Incorporated: Borders Group incorporated 1994
NAIC: 451211 Book Stores; 45122 Prerecorded Tape, Compact Disc
SIC: 5942 Book Stores; 5735 Record & Prerecorded Tape Stores; 6719 Holding Companies Nec
Borders Group Incorporated is the second of the three largest bookstore chains in the United States, based on sales and number of stores. It is the fastest-growing bookstore chain. It operates 354 superstores under the name Borders Books and Music. The superstores feature books as well as special events, including live music, story times, and appearances by artists and authors. The Borders Group subsidiary, Waldenbooks, leads all other book companies in the world in the mall-based book business. Waldenbooks operates stores in over 862 malls and airports. In addition, Borders Group's efforts at international expansion has led to the establishment of Borders bookstores in the United Kingdom, Australia, Singapore, New Zealand, and Puerto Rico. Borders Group, Inc. also has 32 bookstores in the United Kingdom operating under the name Books Etc.
Borders Group, Inc. came into existence following the spinoff from its parent Kmart Corporation in May 1995. However, the Borders name dates back over two decades. Borders began as an independent used bookstore in Ann Arbor, Michigan. The shop was founded in 1971 by Louis and Tom Borders. Serving the bustling academic community of the University of Michigan and Ann Arbor's smaller colleges, the store held its own and became a popular neighborhood hangout. Within the next several years, the Borders brothers opened two more bookstores in Michigan, one in Atlanta, and another in Indianapolis. In addition, Louis and Tom started a wholesaling business they called BIS (Book Inventory Systems), which experienced healthy growth.
Toying with the idea of a "superstore," the brothers opened their first prototype large-scale retail store in 1985. Its success and the rise of similar competing stores set the retail book industry on its ear. The superstore model shifted sales from small, indoor-mall-based chain stores and independent booksellers to the new chain superstores. By 1988, with their five Midwest bookstores and BIS's bustling service numbering 14 bookstore clients, the brothers' enterprise was bringing in a net income of $1.9 million from sales of $32.3 million. But the brothers wanted to expand in a big way.
To achieve their dream of taking the Borders name national, Louis and Tom put their faith in a young man named Robert DiRomualdo. DiRomualdo had a Harvard MBA, and was a graduate of the Drexel Institute of Technology. DiRomualdo had worked his way through several merchandising and marketing positions at Acme Markets and Little General Stores before becoming president and chief executive of Hickory Farms, the prominent food shop chain.
When DiRomualdo joined the Borders brothers' enterprise in 1988, the industry was ripe for the kind of expansion Louis and Tom had hoped for. The late 1980s and early 1990s were a time of unprecedented growth for book retailers. Industry sales mushroomed from $59 million in sales for the top two superstore chains with only 31 units in 1989, to nearly $1.4 billion by 1994 from 350 units; this represented an astounding 87 percent compound annual rate. Taking advantage of these circumstances, DiRomualdo, who was named president and chief executive in 1989, opened 14 new stores in the next three years. Within a few short years, DiRomualdo had turned Borders into a household name in the Midwest, and analysts considered Borders the premier book superstore chain of the 1990s.
By 1992, Borders had quadrupled its size and was beginning the complicated process of going public. Around the same time, the retailer attracted the attention of the huge Kmart Corporation, which had bought Waldenbooks in 1984 and was looking to expand its book retailing segment even further. In October of 1992, Louis and Tom Borders sold their business (though they remained investors), and Borders became a wholly owned subsidiary of Kmart. Sales from Borders' operations for 1993 reached $224.8 million, a 15.8 percent increase in net sales over the previous year. Several changes were implemented in 1993, including modernized cash registers, a human resources department, formal training programs for employees, and the introduction of music to the stores' stock.
In August 1994, Borders and sibling Waldenbooks formed a new company called Borders Group, Inc., with plans to eventually break free from Kmart. DiRomualdo joined with George Mrkonic, who ran Kmart's specialty stores division for four years (which included Builders Square, The Sports Authority, Pay Less Drug Stores, Waldenbooks, Borders, Kmart's in-store Reader's Market shops and others) and had jumped over to the Group in November. He had helped shape the company into a mechanized book and music mecca. By the end of the year, Borders had acquired five CD Superstores and one Planet Music outlet. The company went on to add four Planet stores and 32 new Borders superstores.
