Wednesday, February 16, 2011

Borders Bankruptcy Filing Offers Few Clues About Book Business

Now that is finally here, the Borders bankruptcy filing doesn’t tell us much about the direction that book business is going in.

At least we are learning a little about the management errors at Borders that led it into bankruptcy. It had the astonishing bad luck, if you can call it that, to be fully leveraged and expanding rapidly in 2007 just as the global economy was staggering into the stupor that followed. Some of the new Borders stores that were built in 2008 never opened, and now, in bankruptcy, Borders has the opportunity to close half of its stores and cut its footprint in other ways.

Borders says it will close around 200 stores, less than a third of its total, between now and next month. My hope is that this merely reflects the plan that Borders had to draw up to get into bankruptcy and secure working capital for bankruptcy. Now that it is in bankruptcy protection, it might well find that this is a good time to close more stores. In bankruptcy, a retailer can almost always revoke a lease on a store, regardless of the date the lease was set to expire.

Most of the news stories about Borders this morning are discussing the decline in the book industry, with revenue falling by around 5 percent last year compared to the year before. But it was bad management decisions and bad financial management, not a declining demand for books, that led Borders into bankruptcy. Worse, its reorganization plan doesn’t particularly address the changing dynamics of the book business. Instead, the new business plan for Borders is written as if it were still 2007. I suppose much of the plan might actually have been written in 2007, as Borders has been limping along paycheck-to-paycheck for quite some time, unsuccessfully putting itself up for sale along the way. But the book industry has changed so much in the last four years that a plan drawn up for 2007 is certain to fail in 2011. Borders will adjust its plan in the coming weeks, of course, but the fact that it is looking back more than it is looking forward tells us that Borders’ financial strain has made it irrelevant to the future of books. It can try to keep up with the book business, but it won’t be showing us where things are going.

The Borders bankruptcy is little consolation for its competitors in the book business. Barnes & Noble in particular has to be concerned about the problems at Borders. Barnes & Noble took on its current form largely by copying elements of Borders’ business model, so if this business model ultimately didn’t work for Borders, it may not work for Barnes & Noble either. Nor can independent booksellers hold much hope of picking up customers that Borders is leaving behind. Customers who complained in recent months about the austere look of the shelves at Borders are likely to find the stock at the average independent bookstore positively disheveled. At the beginning of the year, some observers were predicting the collapse of the major book chains this year; others insisted it was the independent bookstores that couldn’t possibly survive. Events so far are consistent with both predictions. If book sales decline by another 5 percent this year, the closing of 200 or 300 stores in the Borders bankruptcy is not enough for the book business as a whole to keep up with that decline.

The loss of 200 stores in two weeks, though, is just large enough to be noticeable on the scale of the national economy. Thousands of workers and millions of square feet of retail space will be added to the idle productive capacity of the economy, adding to the downward pressure on wages and rents, and indirectly leading to more foreclosures, lower real estate values, and other measures of a stagnant economy.