Tuesday, July 19, 2011

The Bankrupt Business Model of Borders and Blockbuster

On Monday, the news reported that the giant bookseller chain Borders was going to close its final 400 stores nationwide, which meant 11,000 employees will soon be joining the millions of other unemployed job seekers. Wow. Though a part of me is sad about this news, another part of me can't help but see the karmic justice in this demise. The rise and fall of Borders is almost like the business version of the rise and fall of empires.

During the 1980s and especially the 1990s, Barnes & Noble and Borders were the two rival giants in the book world. Their business growth model that included huge inventory requiring tens of thousands of square feet of retail space put a lot of independent bookstores out of business. The brand was important. These gigantic stores popped up all over cities and shoppers could pretty much count on knowing how to navigate these stores because of the brand consistency. When you walked into a Barnes & Noble or a Borders, you knew what to expect. You didn't have to go through the discovery process like you do in an independent book store, which tended to be smaller and more crowded (narrow aisles, no place to sit down, no cafe).

In my own experience, I grew up on the mall bookstores like Waldenbooks or B. Daltons. As a teenager, those were the only bookstores I was familiar with. I'd go there to get the latest Beetle Bailey book, or MAD magazine-published book, or a James Bond novel, or a novelization of a movie. Those were the only books I was interested in during my teenage years. I did not see my first gigantic bookstore until 1994 when I was in my last year in the Navy and I had just moved back from Italy and saw a stand-alone Barnes & Noble. I became a huge fan. To this day, I've always preferred Barnes & Noble over Borders, though since moving to Portland, nothing beats Powell's City of Books (though New Renaissance Bookstore is a close second).

In the Buckhead neighbourhood of Atlanta, there was both a Barnes & Noble and a Borders (though they were a mile or two away from each other). Those chain bookstores put Oxford Books completely out of business, which was the largest bookstore in the South. I had only been to that store a few times. It was huge and very labyrinthian in its floor plan, but probably not nearly as large as Portland's Powell's City of Books. I remember when Oxford finally went out of business. It was a sad day. The end of an era.

When I lived in downtown Portland, I used to go to the Borders downtown quite frequently. I used to buy magazines there or DVDs, and occasionally a book. I was a Borders reward card customer, so they would always send me coupons for anywhere from 30% to 50% off, which was a great deal. Plus, they often had good books in the remainder bins that were hugely discounted. That's why I enjoyed Borders. Last fall, though, I was stunned that the downtown location was closing. They had a huge sale on inventory and I found quite a few books worth getting and saved a bundle of money. The nearby Pioneer Place Mall once had a Waldenbooks in it, but that closed not long after I moved to Portland. I was sad to see that happen, as well.

So far, the Barnes & Noble at Lloyd Center Mall is still there (I was just there on Saturday), but mostly, I shop at Powell's and New Renaissance for my books. I hope those two stores never go out of business. Both are independent bookstores, though Powell's does have other bookstores in Beaverton, on Hawthorne Boulevard, and at the Portland Airport.

The problem that I see with the way Borders (and Barnes & Noble) expanded so quickly illustrates what's wrong with our capitalistic system. The whole point of a free market economy is that people would make their livelihood by creating products or brands that others are interested in buying. The competition sets an equilibrium where prices are moderated and quality supposedly improves. Customers vote with their hard earned cash which seller offers the better bargain. People who make their livelihood by operating their own independent store have a vested interest in keeping customers loyal. Many might offer the kind of personalized attention that a huge conglomeration is not able to offer. These stores might only have a small number of employees. But in comes this huge corporation, with chains all over the country and thousands of employees with huge inventory of product. They lure customers in by offering deep discounts on books, selling new books and bestsellers way below cover price. They can recoup the losses by the purchases that customers make, who pick up more than just the latest bestseller at a discount. Small, independent stores can't compete financially with this practice, so they go out of business. That's another set of people who are unemployed and unable to earn a decent living.