The Group's overall sales for 1994 reached $1.5 billion. With what some analysts have called the industry's most sophisticated computer inventory management and sales system, Borders not only possessed the highest sales-per-foot ratio in the industry, but was able to track popular titles by selling season. Borders had identified as many as 55 separately defined seasonal patterns and programmed these into the computer system to keep better track of seasonal and regular bestselling titles, and to help maintain a supply of such titles with little or no interruption in prospective sales.
Though Kmart's ownership of Borders (and Waldenbooks) was to end with the formation of the Borders Group, Inc., finances were settled with the proceeds of a public offering of the new company's stock in May 1995. Two months later, Borders announced it would purchase Kmart's 13 percent stock share. DiRomualdo was installed as chairman and chief executive, while Mrkonic became vice-chairman and president. After a one-time write-off of $182 million, the Borders Group announced second quarter (1994) sales of nearly $364 million, representing an 11.7 percent gain over the previous year's posted sales of $327 million.
Though Borders' transition from small retailer to national chain wasn't completely smooth, many long-time employees remained with the company and were rewarded for their loyalty by generous benefits worked out during the Kmart acquisition. One sore point arose in 1994 with the proposed closure of Louis and Tom's original Borders store in Ann Arbor, set for relocation into an old department store building. Not only was the new store slated to be a Borders Books & Music (the previous was books-only), but its spacious 45,000-square foot interior (four times the size of the original) could in no way maintain the homey atmosphere of the first Borders book shop, despite the added benefits of much more space and extras like the popular new espresso bars.
Nevertheless, Borders new format was obviously giving customers what they wanted and needed. In addition to its unique, state-of-the-art inventory and ordering system, Borders' employee base was another of its major boons; most employees were full-time and college-educated, and all were tested for their knowledge of literature and music prior to hiring. Additionally, the bookstore chain prided itself on first-rate customer service, offering patrons a wide range of services, from locating out-of-print titles to community activities like children's storytelling hours and poetry readings.
Rounding out Borders' offerings were growing varieties of alternative educational and informational media, from videos to CD-ROMs, a relaxing and comfortable environment that encouraged customers to linger, and the ubiquitous espresso bars. An industry-first that was quickly copied by competitors, Borders' espresso bars grew from a store add-on and overhead cost to a $20 million profit per year venture. In 1995, 82 of the company's 88 superstores had espresso bars, and all new stores were scheduled to have them.
The Borders superstore prototype in 1996 was 30,000 square feet of space, substantially larger than major competitor Barnes & Noble's megastore. Averaging 128,000 book titles and about 57,000 prerecorded music titles at an initial cost of $2.6 million, most Borders superstores became profitable within 12 months of business. Since the majority of Borders' superstores were built following the early 1990s, the company's success by 1996 had been swift and immediate.
Revenue figures for year-end 1995 were just shy of $1.6 billion for the Borders Group as a whole, with Borders Books & Music stores contributing over $622.6 million (a 63.4 percent increase over 1994's sales). The superstores contributed a healthy 39.6 percent slice of the Group's overall sales, a welcome and expected 12.2 percent increase from their share in 1994. Sales in 1996 reached more than $2 billion, with Borders' superstores division hitting $950 million.
Second only to Barnes & Noble in sales, industry analysts chose Borders' superstores over Barnes & Noble as having a better variety of products, and most expected the bookseller to overtake its rival in the near future. Additionally, Borders planned to take advantage of Waldenbooks' status as a cash cow to finance expansion across the nation. Scheduled to open between 30 and 35 new Borders superstores in 1996 and to continue the trend (from 35 to 40 new superstores per year) until the end of the 1990s, Borders hoped to not only prove its mettle but to become the country's top book-retailing chain.
