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Why Borders Failed While Barnes & Noble Survived

Yuki Noguchi

Borders Group Inc., the nation's second-largest bookstore chain, announced that it will liquidate the company. Justin Sullivan/Getty Images hide caption

It appears to be all over for the Borders bookselling chain. The company will be liquidated — meaning sold off in pieces — and almost 11,000 employees will lose their jobs. The chain's 400 remaining stores will close their doors by the end of September.

The retailer's first bookstore opened in Ann Arbor, Mich., 40 years ago. Along with competitor Barnes & Noble, Borders pioneered the book megastore business. But Borders made some critical missteps over the years that cost it the business.

The vast tracts of retail space that Borders will soon vacate speak to a gargantuan business that essentially killed itself. At one time, size was its advantage. Borders built a reputation on offering a huge variety of books — tens of thousands of titles in a single store — at a time when most bookstores could afford to stock a fraction of that.

Borders also had an early technical advantage: a superior inventory system that could optimize, and even predict, what consumers across the nation would buy.

But in the mid-1990s, Borders lost its edge.

"It made a pretty big bet in merchandising. [Borders] went heavy into CD music sales and DVD, just as the industry was going digital. And at that same time, Barnes & Noble was pulling back," says Peter Wahlstrom, who tracks Barnes & Noble for the investment research firm Morningstar.

He says Barnes & Noble also invested in beefing up its online sales. Eventually, it also developed its own e-reader, the Nook.

Borders did not. Instead, it expanded its physical plant, refurbished its stores and outsourced its online sales operation to Amazon.

"In our view, that was more like handing the keys over to a direct competitor," Wahlstrom says.

Indeed, outside a Borders bookstore in Arlington, Va., shoppers say they rarely buy books the old-fashioned way.

"I'll go to Borders to find a book, and then I'll to go to Amazon to buy it, generally," customer Jennifer Geier says.

With so many people going online to buy books, Borders lost out. The last time it turned a profit was 2006. In February of this year, it filed for bankruptcy protection.

Those who bemoaned the rise of bookselling giants might see irony in Border's demise. With one of the major players gone, there might be some room, once again, for the little guys.

"I think there are a bunch of different niches around that can still be sustained, but I don't think there's a need for the mass-book seller to be as prevalent or as apparent as they were five or 10 years ago," Wahlstrom says.

Wahlstrom says Borders is disappearing at a time when, as consumers, readers are more empowered than ever. He says he still reads paper books but also reads on his iPhone, computer or tablet.

"Just as I'm probably device agnostic, I am supplier agnostic. I can go online, I can go to Barnes & Noble, I can go to Apple, or I can go to Google. Or I can borrow it from a friend or I can go to a library," he says.

Dan Raff, a management professor at The Wharton School, argues that smaller-town America will suffer from the loss of a chain bookstore.

"The big-box store was a glorious thing while it lasted. To people in many parts of America, they were a kind of Aladdin's cave," Raff says. At Borders, people could access literary variety, contrary to smaller, independent bookstores.

With Barnes & Noble staking its future on digital technology, Raff says, it's likely the big bookstore will only live on in big cities.

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What Happened To Borders Bookstores?

You might remember Borders bookstores. They were all over the country in the early 2000s, selling all kinds of books and even multimedia like CDs and movies. Their stores ranged from small outlets in shopping malls to huge buildings packed full of books. In 2003, according to NPR , there were more than 1,200 of the stores nationwide. But by 2012, the chain had liquidated and closed all of its locations.

Bookstores like Barnes & Noble still hold ground in the bookselling market, and the oldest bookstore in America is still standing after more than 150 years. Clearly, people are still reading, and they're going to bookstores to discover new favorites. Borders, a familiar sight and staple storefront for more than four decades, faced plenty of problems in its final years. But what was the final straw for the bookselling giant? Was it a shift to online sales and e-readers, or something else?

The store didn't have great online sale strategies

When Borders first entered the scene, there wasn't really an online marketplace. It made its name by being a big box store where everyone could find something they wanted, according to NPR . But when the internet came around, customers found other ways to get their reading fix.

Other retailers created websites to help move products along. But Borders opted to go a different route. The store actually opted to use Amazon to sell its online products, according to Time , instead of creating its own online marketplace. Time reports that the decision meant Borders handed over control over its online presence and that the lack of cohesive branding likely hurt the store in the long run.

Borders did have its own website for a while. Surprisingly, it was actually hurting the company, and according to Lit Reactor , that website cost the company $20 million to maintain even before it started working with Amazon. That's not exactly a recipe for success.

