Repost: Borders Strategic Plan: What Borders Could Have Said

Since management has changed again at Borders, I thought I would repost an article I originally wrote on March 26, 2007. As the introduction notes, I originally wrote my version of a Borders growth plan in answer to what I thought was a pretty anemic effort by CEO George Jones.

No telling what the new management of Borders has in mind.



Last week George Jones, the recently appointed CEO of Borders Stores, Inc. released his strategic vision for the next three years. There was little in the document to inspire, and it was replete with suggestions that the route to success for Borders was to travel the road already trod by their stronger competitors rather than develop a set of bold new ideas. Coupled with this mediocre set of objectives was a time frame that seems embarrassing given the critical issues Borders and the retail book industry are facing. Borders sales per store and per square foot which lag their competition are declining, they have embarked on a diversification program that continues to draw attention away for the core products and they propose to withdraw from the international market that appears to produce 50% more revenue per store than the domestic business. What then might George Jones have said.....


Dear shareholders,

Borders is a company in transition in an industry in transition. Borders customers now find the products we sell in more non-traditional outlets and at lower prices. Our customers now have more entertainment options limiting the time they spend on reading and the changes in the music and dvd industry is fundamentally changing the way our customers use and purchase these products. It may be only a matter of time before it becomes unprofitable for Borders to sell physical units of music and dvd products.

These are not issues that Borders faces exclusively, but over the past three years, the company has failed to proactively address these marketplace changes. While our in-store experience has grown confused and directionless, miss-steps in our internal operations now limit our ability to support an effective platform for growth. We have to admit that continued investment in our store management and merchandising technology will not produce or enable the rapid changes in operating efficiency that is required to effectively implement our strategic goals.

The Borders brand remains highly valued both domestically and internationally and as we consider our strategic options, we must resist the urge to adopt ‘me-too’ or duplicative retail models that succeed in this crowded marketplace. To that end, we will focus on maintaining a unique value proposition for the Borders brand and retail experience. Our goals over the next three years are to:

• Lead the industry in sales per store, sales per square foot, fill rates and inventory turn while, maintaining growth in new store openings.
• Aggressively eliminate non-core expenses in operations via strategic partnerships across the supply-chain.
• Revamp the Borders retail experience by redesigning our stores, implementing state-of-the-art technology and integrating web retail into the stores.
• We will expand our international retail operations in combination with partners, expand our Seattle’s Best Coffee relationship but devolve our investment in PaperChase.

Over the next three years the company will focus our improvement program in three areas: (1) Store improvement and better merchandising, (2) operational improvement and (3) efficiencies and expanding retail internationally and via the web. Each of these initiatives is addressed as follows:

Improving the In-Store Experience:
We are in the process of simplifying our in-store product mix and plan to temporarily reduce the amount of in-store product by 25-35% over the next six months. At the same time, we are aggressively revising and reassessing how we use our store-level sales data and have established a task force with an aggressive time horizon that will identify an effective management reporting package so that the company can better plan store inventory and product mix. (We also plan technology improvements at the store level discussed below). Once we have better management information, we will begin to experiment with incremental additions and regional additions to store mix that we expect will support store profitability.

Selling books, music and movies is our strength. Music and DVDs are important but the long-term viability for these product segments is suspect as on-demand, downloading and other direct to consumer distribution patterns become predominant. Frankly, we are not a music and DVD destination store and we recognize we sell these items as add-ons to book purchases which do improve average revenue per customer, but selling the products in their current form is not a long term strategy. Borders will continue to experiment with different mechanisms for selling music and movie content that will enable these segments to remain important revenue sources for us.

We also recognize that our in-store layout and retailing environment has grown stale and boring. As previously mentioned, we are in the process of redesigning the in-store concept and this is a matter of significant importance for the company. We expect to launch the new store concept no later than the fourth quarter 2007. In this important initiative, we do not expect a ‘me-too’ design or to simply replicate the store features of our competitors; rather, our objective will be to develop a unique approach to book retailing that combines an increased awareness of the correct product mix for our stores, market research and marketing statistics to determine the store features that resonate with our customers. Initial research suggests our current stores are bland and confusing to customers, who often leave our stores without finding the books they seek.

As previously disclosed, the company will reduce the number, and revamp the product mix, of our Walden Books mall stores. Critical to this effort is effective management reporting metrics enabling correct executive management decisions to close or significantly revise specific Walden stores. We expect to close 25% of our Walden stores over the next 18mths. While our small mall retailing business has declined, we still believe that mall-based retail outlets represent legitimate opportunities for Borders to retail our products. Along-side our Walden rationalization plan, we plan to test and launch a ‘mini-POD’ bookstore concept. These small stores will be located in high-traffic areas such as medium-to-small sized mall spaces, public spaces, high-traffic retail space and potentially within other retailers spaces. These ‘mini-POD’ stores will sell less than 200 titles (all best sellers based on our store POS data) be staffed by one clerk and cover less than 200 sq/ft; they can be either permanent or temporary fixtures, dependent on context. If the tests prove successful, we expect to have over 1000 of these mini-POD stores in place by the end of 2008.

