Wednesday, February 16, 2011

Borders Trilogy: I'll tell you how it ends.

So Borders capitulates, and thus begins the inevitable transition we have all long anticipated to become smaller, leaner and possibly profitable. The company is now embarking on the third phase of its' existence which has seen it pass through the innovative, entrepreneurial, mercurial phase represented by the founders Tom and Louis Borders to the second kicked off by their IPO and subsequent purchase by K-Mart to this third phase from which they are unlikely to emerge.

The middle or second phase is what got this business in trouble and anyone working with Borders over the past 10-15yrs (as I have) must have seen this was a dead bookseller walking over that time. Make no mistake: This was inevitable. Serial management teams with no real experience intent on "disruption" and "reinvention" which were all "strategies" that hid their inability to understand and address their market effectively. So poor were these teams that even with 'retail' experience they continued a retail expansion plan that's proven so expensive it can't sustain the core business. If that wasn't enough they proved unable to manage inventory and to understand demand in any effective manner. They believed implementing new technology was the key but implemented a set of software tools that not only contributed to their problems it caused even bigger ones.

Long since abandoned, that experience pales in comparison to their biggest mistake (and in the context of Borders this is saying something) which was to 'invest' in the internet via a deal with Amazon. It would be like American investing in air travel by sending all their customers to Jet Blue. A legion of baffling decisions yet this one has a bizarre coda: At a time when the internet book selling market is essentially lost and their physical retail presence under significant threat the company decided to start a book selling web site and in the process wasted cash and management time and expertise in the process.

Will Borders exit bankruptcy? That's an open question. Certainly the economy is staggering into a recovery which could give investors some encouragement but the book market is migrating rapidly away from physical books and therefore the horizon is very short for any investment to return capital - like three years short in my view. So gone is the 'comfort' that an investor might have that in the worst of circumstances they could sit on the investment for five or so years. That's off the table. Alternatively, Borders could rebuild around digital content; however, we know that's closed off to them to because of (non)decisions made long ago. I expect liquidation is a distinct possibility and then the question becomes what happens to all that stock?

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