Inside the E-Commerce Strategy That Could Save Borders, Part 1

In May 2008, retailer Borders finally delivered on its vision of what executives thought a Borders e-commerce engine should look like: A website that meshes the in-store and sometimes serendipitous experience of browsing for books and music with the limitless, easily-searched and interconnected possibilities found in online shopping.

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Kevin Ertell, Borders’ senior VP of e-business, says that the site’s development process was chiefly about “bringing those two together in a way that leverages the strengths of each of the channels but brings them together in a way that’s greater than the sum of its parts.”

One example of this blended strategy is called the Magic Shelf. The attention-grabbing feature on the Borders.com home page uses Flash video technology to recreate a virtual bookshelf and the nirvana of finding a book or DVD that you’ve always been meaning to purchase.

That this online endeavor is, perhaps, a decade late is water under the bridge to Borders Group executives. In 2001, Borders had ceded its entire e-commerce operations to Amazon.com, which as of now is Borders.com’s largest and most entrenched competitor. “We knew it was really important that we have our own website,” Ertell says, “and that we get to control our brand, the experience for our customers and integrate that into the store experience in a way that wasn’t possible under the Amazon partnership.”

The new Borders.com is the centerpiece of the retailer’s strategy going forward. Borders’ capital expenditures in 2008 are mainly focused on building out the site’s functionalities and the systems that will wrap around it—replenishment, supply chain, CRM and in-store technology improvements, like kiosks that will allow customers to search in-store and online inventories.

The desired end result of all the front- and back-end integration and cross-channel marketing and sales opportunities is better fiscal health for Borders. It certainly could use it. Revenues dropped from $4.1 billion in 2006 to $3.8 billion in 2007, and profits have been on the decline during the past several years. In May 2007, its stock traded at over $20 per share; just over a year later, in July 2008, the share price hovered around $4 to $5.

The significance of Borders.com to the company’s future is not lost on anyone inside its Ann Arbor, Mich., headquarters. “It’s a marketplace we weren’t really competing in, and we had to be there and we had to be successful with it,” Ertell says. “Everyone understands that, and everybody rallies around it.”

Borders’ Need for Big Change

In retrospect, the “partnership” with Amazon.com seems like anything but. Amazon did everything for Borders—inventory management, content development, back-end fulfillment and customer service—and grew its business into the juggernaut it is today. The wealth of intellectual capital and hard-earned lessons that Amazon realized over the years from selling to Borders’ online customers stayed inside Amazon’s Seattle headquarters. All Borders got out of the deal was a percentage of sales.

Borders did, in fact, have an early e-commerce site before it moved under Amazon’s umbrella, but the costs of running it totaled more than the revenue it generated. “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,” said Anne Roman, a spokeswoman for Borders, in a 2007 CIO article.

Before the new Borders’ CEO, George Jones, arrived to transform the company in July 2006, Ertell says he had been working on a business plan for a new e-commerce site. “One week after he got here, we met and he said: ‘We gotta to go with it. We gotta do it,'” Ertell recalls. “He came in already knowing we had to do it, and he was the catalyst that kicked it into full gear.”

The scope of the project was massive, and the site had to be up in 18 months. “We had an aggressive timeline that we wanted to make,” says CIO Susan Harwood, who joined Borders mid-project, in August 2007.

Ertell says that the prospect of creating a new, fully functional website from scratch that was expected to help transform and save the company was both exciting and daunting. “But absolutely exciting,” he says.

Developing an E-Commerce Strategy

As for the overriding strategies for the site, Ertell says several key themes influenced the overall site and IT systems design. “We always saw the site as more than just the buy button,” he says. “The goal has always been to help us have better relationships with our customers, to drive sales online and in store via the site…and to be a really great cross-channel hub for us.”

One key piece of the plan was that the company reorganized itself around the e-commerce operations and made it core to the company’s short-term and long-term strategies, Ertell says. “A lot of companies have their Web operations completely separate from the business because they started in the late ’90s, and it was this little business that only a couple people cared about and was incubated on the side. And it grew, and it grew apart at a lot of companies,” Ertell says. “So we made sure we were organized [around it], people were incented and all of those types of driving forces were in place before we built it. And it’s already helping us.”