The late 1990s and early 2000s posed significant challenges to the book industry, in general, and Borders Group specifically. Stock prices were down, online businesses suffered losses, and shareholders questioned Borders management. Independent booksellers went to court with charges that the big chains had made unfair deals with publishers, thus discouraging competition. Borders was ordered to pay the American Booksellers Association (ABA) a settlement of $2.5 million in June 2001.
Financially, the year 2000 was a gloomy one for book retailers. Borders Group, Inc. stock price dipped 28.1 percent during the year, though sales and earnings during the last quarter increased 18 percent and were up 9.9 percent for the year. Annual sales at superstores increased 14 percent over the previous year.
The Company's Web site, Borders.com, launched in 1998, was the big loser for the Company. Though sales were up in the fourth quarter, total annual sales were down $27.4 million. The site posted losses in the fourth quarter of both 1999 and 2000, with an annual loss of $18.4 million for the year 2000. Borders became an online bookseller later than its major, already well-established, competitors. Business losses were also attributed to a general retreat in the industry from discounting online purchases, and subsidizing book sales by selling below operating costs. As Borders and other online sellers stopped discounting and offering other incentives to purchasers, online sales were reduced substantially. Borders Group, Inc. closed the doors on its online store and turned it over to Amazon.com in April 2001. Amazon.com planned to provide inventory, content, and customer service for the new Borders.com, and Borders Group planned activities to boost sales for the site.
In December 2000, Borders management faced heavy criticism from shareholders Alan and Barry Lafer, who controlled approximately two percent of the Company shares. The Lafer brothers had previously asked the Company to consider strategic options, including a possible sale of Borders Group, Inc. The Lafers accusations were fueled by the Company's slow growth during the previous fiscal year. During summer 2000, Merrill Lynch had been hired to evaluate the options. Subsequently, the Company resolved to remain independent. In renewed criticism, the Lafers charged that the half-time employment contracts of top executives weakened the Company's management capabilities. Part-time management leads to part-time results, they claimed.
The Lafer brothers also accused management of errors in handling the Company's online expansion and the acquisition of the retail toy store, All Wound Up. The Company had acquired All Wound Up in March 1999 and, by January 2001, planned to discontinue its operations.
In March 2001, Borders announced that Greg Josefowicz, the president and chief executive, would become chairman at the end of the year, replacing Robert DiRomualdo.
After the realignment of online commitments and internal review of options and management, Borders Group's strategy in the new millennium was to continue growth and increase profitability by focusing primarily on its superstores and continuing to develop mall and kiosk bookstores.
Principal Subsidiaries
Borders, Inc.; Waldenbooks.
Principal Competitors
Barnes & Noble; Books-A-Million; Amazon.com.
Further Reading
"Amazon.com and Borders to Relaunch Borders.Com," EFE World News Service, April 11, 2001.
"Barnes and Noble and Borders Group to Pay American Booksellers Association settlement," Chain Store Executive with Shopping Center Age, June 2001, p. 24.
"Borders Group," Billboard, January 20, 2001, p. 71.
"Borders Group," Billboard, March 31, 2001, p. 55.
"Borders Group, Inc. Announces Year-End Results," PR Newswire, March 11, 1996, p. 311.
"Borders Group, Inc.: Booking Profits," United States Equity Research: Retailing, June 22, 1995.
"Kmart Sells Remaining 13% Stake in Borders Group," New York Times, August 17, 1995, p. C3.
McKenna, John F. and Buchanan, Robert F., "Strategic Assessment: Borders Group, Inc.," NatWest Securities, October 9, 1995.
Milliot, Jim, "Chain Sales Rise 9% to $7.2 Billion," Publishers Weekly, April 2, 2001 p. 9.
------, "Industry Stocks Stumbled in 2000," Publishers Weekly, January 8, 2001, p. 10.
Mutter, John, "Beyond Borders: Trimming Walden," Publishers Weekly, February 7, 1994, pp. 28-32.
"Taking over Borders.com," Display & Design Ideas, May 2001, p. 10.
— Taryn Benbow Pfalzgraf; Update: Elizabeth Shé