E-readers and digital books were more popular

The creation of the internet marketplace led to another trend that hurt Borders' prospects. On top of buying physical books online, readers started to shift to electronic books (via Time ). Over the early 2000s, e-books outpaced the sale of physical books, according to Time.

Other outlets saw the change coming and adapted. Barnes & Noble created its Nook e-reader to compete with Amazon's marketplace, according to Time, but Borders never created its own e-reader. In an online essay about the bookstore's closure, former Borders Director of Merchandise Planning and Analysis Mark Evans in part blamed the slow adaptation to e-books.

"[Borders] also dropped the ball on e-books," Evans wrote. "But by the time this became an issue they were just trying to figure out how to keep the whole house from burning down around them, so I find it more understandable."

Without a place to direct people interested in e-books, Borders missed out on a market that could have brought in more sales.

It invested too much in selling other media

Borders might have started out as just a bookstore, but it didn't stay that way. The stores later shifted to selling DVDs and CDs and opted to heavily focus on that market in the 1990s, according to Time . But ultimately, it wasn't as great a success as business executives might have hoped for. The iPod and other MP3 players came through shortly after the shift, and it drew customers away from the physical media Borders was selling (via Time).

According to Lit Reactor , Borders filled almost half of its retail space with CDs. That left them with a lot of empty or underutilized space later on when CDs fell out of fashion, including warehouse space. According to Evans, it took a lot of resources to fill the empty space and the loss of revenue that came around when CDs fell out of fashion.

Their troubles with real estate strategy

Another issue that pops up during a Borders post-mortem is somewhat  easier to understand. The hypothesis is that Borders went on a commercial retail buying spree and bought up too many storefronts — and simply didn't have enough money to support them. According to Time , a vast majority of its stores were also in close proximity to other booksellers like Barnes & Noble. So on top of the shift to online sales and e-books, there were too many physical bookstores (both other stores in the chain and competitors) around wherever a Borders was operating.

According to NPR , Borders bought up plenty of real estate in the 1990s when the business was doing well. It might have been that they couldn't sustain that level of expense , and eventually it caught up with them. That theory is backed up by former employee Mark Evans , too according to NPR . He says they didn't do as well with relocating stores to better locations, and their storefronts couldn't compete with other stores in the area. The company was also trying to recover from massive debt, according to Time, even before the market crash in 2008.

The workplace atmosphere might have played a part

The issues with online sales and real estate were all pretty visible from the outside. But there's also some commentary on the differences in workplace atmosphere between Borders and other retailers. Barnes & Noble, for example, gave its employees an opportunity to try other things. According to Lit Reactor , some were able to work as baristas or fill other roles in addition to cashier or bookseller duty. And a different seller, Half Price Books, also offered better policies for workers, including paid hour-long lunches, full benefits, and better wages. Those factors probably didn't lead directly to Borders' closure, but they didn't help them, either.

Borders closed its doors for a variety of reasons. Some of those were due to management, while others were the result of a changing market. But the bookselling industry is still going strong. From at least some analyses , Borders' disappearance even allowed independent booksellers to expand and flourish in different parts of the country. But for many, the loss of the traditional big-box storefronts is still a sore subject.

Borders' rise and fall: a timeline of the bookstore chain's 40-year history

This timeline provides a historical perspective of the rise and fall of Ann Arbor-based Borders Group Inc. from its inception in 1971 to its liquidation announcement this afternoon. It is based on AnnArbor.com research, interviews, Securities and Exchange Commission documents, archived news reports and information from Borders.

1971 : Brothers Tom and Louis Borders open an 800-square-foot used bookstore called Borders Book Shop at 211 S. South State St . in Ann Arbor.

The first Borders store at 211 S. State, now the site of a CVS store under construction.

Ann Arbor District Library

1988 : In an effort to import business leadership, Borders recruits Robert DiRomualdo to lead the company's expansion. DiRomualdo is later credited with leading the company's rise to national prominence in the 1990s.

1991 : Borders starts integrating music and movies into some of its stores.

1992 : Kmart Corp., which bought Waldenbooks in 1984, acquires Borders and creates the Borders-Walden Group. At the time, Borders had 21 large stores and had valued itself at about $190 million, the New York Times reported at the time.

1994 : Borders' flagship store moves from 303 S. State to the ex-Jacobson's department store on East Liberty. The bookseller is the largest retailer in downtown Ann Arbor.