The company also decided to allow the Borders Rewards loyalty program members—more than 27 million, currently—to redeem their rewards online. This allows all that customer data to be further mined to determine shopping patterns and how customers are using the website and in-store service offerings.

CIO Harwood points out that the new e-commerce data streams will better inform Borders’ merchandising systems and provide merchandising decision-makers with more information on what products are hot (for example, what books are getting lots of advanced orders online or spikes in traffic on the site).

Testing What Customers Want Online

Unfortunately for Borders, the Web is already stacked high with online-only e-commerce players and retailers with economies of scale that are doing a very good job of selling a broad assortment of books, CDs, DVDs and other media products. Furthermore, sales of some of those media products that Borders is selling, such as CDs, have been heading south during the past several years.

And online customers, it should be noted, are notorious for their impatience with slow sites that lack an intuitive design and personalized attention. “Consumers are increasingly seeking online experiences that are relevant, engaging and personal,” writes Forrester Research analyst Kerry Bodine in a June 2008 report. “That’s why companies need to design websites that are not only useful (offer value) and usable (provide easy access to value) but also desirable (appeal to emotions).”

Ertell says Borders employed several methods to gauge what their customers wanted in a site. “We spent a lot of time doing customer research, and we started out just actually talking to customers,” he says. “What they liked, and what they didn’t.”

A beta site that lacked the e-commerce functionality but had lots of other elements went live in September 2007. “The whole point was to get it up and get as much feedback as we could on that,” he says. Borders also partnered with social networking site Gather.com to assemble even more feedback.

The early version of the Magic Shelf went live on the beta site. Ertell says that there was some “internal discussion” about whether the Magic Shelf idea was good or not. “So we just put it up and said: Let the customers tell us if it is,” he says. “And what we found was that they loved the idea, but they didn’t necessary love the execution of that original one. There were some things navigationally that they didn’t like.”

The end result of all that testing, however, was that, according to Borders feedback, the Magic Shelf has been a “big, big hit,” Ertell says, though he declines to provide specific metrics.

Why Go to a Bookstore?

Borders was aware that to truly cement the new site-to-store connection, the in-store search kiosks needed to be connected to the Web. So Borders created a version of Borders.com that would work on the kiosks. As of early July, Ertell says those are currently being rolled out to Borders’ 1,100 stores.

The in-store kiosks connected to the Web are key, says Kevin Sterneckert, a retail research director at AMR Research, mainly because it’s really hard to find an associate who’s as knowledgeable as what’s offered online. Sterneckert says that the last time he was in a Borders physical store, he wondered why anyone actually went to bookstores any more.

“Where do I start to find a book? Where do I look for my favorite authors? Where will I start? I didn’t know,” Sterneckert recalls thinking. “I found myself wanting to go back to the Web so that I could locate what I wanted. I think the tie-in that Borders is trying to do with the Web and in-store experience is really critical.”

Says Ertell: “The idea is to bring all those strengths together, to not only let people place orders in the stores via those and thus augment our store inventory by more than 10 times, but also allow people to create a ‘wish list’ at home and access it at the store.” Scraps of paper that people put in their wallets or pocketbooks will, hopefully, be a thing of the past, he adds.

Site-to-store and store-to-site ordering and pickup or delivery is a critical customer component for all retailers these days. At Borders, the new store-to-site kiosk capability will help to further the brick and mortar and online bind. “If the customer goes into a store looking for something obscure that we don’t carry, they’ve got the ability, right there in the store, to satisfy their need and have it shipped right to the home or to the store,” Harwood says.

AMR’s Sterneckert is bullish on this service offering. “I think the connection between online and in-store presence is really what the customer is looking for and that will pay dividends for Borders,” he says. “You can’t go to other bookstores and have a rich experience, like what you can get online. This can be a competitive advantage for them.”

In Part 2: As the struggling retailer makes a massive effort to win e-commerce success, can it capitalize on any late-mover advantages? Borders IT and business execs take CIO.com inside the technology effort, the early results and the competitive challenge that you can call nothing but Amazonian. See “Inside the E-Commerce Strategy That Could Save Borders, Part 2.”