Borders' New E-Commerce Strategy Falls Flat During Holidays

In 1971, Tom and Louis Borders opened an 800-square-foot used bookstore in the quintessential college town of Ann Arbor, Michigan, and named it Borders Book Shop. Flash forward nearly 40 years, and their namesake book establishment, now expanded to 1100 stores and 28,000 employees worldwide with a state-of-the-art e-commerce website, is in trouble on a Dickensian scale.

The 2008 holiday shopping season was the worst in several decades: Retail industry sales fell 2.2 percent, the biggest decline since at least 1970, according to the International Council of Shopping Centers.

Borders Group, in particular, found little joy in the season. It reported that during the nine-week holiday period that ended Jan. 3, 2009, total consolidated sales were US$869 million, which was an 11.7 percent decline compared to the same period last year. Comparable store sales at Borders superstores, a key retail metric, showed a decline of 14.4 percent compared to the same period in 2007.

Borders then announced a management reshuffling on Jan. 5: Out went CEO George Jones, who had been specifically hired in 2006 to turnaround the company; other high-level positions were shaken up. (Susan Harwood, who joined in 2007, remained as CIO.) And lastly, Borders heard from the New York Stock Exchange that it was closer to being delisted. 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. In early January 2009, a share of Borders Group stock traded at about 50 cents.

A central piece of Borders' turnaround strategy has been its new e-commerce engine, which launched in May 2008 and. Since 2001, the Borders brand had used Amazon.com as its e-commerce vehicle, the same Amazon.com that had always been its most formidable competitor.

Borders' 2008 quarterly US Securities and Exchange Commission filings show the new Borders.com as being at the centre of the Borders in-store and online experience. "The proprietary e-commerce Web site will allow the company to engage in key partnerships that are expected to build incremental revenues and margins, connect e-commerce sales to the Company's Borders Rewards loyalty program and integrate Borders.com into the domestic Borders superstores," according to one such filing.

Senior VP of E-Business Kevin Ertell said this to CIO.com, in August, regarding the success of the new e-commerce site: "I don't think it could be any more important."

Page Break

Season of Discontent Online

The 2008 holiday shopping season was, of course, abysmal for retailers. Book and music purveyors such as Borders and Barnes amp; Noble struggled. According to holiday e-commerce data from comScore, online retailers fared better than brick-and-mortar stores, though online still took its lumps, with overall sales falling 3 percent between November and Dec. 23rd, when compared with data from 2007.

Online consumer spending in the "books and magazine" category dropped 1 percent year over year; the "music, movies and videos" category crashed 32 percent, according to the comScore data.

The lone bright spot among the e-commerce wreckage was Borders' former partner, Amazon.com. The day after Christmas, Amazon executives called the season its quot;best ever.quot; Compared with 2007 results, spending per customer was up 17 percent, as was customer spending per visit (up 4 percent), according to Geezeo's Main Street Spending Index data.

In the second half of 2008, Amazon.com estimated that its earnings would be around $20 billion for the entire year. During the 2008 holiday period, Borders.com delivered $20.3 million of the $869 million in overall sales, which is roughly 2.4 percent of the total, according to Borders' SEC filings and press releases. Other pieces of financial data, however, show that the e-commerce site is delivering, as a percentage of sales, even smaller amounts to the bottom line.

In the third-quarter, for instance, online delivered just 1.7 percent of sales to the total of $682 million. In looking at the previous 39 weeks that ended on Nov. 1, 2008, Borders.com delivered less than 1 percent of the company's $2.1 billion in sales.

"Progress has been made by Borders Group over recent quarters within the challenging economy to reduce debt, improve cash flow, cut expenses, enhance inventory productivity and improve margins," said Borders Group Board of Directors Chairman Larry Pollock, announcing the management moves in January, "but it is imperative that the company more aggressively attack these initiatives to address its long-term future."

On the day of the management shake up, serious questions hung over the company regarding more layoffs, more store closings, or another attempt to sell the company, noted The Ann Arbor News's Stefanie Murray. Cutting costs and streamlining operations were top of mind for the new Borders' executives. Noticeably absent from their latest "transformation" rhetoric was the Borders.com e-commerce strategy.

David Schick, an analyst with Stifel, Nicolaus Co., told The Ann Arbor News that his company had decided to end coverage of the Borders Group stock. "I just think it's sort of like when there is a football team out on the field and there is the biggest blizzard it's been in the past 50 years, do you change the coach at half-time?" Schick said. "That is kind of what it feels like to me."

Copyright © 2009 IDG Communications, Inc.

Security vs. innovation: IT's trickiest balancing act