From todays Wsj,
>>Staff Reporter of THE WALL STREET JOURNAL
Borders Group Inc. is learning a hard lesson: In today's Web-crazed economy, if you're slow to climb aboard the dot-com express, you're toast.
The Ann Arbor, Mich., company is America's most profitable bookseller. It soon will report annual earnings that are expected to be nearly twice the size of those at the larger Barnes & Noble Inc. After being spun off from Kmart Corp. in the mid-1990s, it ran fast out of the gate with a highly regarded management, 20%-plus annual earnings gains and, later, successful expansion abroad.
None of this seems to matter to investors, who have lately pummeled the stock to a 52-week low. How, they wonder, did Borders, a book-superstore pioneer of the early 1990s known for its vast book selection and coffee bars, wind up a distant No. 3 in Internet book-selling, the most dynamic area of the book business?
Borders, which prides itself on above-average service, believed people would be willing to wait for a better site. It let Amazon.com Inc. get a three-year head start before introducing its own Internet book-selling site. But when Borders.com finally arrived last May, many of its best features -- such as selling books, music and video together -- were quickly replicated by rivals that had a head start.
"It's catch-up time. No question," says Philip Pfeffer, Borders' chief executive. Mr. Pfeffer, a former president of Random House and chief executive of book and media wholesaler Ingram Distribution Group, was named CEO in November after a year-long search to find a successor to Robert DiRomualdo, who led Borders' national expansion.
Twice last month, the 54-year-old Mr. Pfeffer had to concede analysts' profit estimates were too high for the just-ended fiscal year. Sales were softer than expected, partly because the public embrace of book-buying over the Internet finally is starting to erode sales at Borders superstores.
The Internet isn't the only problem for Borders. By its own admission, massive superstores have lost some of their appeal. While Borders continues to open superstores at a rapid clip, they are no longer novel, and competition has increased from unconventional booksellers such as Home Depot Inc. as well as the Internet. "My sense was our stores weren't very inviting to consumers," Mr. Pfeffer said after a year-end visit during the holidays. "They looked cluttered."
Fourth-quarter sales growth at Borders superstores open a year or more slipped to a low single-digit rate, quite a comedown from a 15%-or-better annual growth rate at the superstores from 1992 through 1994. Meanwhile, Amazon had sales of $610 million in 1998. Sales at Borders.com were less than $5 million.
Many would have picked Borders to lead the way to the Internet rather than follow. Born in 1971 near the University of Michigan campus as a used-book store, Borders seemed less corporate than other book chains, even as it built 250 superstores during a nose-to-nose real estate and marketing battle with Barnes & Noble.
Under its former CEO and current chairman, Mr. DiRomualdo, an opera buff who once ran supermarkets and the Hickory Farm roadside-store chain, Borders burnished its reputation for having superior stores and ultra-knowledgeable staff. It tested salespeople on their knowledge of authors and music. It was first with coffee and espresso bars in its superstores and first to sell music CDs along with books. It was a corporate sponsor of the Lilith Fair rock tour and catered to sometimes eccentric reading tastes of local communities.
Borders encouraged a contrarian, eclectic corporate culture reminiscent of a funky graduate school. Book buyers came to work in grunge attire with tattoos and pierced body parts. But they made smart bets; Borders ordered large amounts of Random House's "Primary Colors" in 1995, months before it was published and its author Anonymous became a sensation. The culture was loose. No one, not even Mr. DiRomualdo, wore a tie.
Borders managers weren't Luddites. As early as 1990, Borders' mission statement envisioned distributing a computer floppy disk that customers could use to order books from home, Mr. DiRomualdo recalls. But Amazon burst on the scene with an Internet-only book-selling site in 1995, and barnesandnoble.com followed by 1997. Borders.com got in the game less than a year ago, and its site had to be upgraded twice before Christmas and is being upgraded again.
Some analysts still fault Borders.com when it comes to search functions and ease of use. In a report last week, analyst Danielle Turnof Fox of J. P. Morgan Securities said while Borders.com offers "superior" shipping speed, "it tends to be more expensive and its editorial content is not yet commensurate with its premium pricing." Other surveys have rated Borders.com better on price.
Borders had begun building its site in earnest by early 1997. But Mr. DiRomualdo didn't want to start small. Borders labored to create a fulfillment center for books, music and videos outside Nashville, Tenn., that would have 10 million items ready to ship the day an order is placed.
Mr. DiRomualdo periodically has expressed wariness about the Internet, where he considers the profit potential too small for book sellers. As late as last year, he told a Merrill Lynch retailing conference that selling books online "is a low-margin retailing business." Even now, in an interview from his retirement home in Naples, Fla., Mr. DiRomualdo is an Internet skeptic.
"Should we have moved faster? Yes," he concedes, but adds, "If we had moved faster, how much better off would we be? We certainly would have lost more money." He calls "just insane" the current stock-market view of Internet stocks, with their sky-high valuations despite their companies' lack of profits.
Borders also got hurt as rivals advertised more aggressively. The company slashed its TV advertising budget last year because it wasn't certain the ads significantly improved store sales. But barnesandnoble.com was spending millions on a nationwide TV and print campaign, a move that drove people to its sites as well as its stores. Borders executives say they are uncertain how much they will spend on advertising and promotion this year.
Borders is intent on making Borders.com a player. It poured millions into renewing its position as exclusive bookseller for Walt Disney Cos.' Go.com portal and beat out e-commerce rivals to be the exclusive online music retailer for the Webcast of the 41st Grammy Awards on Wednesday. This year, Borders has told analysts to expect Borders.com sales to increase to $25 million. But losses will balloon too, resulting in a loss for the company of between 21 cents and 24 cents a share, or about double the loss of last year.
Borders says that it doesn't want to "out Amazon Amazon.com" and that the retailer won't lose sight of its core store business. Mr. Pfeffer is busy revamping Borders stores after his Christmastime tour. "They weren't dressed for the holidays," he says.
Borders is now repainting its superstores, replacing its yellows and browns with a "more sophisticated" reddish yellow, electric blue and tomato red. Its logo, now white letters on a burgundy background, will become white on black. Departmental signs in stores are being made larger and suspended from the ceiling in addition to being mounted on walls and book shelves.
Mr. Pfeffer envisions "a retail convergence," where Internet technology is integrated with superstore operations. For example, Borders.com lists its store locations on its site for travelers. Meanwhile, customers later this year will be able to special-order a book over the Internet while at a Borders store. People who register for Borders.com will soon get a coupon for a free cappuccino at one of the stores.<< |
