Borders Suspends Payments to Some Publishers

[DMcCunney]

Borders is looking for ways to restructure:

http://online.wsj.com/article/0,,SB1...239132,00.html

Jeffries and Co. are among those advising Borders, causing some interest in the market, as Jeffries is known for restructuring efforts. Borders claims they have no plans to file for bankruptcy, but it's hard to see how they can avoid it.
______
Dennis

[fjtorres]

Originally Posted by DMcCunney

Whether a big store makes economic sense depends on where it is. Part of the issue with Borders vs B&N is that they were trying to compete in the same markets with the same approaches. There may be a market to support one superstore in an area. There is unlikely to be room for two.
______
Dennis

I'm not sure that geography can save either chain, *long term*.
A Borders closure will clearly help B&N given that ridicuous 70% overlap rate.
But the number I saw said B&N would be capturing 19% of the borders market share. And they'll be losing about that much to discounters and ebooks in just a few years.
That's why I think a Borders implosion will only buy B&N time to switch to a sustainable business model.
(shrug)
I just don't think there are many, if any US locations where stocking tens of thousands of different books will be competitive with online. Places with the affordable rent will lack traffic, places with the traffic will be too expensive to operate. And consumers are *not* going to swallow $50 hardcover prices.

Even B&N's optimistic analysis from today's press release sees quick and significant decline in their volume of print sales. Their strategy clearly states they see attrition and consolidation; they just intend to be the last vendor standing, is all.

Time will tell.
Peace!

[DMcCunney]

Originally Posted by DaronFraley

I think there is a parallel to music stores with all this. When I was growing up, music stores were all over the place. That was one of the few places you could go to get a record or a cassette tape. Department stores sold music too, but in limited quantities. Those were the days of tangible music collections; the record, the cassette, and then the CD. Now CDs are sold at three places: Online stores, a FEW specialty music stores, and department stores.

How few the specialty music stores are depends on your location. There's an active one relatively near me in NYC, for example, which has been there for a long time. I've bought a few things there, but it has persisted because it's one of the best places to find latin music. NYC has a large Latino community, so more than a few shops cater to them.

This seems to be happening to books too. Walmart, Target, etc. entered the book selling business. Online stores were already in place. And the brick and mortar stores seem to be disappearing. I think that if a brick and mortar store doesn't sell MORE than just books, their days are numbered. Book stores are going to be as rare as music stores, in my opinion.

Walmart and Target sell books. So do the people squeezing them, like CostCo and Sam's Club. But selection will be limited. Those guys sell in volume, and if it won't move in volume, it's unlikly to be ordered.

I think you're right on the "sell more than just books", however. The B&N superstore near me, for example, has new bestsellers front and center as you enter on the ground floor, with rest of floor taken up by cards/gifts/knick-knacks/nooks. Most books are on other three floors, with cafe on third. Bookstores will increasingly diversify product mix to survive.
______
Dennis

[fjtorres]

Originally Posted by DMcCunney

I think you're right on the "sell more than just books", however. The B&N superstore near me, for example, has new bestsellers front and center as you enter on the ground floor, with rest of floor taken up by cards/gifts/knick-knacks/nooks. Most books are on other three floors, with cafe on third. Bookstores will increasingly diversify product mix to survive.
______
Dennis

Borders tried to diversify, no?
CDs, DVDs, stuffed bears.

Thing is, is a bookstore still a bookstore if it makes its money off everything *except* books? At what point does stocking books become a public service or loss leader instead of your core business?
Cause if books are just a traffic-draw for your *real* profit center... Well, that is why Target and Walmart sell books.
Is B&N going to become just another dry goods retailer masquerading as a book store?
I dunno...

[Graham]

Originally Posted by DMcCunney

... knick-knacks/nooks ...

Graham

[ATimson]

Originally Posted by fjtorres

Borders tried to diversify, no?
CDs, DVDs, stuffed bears.

They tried... I just don't think they did very hard. (They'd probably have been better off discounting CDs/DVDs and saying that coupons aren't valid on them, rather than expecting people to connect "price after coupon is the same or less than at Target".)

[fjtorres]

Don't think this merits a different thread, so here goes:

In checking out the various reports out this week some numbers have popped up that suggest just how disfunctional consumer book retailing as a whole has become.

1- B&N and Borders combined are supposed to account for 49% of all books sold in the US. Amazon adds 28%. Number four Books-a-million is supposed to chip in with 9% or so. That means that four retailers account for 90% of the sales? Add in walmart and Target and that means regional and independent bookstores barely register.

2- Neither B&N nor Borders seems to be making money off the consumer book operations. Borders is bleeding to death and B&N is hanging on off the growing ebook and college bookstore business. Factor in Walmart and Target and it's clear that over half the books are sold at a loss. I'm not familiar enough with B-A-M to know how their sales and financials are structured or how they're sited (or how much they rely on BPH bestsellers) but it seems at first glance that they (and the niche bookstores like Powells) are the only ones making money in B&M consumer book sales.

3- Added up, it seems like nobody makes money retailing bestsellers (except, maybe, online); just the publishers and big-name authors.

