Saturday, July 23, 2011

Borders Liquidates, a Victim of Growth Strategy

Book publishers won’t have Borders to kick around anymore. But while book publishers may have been the ones who forced Borders into bankruptcy in January and into liquidation this month, Borders is ultimately the agent of its own undoing, and conventional management theories are ultimately to blame.

The reason Borders ended up broke was that it spent every nickel it had on expansion, particularly during the troubled economic times of 2005–2008. And an expansion of what? Borders was a lively place in the 1990s with attention-getting live events and the most complete inventory in the business, but after about 1999 it turned into an empty shell of a retailer, with a random selection of products and a small, disempowered staff. What do you accomplish by expanding that? But this is what the management textbooks say to do. When there is an economic downturn, it is said to be the perfect time to grab market share, and that is exactly the strategy that Borders was following. The textbooks are wrong, and Borders’ new market share, in a couple of months, will be zero.

Borders began liquidating all 399 of its remaining stores yesterday. There is a hope of keeping 15 stores open with a new owner, but those are liquidating too. If a store is sold, much of its inventory will still have to be liquidated, which probably would involve taking it to the stores that are closing. Given the number of stores involved in the liquidation sale, it is easily the largest sale in the history of books.

This is not good news for the book business. The Borders liquidation will give many of the more avid readers more than enough books to read for the fall, winter, and spring while providing minimal revenue to wholesalers, publishers, and authors. It will draw shoppers away from other bookstores not just during the liquidation itself, but for months beyond it, and hundreds of smaller bookstores may fall as a result. Even Barnes & Noble has warned that it expects to lose money all this year because of the Borders liquidation.

Book publishers face similar pressure, and with fewer stores open, will have fewer selling opportunities going forward. We will know this has had its impact if publishers start announcing mass postponements of book releases to preserve their capital.

Borders no doubt thought it was being clever by expanding into a downturn, the way the business textbooks say to do. Obviously, Borders’ executives were not the only ones who read those textbooks, so Borders could not be the only large U.S. business whose expansion plans sailed into the teeth of the sluggish economy. Some of the mass hiring of last year and this will turn into mass layoffs next year as companies find themselves overextended just as their competitors are turning things around. It will be shocking if we don’t see larger companies than this in liquidation before next year is over.