1995 : The book store chain, renamed Borders Group Inc., spins off from Kmart and goes public on the New York Stock Exchange (Ticker: BGP) under CEO Robert DiRomualdo. At the time, Borders' innovative inventory management system was considered " the envy of the industry ," as one publisher put it, and was a catalyst in the forthcoming boom in the company's superstore footprint.

1995 : The company's Waldenbooks division moves to Ann Arbor after receiving a $7.7 million tax credit from the Michigan Economic Development Corp.'s Michigan Economic Growth Authority board.

1995 : Borders headquarters moves to a renovated, abandoned downtown retail destination on Washington Street called Tally Hall. A few years later, the company moves to its current headquarters on Phoenix Drive on the city's south side.

Feb. 4, 1997 : Shares close at an all-time high of $44.88.

March 11, 1997 : Borders executes a 2-for-1 split on its stock.

January 1998 to January 1999 : Borders expands its store footprint by 25.5 percent, adding 52 superstores in the biggest one-year expansion in its history. By January 1999, the company has 256 superstores averaging $256 in sales per square foot.

May 1998 : Borders launches an online retail presence for the first time at Borders.com.

Nov. 12, 1998 : Philip Pfeffer is hired to replace DiRomualdo.

Greg Josefowicz was CEO of Borders Group from 1999 to 2006.

Photo courtesy of Borders

November 1999 : Greg Josefowicz becomes Borders permanent CEO. August 2001 : Borders contracts with online retailer Amazon to sell products online -- a relationship later blamed for making Borders late to the emerging web retail segment.

July 2004 : Borders buys United Kingdom-based Paperchase Products Ltd. The company also starts branding some Waldenbooks stores as Borders Express.

August 2004 : Borders signs deal with Starbucks Corp. to run Seattle’s Best Coffee cafe operations in its stores.

2005 : Borders posts its most recent annual profit: $101.0 million.

February 2006 : The company launches a loyalty program called Borders Rewards.

July 2006 : George Jones replaces Josefowicz, who had led Borders since November 1999. At the time, Borders had nearly 36,000 employees worldwide and more than 1,200 in Ann Arbor.

September 2007 : Borders sells its U.K. and Ireland subsidiaries.

September 2007 : Stock hits then-six-year-low $12.28 a share.

The Borders store on Lohr Road in Pittsfield Township was created as the chain's new "concept" store when it opened in 2008.

Lon Horwedel | AnnArbor.com

March 28, 2008 : Stock closes down 28.5 percent to $5.07 after Borders says it lost $157.4 million in 2007.

March 2008 : Borders puts itself up for sale and accepts $42.5 million loan from New York hedge fund Pershing Square Capital Management to boost financial position.

May 2008 : Severing ties with Amazon, the company launches a new Borders.com.

June 3, 2008 : Borders’ shrinking Ann Arbor personnel count hits 1,000 after 156 job cuts are announced as part of a $120 million cost-cutting plan . At this point, the company still has 30,000 employees overall.

June 10, 2008 : Borders sells off its business based in Australia, New Zealand and Singapore.

Former Borders Group CEO George Jones speaks to employees in February 2008. He was fired less than a year later.

File photo | AnnArbor.com

Jan. 5, 2009 : CEO George Jones is fired and replaced with Ron Marshall as global financial crisis raises questions about Borders' viability.

March 2009 : Borders cuts costs, conserves cash in effort to avoid bankruptcy in the aftermath of the financial crisis.

March 30, 2009 : Borders, despite posting a $187 million loss in 2008, gets some breathing room after receiving a one-year extension on a loan from Pershing Square Capital Management.

Nov. 5, 2009 : Borders announces plans to close 200 of its small stores and cut 1,500 jobs. By February 2011, the number of small-format stores is about 170, down from more than 1,100 in 1995.

November 2009 : Investors criticize Borders' sluggish approach to the emerging electronic books market.

Borders started selling the Kobo e-reader in its stores in summer 2010.

Jan. 18, 2010 : Executives say they're “ disappointed ” with 13.7 percent decline in holiday sales.

Jan. 26, 2010 : CEO Ron Marshall resigns to become CEO of the Great Atlantic & Pacific Tea Co., which files for bankruptcy later in the year after Marshall’s departure. Borders executive Mike Edwards is named interim CEO of Borders Group.

Jan. 28, 2010 : Layoffs hit 10 percent of the Ann Arbor corporate staff.

Feb. 3, 2010 : Hedge fund investor and Borders shareholder Bill Ackman says bankruptcy is unlikely .

