Borders Tries to Open New Chapter with Website Relaunch Separate from Amazon.com

New website to debut in 2008 central to struggling retailer's turnaround strategy.

Borders Group next year will unveil a new proprietary website billed as the centerpiece of the retailer’s turnaround strategy and an effort to break out of Amazon.com’s e-commerce shadow.

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The current Borders.com is run entirely by Amazon.com. It features Amazon's inventory, site content, fulfillment and customer service capabilities. The sales even belong to Amazon, with a percentage going to Borders. The new Borders site, which is expected to launch early in 2008, marks a major juncture in Borders' business and e-commerce strategy and the end of what will be a seven-year relationship with Amazon.com at a time when the Ann Arbor, Mich.-based bookseller is in the midst of a turnaround.

The new online store is a major piece of Borders’ attempt to triple earnings by 2009, to 5 or 6 percent from 1.9 percent in 2006, when the company recorded revenues of $4 billion. Other pieces of Borders' strategy include expanding franchisees overseas and cutting the number of Waldenbooks outlets.

An E-Commerce Marriage of Convenience with Amazon.com

In 2001, when the retailing rivals inked this deal to develop a co-branded web site, it was mutually beneficial. Amazon.com, which had gone public in 1997, was under pressure to turn its first profit. Extending the e-commerce infrastructure into which it had invested millions of dollars to third parties such as Borders injected much needed cash into Amazon.com's business. And Borders, which like many traditional brick and mortar stores at the time was struggling to make the e-commerce game work for them, got a tried and tested, user-friendly e-commerce site powered by a company that consumers trusted. Never mind the fact that Amazon was a competitor.

"The relationship with Amazon.com allowed us at the time to focus on our brick and mortar stores while still having an online channel that was branded Borders," says Anne Roman, a spokeswoman for Borders. She notes that the company had its own e-commerce site before it partnered with Amazon but that the costs associated with operating and marketing it outweighed the revenue it generated at the time.

Turnaround Time for Borders

Over time, as Borders' business headed south, the partnership with Amazon.com became less advantageous to Borders. During its fiscal year 2005, Borders' consolidated earnings per share began its decline. The following fiscal year, the company posted a loss of $2.44 per share, a net loss of $151.3 million and a 2.2 percent decrease in same store sales for the year. Consequently, Borders unveiled a strategy for revitalizing its business in March 2007—a cornerstone of which is the launch of a new, proprietary e-commerce site and the use of technology to drive sales and create deeper customer relationships. The company also announced the hire of a new CIO, Susan Harwood, to oversee all of the company's systems, including the new e-commerce site.

"With us looking at the future and seeking to drive this turnaround, we felt we had the opportunity to have sales and profit generated by our e-commerce site and to build a true cross-channel relationship with our customers," says Roman.

In essence, the bookseller is going back to square one with its e-commerce strategy by setting up its own site.

Roman says the existing relationship with Amazon doesn't allow Borders to do all the things it wants to do moving forward to create a more integrated, cross-channel experience for customers, such as give Borders' customers access to author readings and concerts at the company’s flagship store in Ann Arbor via online video. Borders also wants customers to be able to earn points toward the Borders Rewards loyalty program when they shop online. Currently, customers can't earn points when they use the co-branded site because it exists as a separate silo of Borders' business. "Once we launch the proprietary site, that [loyalty program] will be fully integrated into it," says Roman.

Borders' decision to part ways with Amazon and build its own site is also driven by the availability of off-the-shelf software products designed to facilitate e-commerce, says Roman. "Some of the cost of setting up this type of site has diminished," she says. "It's still a big investment, and we're making that investment, but it's not the same scenario today as it was when we went into the agreement with Amazon." The company declined to say how much it's invested in the development and launch of the new site.

Challenges and Opportunities Ahead

Technology analysts say Borders' decision to launch its own e-commerce site is wise. "This move to own and operate their online channel is a logical step to grow their business in the long term," says Robert Garf, vice president of retail strategies at AMR Research. "As the online channel becomes a material aspect of a retailer's cross channel strategy, it only makes sense to have tighter control over the technology and the operations."

Gartner analyst Adam Sarner says the best e-commerce sites are built in-house, but neither he nor Garf think the barriers to entry in e-commerce are any lower today than they were in 2001.

"There might be things you can buy off the shelf, and some kinks have been worked out like fulfillment, but there are other issues," says Sarner. Namely, he says Borders has to give customers a compelling reason to buy books, movies and music from Borders.com instead of Amazon.com. That's not going to be easy when Amazon.com has customer loyalty "locked up" and is so competitive on pricing, according to Sarner.

Scott Devitt, a research analyst who covers Amazon.com for investment bank Stifel Nicolaus, doesn't think Borders can compete and issued the following indictment of its business model: "Amazon is absolutely decimating Borders' franchise," he says. "Amazon has a lower cost structure. They sell at lower prices and don't collect sales tax. Anyone who wants to buy a book has no reason to walk into a Borders store or go on their web site. The only reason to go to Borders is for entertainment. I find Borders irrelevant."

Bearish Wall Street analysts rate the stock a hold, according to Marketwatch.com.

Borders faces tactical challenges as well. AMR's Garf says Borders has to implement new business processes for order fulfillment and a call center operation to start a direct to consumer business.

Sarner notes that the web has become a major influence of offline sales. In fact, forty percent of commerce in the offline world is influence by the web, he says. If Borders can take advantage of that dynamic, he adds, they'll be better able to compete with Amazon. "If their site can become a lead management tool that gets more people to visit the store and pick up more books or visit three times instead of two, that might be a better model for them," says Sarner. "Borders has the benefit of the physical stores. That's where they can differentiate themselves from Amazon."

Copyright © 2007 IDG Communications, Inc.

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