Maybe Borders *is* right to ask the BPHs for relief.
Maybe Borders problems aren't all about bad management.
It's taken a lot of short-sighted decision making in a lot of places to get here.

4- I vaguely remember B&N sales being sized at 32% of the market, which leaves Borders at about 17%. Factoring in the quote about B&N capturing at most 19% of Borders' volume (3.2% of the total) in a Borders liquidation, the next question is what happens to the other 14%. Does it go away totally, as some analysts are saying? Does it go to the dept stores? Does it go online? To ebooks?

5- In their crowing press release B&N brags that they see the dept stores and "other" competitors leaving the book retailing business as the industry consolidates and that they intend to prosper as the consolidator. But a business where 90% of the volume is controlled by just 4 players is already consolidated more than common sense suggests is sensible. Cut it down to three and it's going to start looking like a dying business or a monopoly in the making. Neither is good.

5- Factor in ebooks. Factor in that the most prolific book buyers seem to be transition to ebooks and/or online retailing. Factor in that the most successful reader platforms, so far, are tied to walled-garden ebookstores. Factor in that Borders does *not* have one of those walled gardens as an escape hatch. Neither does B-A-M, btw; they've outsourced that to B&N.

I'm sorry but I don't see Chapter 11 working for Borders.
Unless the BPHs or some other samaritan throws a lifeline to Borders in the name of channel diversity, what I see ahead is Chapter 7.
Anything else will simply be preserving a zombie operation.

Things aren't as bad as they seem; they're worse.

Edit: BTW, if anybody has better numbers, please link the sources; I'd like to see a ray of hope somewhere.

[fjtorres]

Originally Posted by ATimson

They tried... I just don't think they did very hard. (They'd probably have been better off discounting CDs/DVDs and saying that coupons aren't valid on them, rather than expecting people to connect "price after coupon is the same or less than at Target".)

But what else *could* they do?
Neither CDs nor DVDs are a growth industry themselves.
B&M retailing of any kind *isn't* a growth business these days.
The biggest B&M retailers of CDs and DVDs (Best Buy and Walmart) use them as traffic-draw loss-leaders.
Times are tough and tough times stress the weak players...
...often to destruction.

[jasonkchapman]

Originally Posted by fjtorres

Is B&N going to become just another dry goods retailer masquerading as a book store?
I dunno...

I'm not sure that's such an unusual thing, though, even online. Amazon certainly doesn't make most of its money from books. I'm pretty sure the combined sales category of "Books, Music, Movies, Video Games and Consoles, Software and Digital Downloads" is still less than half of their total revenue, with the rest being electronics and other merchandise.

Personally, I've spent more on light bulbs and VOD at Amazon than I have on books.

[fjtorres]

Amazon is more of an online shopping Mall than anything else since a lot of their revenue comes from hosting other stores and providing backend services to entirely unrelated businesses.

The main distinction between Amazon (which is thriving, like other online retailers) and B&N/Borders is the B&M portion of the business, not breadth of product. Books are a key to Amazon's visibility but they're not key to their survival. That means they're not subject to the vagaries of the book business; one of the reasons for all the vitriol generally heaped upon them. Unlike other booksellers not named Walmart and Target, they are *not* subject to the whims of the BPHs and they're not shy about pushing back when they think its appropriate. *Their* share of the consumer book business is in no danger. *Their* business model works.

It's B&M retailing that is at risk today.

[DMcCunney]

Originally Posted by fjtorres

Borders tried to diversify, no?
CDs, DVDs, stuffed bears.

Yes, but diversification characterized by poor execution and a revolving door on the CEO's office, with no coherent long term plan. I really wonder what their board was thinking, if "thought" is the term to apply.

Thing is, is a bookstore still a bookstore if it makes its money off everything *except* books? At what point does stocking books become a public service or loss leader instead of your core business?

If you aren't making some money selling books, you're in the wrong business. The question is whether you can make enough money selling only books. The answer to that question appears to be no.

Cause if books are just a traffic-draw for your *real* profit center... Well, that is why Target and Walmart sell books.

Er, what do you think Target and Walmart's real profit centers are?

I think it's a fair assumption they make money selling books. Product lines that don't generate revenue at least sufficient to cover the space devoted to them aren't likely to be retained.

Is B&N going to become just another dry goods retailer masquerading as a book store?
I dunno...

I don't either, but there's a market for books, paper books aren't going away in the near future, and there will continue to be opportunities for retailers selling them, even in brick and mortar environments. B&N is better placed to survive than most bookstores.
______
Dennis

[DMcCunney]

Originally Posted by fjtorres

Don't think this merits a different thread, so here goes:

In checking out the various reports out this week some numbers have popped up that suggest just how disfunctional consumer book retailing as a whole has become.

1- B&N and Borders combined are supposed to account for 49% of all books sold in the US. Amazon adds 28%. Number four Books-a-million is supposed to chip in with 9% or so. That means that four retailers account for 90% of the sales? Add in walmart and Target and that means regional and independent bookstores barely register.