Meanwhile, the huge chain bookstore pays thousands of its employees minimum wage and they can even manage a store with mostly part-time employees, which saves money on benefits. Meanwhile, the corporate suits at some far off headquarters office gets paid a higher salary for doing managerial stuff of running a business with chains all over the country funneling money to headquarters. The conformity of the stores and the inability of corporate managers to be innovative, creative, or even knowledgeable about catering to specific customer interest at the local level helps contribute to the demise. The pressure to show growth every quarter of every year, despite trends of the market place and the health of the economy puts a huge squeeze on these chain stores. Its not exactly cheap to pay for the energy costs of operating a store with tens of thousands of square feet. Think of the costs of air conditioning in the South during the summer! Do these stores sell enough product to pay for overhead and salaries at the local level, much less funding the corporate salary (which is a lot higher because of the sense of entitlement that a typical MBA manager seems to have)? Its no way to run a profitable business. Especially in a recession as well as in the waning days of peak oil and over consumption.

I love bookstores, and yes, I was a customer at Borders, but I think they got what was coming to them. Karmic payback is a bitch! The same fate fell on them what they did to all those independent booksellers in the 1990s. If it wasn't for Borders and Barnes & Noble's rapid growth expansion, I bet many of the independent bookstores might probably still be around today.

The recent news of Borders' bankruptcy and liquidation makes me think of another business model for disaster: Blockbuster video. Its a similar story. In the 1980s and 1990s, Blockbuster video expanded rapidly, putting out a lot of independent video stores. However, I had been in a few independent video rental places in the 1980s and I remember being unimpressed with their selections. Blockbuster was able to have a huge selection because the size of their stores were typically a lot larger than an independent video store.

Blockbuster did have a rival in Hollywood Video. In the past few years, though, I was sad to see all the Hollywood video rental places go out of business in Portland. This made for some great sales of their DVD inventory. I've also seen quite a few Blockbuster stores go out of business as well, though there are a few still around. I stopped using Blockbuster in 2003 or so. I got tired of being charged a late fee for DVDs that I had returned on time. Blockbuster received most of their money from late fees and this became a big issue for them. My father was even angry about their scam, after being told that he had late fees on DVDs that he had returned well before the deadline. Blockbuster so infuriated him that he took a pair of scissors with him and cut up his Blockbuster card in front of the rental clerk. When the store finally closed, our family actually cheered. Good riddance!

What killed Blockbuster? Netflix! And Redbox certainly did not help. When Netflix came on the scene, their big thing was promising no late fees. One can keep DVDs for as long as one wished. The member was charged by the month and the number of DVDs out at one time. This was a huge winner in a lot of people's eyes. The downside is that you have to wait for the mail delivery, so for those who loved to pick up a DVD or two on Friday night, an actual store location was preferrable, which is where Redbox came in. With Netflix and Redbox in expansion mode, Hollywood Video is gone and Blockbuster is fighting to stay afloat.

Like the Borders model, Blockbuster's fate shows what's wrong with corporate thinking. The free market favours innovation. Someone giving customers what they want. This benefits upstarts, which requires thinking outside the box to know what customers want and to meet their demands. Once the upstart becomes a corporate entity, though, a conformist mindset sets in and they are unable to see new challenges ahead in order to prevent the upstarts from stealing their throne. Why do corporate managers get paid so much money if they are unable to think in innovative ways? Ultimately, they end up cannibalizing their own company.

This should be a lesson for every die-hard capitalist out there. Blockbuster was such a giant in the 1980s and 1990s. They basically cornered the market on video rentals. They put so many independent video rental places out of business. Yet no one could foresee the rise of Netflix and Redbox. Netflix has shown its smarts by moving rapidly towards streaming movies directly to computers, because one day, even the mailing of DVDs might become less popular and perhaps even obsolete. The overhead costs are far lower for Netflix and Redbox than they were for Blockbuster and Hollywood Video. Now, in every major city and town and suburb, we have huge empty buildings that once housed thousands upon thousands of books and DVDs. Who will move into these empty buildings?

If you're a corporate hack reading this, I suggest that you take some courses about the rise and fall of empires. Its no different in the business world. Complacency and comfort with one's economic status / managerial position is no guarantee that your company won't come crashing down on you someday. There are always going to be creative thinkers who are hungry to fill the customer needs that you no longer pay attention to. This is the business cycle. The Circle of business life. Hakuna matata, corporate bitches!

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