March 31, 2010 : Borders pays off $42.5 million loan to Ackman, renegotiates credit agreement with lenders.

April 1, 2010 : Executives describe strategy of " transforming the Borders brand ."

May 21, 2010 : Tobacco executive and activist investor Bennett LeBow invests $25 million and is named chairman.

Borders liquidating

• Borders plans to liquidate, ending 40-year-old bookstore chain
• Column: Borders' expansion hastened its implosion
• Borders' rise and fall: a timeline of the bookstore chain's 40-year history
• What's next for downtown Ann Arbor Borders store after chain closes?
• Downtown store closure also means a loss of arts and music venue
• Expected closure of Borders superstore in Pittsfield Township leaves shopping center with vacancy
• Disappearing act: Borders brothers nowhere to be found
• Residents express disappointment and sense of inevitability at closing of flagship Borders store
• Read Borders CEO Mike Edwards' letter to employees announcing liquidation
• Media watch: What other news sites are reporting on the Borders liquidation 
• Share your memories of Borders' 40-year heritage in Ann Arbor

July 2010 : Borders launches e-book store, starts selling e-readers, sets strategy to get 17 percent market share in e-books within a year.

July 31, 2010 : Borders sells Paperchase unit for $31 million.

Aug. 11, 2010 : Borders lays off more Ann Arbor workers. About 600 workers left.

Sept. 1, 2010 : Borders posts $46.7 million loss in second quarter, eyes " non-book products " like games and toys.

Nov. 15, 2010 : Borders launches redesigned website.

Dec. 6, 2010 : Ackman says he’d be willing to finance a Borders bid to acquire Barnes & Noble and merge the retailers.

Dec. 9, 2010 : Borders posts $74.4 million loss for third quarter, acknowledges possible cash crunch in early 2011.

Dec. 30, 2010 : Borders confirms that it’s delaying payments to some publishers in hopes of reworking vendor financing arrangements.

Dec. 31, 2010 : Stock plunges 22 percent to $0.90 a share.

Early January 2011 : Publishers weigh whether to agree to short-term debt in exchange for giving up immediate cash payments for book shipments.

Jan. 6, 2011 : University of Michigan expert says Borders likely headed toward bankruptcy or merger.

Jan. 12, 2011 : Borders announces plans to cut 300-person Tennessee distribution center .

Jan. 17, 2011 : Borders lays off another 40 employees at its corporate headquarters, leaving about 550 workers there.

Jan. 24, 2011 : Company sells off Day By Day Calendar unit in bid to raise cash.

Jan. 27, 2011 : Borders announces tentative financing deal with GE Capital but acknowledges possibility of "in-court restructuring."

Jan. 30, 2011 : Borders announces decision to delay payments to more partners, including some landlords.

Feb. 1, 2011 : Reports indicate bankruptcy filing may come with weeks.

Feb. 3, 2011 : New York Stock Exchange warns Borders that its stock could face delisting if it doesn't rise above an average monthly price of $1 within six months.

Feb. 11, 2011 : Ackman acknowledges $125 million loss on Borders investment.

Feb. 16, 2011 : Borders files for Chapter 11 bankruptcy protection with plans to close 30 percent of its stores.

March 25, 2011 : Borders asks court to approve executive bonus plan contingent upon a successful exit from bankruptcy.

April 6, 2011 : Executives reveal plans to move Borders out of its corporate headquarters building on Phoenix Drive on Ann Arbor's south side, saying they would consider the metro Detroit region. Later, the company identifies the former Visteon Village complex in Van Buren Township as one possible destination.

April 22, 2011 : Judge approves bonus plan with several strings attached.

May 5, 2011 : In an interview , Borders CEO Mike Edwards says the company could emerge from bankruptcy by September if it gets support from publishers. He also says the company has fewer than 400 workers left at its headquarters.

May 19, 2011 : In a filing, Borders asks the court to approve the severance of its deal with Seattle's Best Coffee , a subsidiary of Starbucks Corp.

June 1, 2011 : A Los Angeles-based private equity firm named Gores Group , which is led by the brother of the billionaire who recently bought the Detroit Pistons, is reported to be considering an acquisition of Borders .

June 7, 2011 : Phoenix-based private equity firm Najafi Companies is reported to be considering a bid to buy Borders. Najafi owns Direct Brands , which operates the Book of the Month Club and the Doubleday Book Club .