Correct, but that's been the case for some time. Retail consolidation has been steadily progressing, and not just in book retailing. Competition is largely on price, and everyone wants market share and economies of scale, to lower costs, get bigger discounts, and offer lower prices.

2- Neither B&N nor Borders seems to be making money off the consumer book operations. Borders is bleeding to death and B&N is hanging on off the growing ebook and college bookstore business. Factor in Walmart and Target and it's clear that over half the books are sold at a loss. I'm not familiar enough with B-A-M to know how their sales and financials are structured or how they're sited (or how much they rely on BPH bestsellers) but it seems at first glance that they (and the niche bookstores like Powells) are the only ones making money in B&M consumer book sales.

Other people are still making money in consumer book sales, but I think the ones who are have a specialist focus. There's an indie Juvenile/YA bookseller in my area that seems to be doing okay. Another is a specialist photography bookseller.

3- Added up, it seems like nobody makes money retailing bestsellers (except, maybe, online); just the publishers and big-name authors.

Depends on the best seller. Standard trade discount is 40%. Big outfits like B&N probably get 50%. Amazon appears to get 55%. There's margin to play with to reduce the price the consumer pays and still make money on the sale. Really popular titles might be offered as "loss leaders", sold at a loss to attract traffic that will (hopefully) buy other things once they are on premises. The Harry Potter books had that happen, simply because they were so popular and everybody bought them.

The HC best sellers have the highest prices and margin, and having best selllers may mean the difference between a profit and a loss on the year for the publisher.

Maybe Borders *is* right to ask the BPHs for relief.
Maybe Borders problems aren't all about bad management.
It's taken a lot of short-sighted decision making in a lot of places to get here.

From Border's perspective it is. They want to survive.

But the underlying problem is an extension of one publishers have been struggling with for years. There are too many books chasing too few readers, and too many bookstores chasing too few customers.

Publishing has gone through wrenching rounds of consolidation and trimming of lines to adjust supply to demand. Retailing is doing likewise. The available market can support a B&N or a Borders, but probably can't support both.

4- I vaguely remember B&N sales being sized at 32% of the market, which leaves Borders at about 17%. Factoring in the quote about B&N capturing at most 19% of Borders' volume (3.2% of the total) in a Borders liquidation, the next question is what happens to the other 14%. Does it go away totally, as some analysts are saying? Does it go to the dept stores? Does it go online? To ebooks?

I doubt it simply goes away. That would imply a fair sized number of folks simply not buying books any more, which I don't see happening. Online is one alternative. eBooks are another.

5- In their crowing press release B&N brags that they see the dept stores and "other" competitors leaving the book retailing business as the industry consolidates and that they intend to prosper as the consolidator. But a business where 90% of the volume is controlled by just 4 players is already consolidated more than common sense suggests is sensible. Cut it down to three and it's going to start looking like a dying business or a monopoly in the making. Neither is good.

It might not be good, but it likely is inevitable. In any industry, as it matures, some players become bigger and some fail. In a mature industry, you are likely to see two or three big guys dominating the market, with an assortment of specialty niche players addressing holes in what the big guys offer.

But I don't see department stores and other competitors leaving book retailing entirely. The issue from the publisher's and buyers perspective will be selection. I was in a BJ's warehouse store a few weeks ago. They sold books, but the selection was mostly current best sellers like the new Tom Clancy novel and Keith Richard's autobiography. Outfits like that buy and expect to sell in volume, and if they don't think it will move in volume, they aren't likely to order it. Similar comments apply to places like Target and Walmart.

5- Factor in ebooks. Factor in that the most prolific book buyers seem to be transition to ebooks and/or online retailing. Factor in that the most successful reader platforms, so far, are tied to walled-garden ebookstores. Factor in that Borders does *not* have one of those walled gardens as an escape hatch. Neither does B-A-M, btw; they've outsourced that to B&N.

I don't think B-A-M is big enough for the "walled garden" ebookstore to do them a lot of good. Outsourcing to B&N isn't necessarily a fail. It saves them development and infrastructure costs. The question is what sort of revenue and profit they make on the connection.

I'm sorry but I don't see Chapter 11 working for Borders.
Unless the BPHs or some other samaritan throws a lifeline to Borders in the name of channel diversity, what I see ahead is Chapter 7.
Anything else will simply be preserving a zombie operation.

I don't see Chapter 11 either. Borders might want to go that way, but such a deal has to be approved by creditors and the courts. The creditors will want a deal that pays them off, and I suspect the publishers who are owed money by Borders aren't first in line - lenders propping up Borders, like GE Capital, will have a prior claim.

Things aren't as bad as they seem; they're worse.

Edit: BTW, if anybody has better numbers, please link the sources; I'd like to see a ray of hope somewhere.

You can find some numbers from the publishing perspective at the Association of American Publisher's Industry Statistics pages, here: http://www.publishers.org/main/Indus...ndStats_01.htm
(Most recent stats are as of October 2010. Full year 2010 stats aren't out yet.)

I don't have numbers handy for book retailing.
______
Dennis