Our airport store growth and re-branding effort has been resoundingly successful and we will continue to expand this program in the North American market. As part of our international expansion, we will consider opportunities to extend the model into the developing air transport markets of Asia.

The PaperChase acquisition has been an interesting experiment and the company stores continue to do well under Borders management. Regardless, the company’s future is in the sale of entertainment products and PaperChase will be carved off as a separate business and eventually sold to its management. We believe there is a future for this line of business but the synergy with entertainment products, our internal processes and between our vendors and those of Paperchase is tenuous at best. We believe we can generate higher sales/sq/ft from our traditional produce mix and Seattle’s Best Coffee.

Operations Review:
Borders must rationalize our internal operations so that we can focus on our core expertise. We are not proficient at software development, distribution, fulfillment or logistics, and over the years these areas have diverted too much management time, resources and money away from merchandising, retailing and brand development. It is our goal to seek strategic partners to further outsource our warehouse, fulfillment and distribution operations and to seek efficiencies in our logistics operations – particularly store fulfillment. Lastly, under discussion is the possibility of outsourcing our management information systems that support our store level point of sale systems and which connect these store systems to our merchandising systems. We believe the only way Borders can achieve the state-of-the-art technology critical to our success is to partner with a provider(s) who is simply better at implementation and IT management than we are. Discussions are advanced in these areas.

Coupled with this operations review, we will work with our vendors to implement Radio Frequency Identification throughout our supply chain. We believe this initiative will have particular value at the store level. Experience in other businesses indicates that this will be an expensive initiative but will lead to the following material benefits:

• RFID on all book product and in all stores within 18mths (on 85% of in-store products and 100% by end 2009)
• 100% location data for all products in store: ability to locate any item
• Virtually eliminate theft
• Increase in-store fill rates: Expect incremental sales increases between 5-10% of current store revenue ($250-500,000/store annually).
• Reduce out of stocks by 10-20%
• Reduce to 10% the current amount of time to stock new stores (to two days from 2 weeks)
• Remove/reallocate slow-moving stock: Rapid/immediate understanding of stock mix versus sales
• Daily inventory count: Eliminate need for physical inventory
• Speed product receipt and returns process

We expect to lead the book industry in this initiative and we also expect the initiative to pay for itself in increased sales, better merchandising and higher customer loyalty within a 36-month period. Complementary store-level technology enhancements will also enable wireless couponing, self-check out and cross- and up-selling opportunities. These are the types of critical success factors that will lead to the industry-leading revenues per store and per square foot to which we aspire.

Expanding Our Retail Outlets:
Finally, the company has questioned the continued development of our international operations, but we remain committed to expanding this business via merger with a leading non-US retailer. Together, we will aggressively expand the super-store concept to Asia and ME particularly China, India and South and Eastern Africa. Additionally, we will seek a similar partnership arrangement in South and Central American where we believe the super-store market for books, music and DVDs is largely untapped. The development of these markets is expected to take place through a combination of franchising and store-owned operations. We expect to announce our first Borders stores in Buenos Aires and Santiago by the end of the year. The UK book retail market is currently in turmoil and we will seek to take aggressive advantage of this and leverage our strong market position in that market with assertive merchandising and product discounting to drive traffic to our stores. We will close underperforming stores and expand the superstore concept in the UK and Ireland as results dictate. All told, we expect our international operations to grow to over 300 stores by the end of 2012 and believe our continued success internationally will derive from our steep investment in our US store operations.

Lastly, we commenced development of a Borders.com web retailing site which we believe will tap a missing link between Borders and its customers. We will use this site as a marketing and customer service solution to strengthen the bond between Borders and our customer base (particularly the 17,000 members of the Borders awards program). There will be a close coordination between the redesign of this program and the development of the web site. The success of this site will be determined by the strength of the connection we can make between the physical stores and the web experience. We expect to make the Borders web-site a destination site that will enable social networking, user tagging and customer retailing options similar to those available on auction sites.

We recognize this strategic plan represents a series of ambitious but attainable goals. Importantly, across our business we will focus on our core competency in selling entertainment products in a conducive retail environment supported by strong merchandising and management information. Supporting this development will be an aggressive efficiency program that will support the above objectives by realigning our operations to reduce time and expense spent on activities we are not good at and investing in technology solutions that will support our long term goals.

Many of these initiatives are in process and we look forward to bringing you up to date with them in the next three months.