Borders's Fall From Grace

The Borders Group that filed for bankruptcy last week was formed in 1995 when Kmart, which had bought Waldenbooks in 1984 and Borders in 1992, merged the two and spun them off into a separate company. Although the newly formed Borders Group initially prospered and became Barnes & Noble's chief rival in the superstore wars, the integration of the two companies contained one fatal flaw—they never became fully integrated. The most serious problem of the newly formed retailer was Borders's inability to combine its computer and inventory management systems with that of Walden, an issue that plagued the company right up until the end. The dual systems prevented Borders from implementing the more efficient operating systems that B&N would eventually install, giving B&N numerous advantages, including a faster speed-to-market.

Still, Borders's early years were successful. The first signs of trouble didn't occur until 1999, when Phil Pfeffer, a former top executive with Ingram and Random House, resigned as Borders Group CEO after only five months on the job. An experienced bookman would never head Borders again. Bob DiRomualdo, chairman of the company since its formation, stepped in on an interim basis until the Borders board hired Greg Josefowicz as CEO. Josefowicz's background was with food and drug retailers, and he implemented several strategic decisions that hampered the company. The first was giving up control of its Web site to Amazon in a partnership deal in 2001. Although Borders.com trailed both Amazon and B&N's new site, it generated sales of $27.4 million in the fiscal year ended January 2001. Rather than build its online presence, Borders turned to the international market for growth. Although the stores (in the U.K., New Zealand, and Australia) were successful for a time, they drained away management and financial resources that could have been better spent building its domestic operations. And Josefowicz brought with him from Jewel-Osco, the Midwest supermarket chain of which he had been president, a program that became loathed by publishers and veteran Borders employees—category management. The implementation of category management, in which top publishers in different book segments paid to help oversee specific areas, widened the gap between longtime Borders booksellers and a management team drawn from outside of the industry.

By 2004 that culture clash began appearing in Borders's financial results. In the third quarter of that year, Borders failed to hit its targets by a significant margin and it began to fall further behind B&N, never to catch up. Josefowicz remained at Borders—he was promoted to chairman in 2002—until 2006 when, after two weak quarters that included losses, he stepped down in favor of George Jones. Jones immediately did away with the last vestiges of category management, announced that Borders would take back control of its online business from Amazon, and divested the majority of its international operations. Jones also accelerated the downsizing of Borders's music offerings. For several years in the mid to late part of the last decade, declines in music sales would offset decent performances by Borders's core book business while book comparable store sales increased in low-single digits, music comparables fell by double digits. Jones also looked to put in tighter cost controls throughout the company and fix problems with the Walden operation. By the time Jones took over Walden, the bookseller was viewed as little more than a cash cow that fueled the growth of the superstores. Although the number of Walden outlets had fallen dramatically under Josefowicz, the unit was only breaking even in 2005, and Jones tried to correct that by updating and changing the product mix and accelerating the stores-closing program. Jones hoped to prove that a tightly managed, smaller Walden group could prove to be a viable mall business, but the effort failed. And Jones did make a serious misstep
under pressure to cut costs and reduce debt, he slashed inventory and in doing so cut the selection and breadth of titles in the superstores, a factor that contributed to disappointing results in his final holiday season at the retailer.

When Ron Marshall was hired in January 2009, his focus was on accelerating cost cuts and Walden store closings, as well as looking for ways to improve the company's execution at the store level, a weakness often cited by publishers in dealing with Borders. But while Marshall's actions did reduce the company's losses in his one year, it did nothing to slow the decline in sales, and the company still did not have a meaningful digital strategy. Borders only began to seriously address digital in 2010 with its partnership (and investment in) Kobo and the establishment of its e-bookstore, but by then, like many other times in the past, it was too late.

The (Recent) Borders Era