOP <GO> Company News: BGP US <Equity> CN <GO> Peer comparison: BGP US <Equity> PPC <GO> Relative value: BGP US <Equity> RV <GO>

--Editors: Robin Ajello, Kevin Orland

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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