June 30, 2011 : Najafi submits a tentative bid to buy Borders for $215.1 million in cash and the assumption of $220 million in liabilities. Borders asks the court to establish Najafi as the "stalking-horse bidder" and to approve a $6.45 million breakup fee for Najafi if Borders chooses another buyer against Najafi's will.

July 13, 2011 : A committee of unsecured creditors — namely, publishers that ship books to Borders — file an objection to the proposed sale, saying that nothing would prevent Najafi from liquidating Borders on its own and pocketing valuable intellectual property. The creditors said that if Borders was to be liquidated, it wanted the Borders-approved liquidators to handle the process.

July 13, 2011 : Najafi says it cannot proceed with an acquisition of Borders under the terms it previously laid out — a development believed to be related to the publishers' objection.

July 14, 2011 : A bid by a team of liquidators is established as the top bid in an auction tentatively scheduled to take place July 19. Without another bid, the company would have to start liquidation sales as soon as July 22.

July 17, 2011 : Deadline for bids passes without any new possible acquirers emerging.

July 18, 2011 : Borders announces plans to liquidate . Some 10,700 people will lose their jobs, including 400 in Ann Arbor.

Contact AnnArbor.com's Nathan Bomey at (734) 623-2587 or [email protected] . You can also follow him on Twitter or subscribe to AnnArbor.com's newsletters.

Tue, Jul 19, 2011 : 6:02 p.m.

A few more dates to bear in mind, when Border's downtown store added music in 1991, Schoolkids, SKR Classical and Discount Records each closed. Capitalism and legacy don't have a lot to do with each other. Pay attention to your customers and innovate or die. I do mourn the early days of Borders when I could walk into the computer book section on State St. and have the buyer steer me to just the book I needed. My career benefited markedly by that guidance. But its hard to pity serial bad management decisions and repeatedly turning their back on the roots.

Joe Bavonese

Tue, Jul 19, 2011 : 12:30 p.m.

I was disappointed that the original Borders store on State St was not given more space in this timeline. To those of us who remember it, it was like going to a shrine - the first bookstore where you could sit down, relax, not feel pressured - and measure your time in dollars per minute. It was a destination and part of what made the Ann Arbor book scene unique.

Tue, Jul 19, 2011 : 10:24 a.m.

This should be a warning to the bookstore business. Borders reckless expansion caused much of its problems, but online innovation could also be the next knockout blow. Barnes and Noble should be cautious in their approach. While they are much better managed than Borders and wisely did not purchase the latter company; they are not immune to the online onslaught.

Tue, Jul 19, 2011 : 12:10 a.m.

A couple of important milestones that would be interesting (and relevant) to include would be: Beginning sales of eReaders (such as Kindle) Arrival of Napster Launch of iPod and iTunes Launch of Netflix Launch of Amazon All of those events helped to act as killer technologies for all of Borders sales channels.

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Reference for Business

Company history index, borders group, inc. - company profile, information, business description, history, background information on borders group, inc..

100 Phoenix Dr. Ann Arbor, Michigan 48108 U.S.A.

Company Perspectives:

The goal of Borders Group, Inc. is to be the best-loved provider of books, music, video and other entertainment, as well as educational and informational products and services. Borders strives to be the world leader in selection, service, innovation, ambiance, community involvement, and shareholder value.

History of Borders Group, Inc.

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.

Early History

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.

National Status

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.

Late 1990s and Early 2000s

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.

• 1971: Original Borders bookstore is founded by Louis and Tom Borders.
• 1985: Prototype superstore opens.
• 1992: Borders becomes subsidiary of Kmart.
• 1994: Borders and Waldenbooks merge and form Borders Group, Inc.
• 1995: Company purchases Borders stock held by Kmart; Borders Group, Inc. makes initial public offering.
• 1996: Company closes more than 100 Waldenbooks locations; focuses on superstore development.
• 1997: Borders Online, Inc. created to establish electronic sales operations; stores open in United Kingdom and Singapore.
• 1998: Company launches Borders.com Web site.
• 1999: Management begins aggressive expansion and opens more stores in England, Australia, and New Zealand.
• 2001: Company teams with Amazon.com to launch a co-branded Web site.

Additional Details

• Public Company
• Incorporated: Borders Group incorporated 1994
• Employees: 30,000
• Sales: $3.27 billion (2001)
• Stock Exchanges: New York
• Ticker Symbol: BGP
• NAIC: 451211 Book Stores; 45122 Prerecorded Tape, Compact Disc and Record Stores; 551112 Offices of Other Holding Companies

Further Reference

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