The End of Borders and the Future of Books??

many experts predict the future books will not be sold, following an article in Businessweek will describe the current condition of the book.

In September, just days before Borders Group met its end, one of the chain’s last retail holdouts, in the Nashville suburb of Brentwood, Tenn., was being liquidated, with prices slashed by 90 percent. It was difficult in the stark surroundings not to think of a battle waged and lost, of the armies of Kindle owners and e-book peddlars off celebrating victory while all around lay the carnage—two copies of a Paul Reiser memoir, the suspect Greg Mortensen book Stones into Schools, a still-brimming manga section. A couple of professional scavengers picked over the DVDs, cataloging them with their own scanners. Empty shelves were being stacked in the store’s growing hollows and themselves tagged with prices ranging from $25 to $50. The defeat felt so stunning because it seemed so nearly complete, not just for Borders but also for bookselling in general. A two-story Borders in Nashville proper, about 10 miles north, had shut its doors four months earlier. In November 2010, a 30,000-square-foot outlet of a bookstore chain called Davis-Kidd Booksellers, in business in the city for 30 years, had closed as well. With the shuttering of the Brentwood Borders, there wasn’t a store within 22 miles of Nashville that specialized in new books.

Nashville might seem like an archetype of the death-of-the-bookstore-everywhere narrative, but its story turns out to be different. The cashier who checked me out at the Brentwood store, Nancy DeVille, had transferred from the Nashville location when it closed, and she said both outlets were constantly packed with regulars drawn to the sight, feel, and smell of books. David Beddow, a supervisor at the Nashville store from 2005 to 2008, remembered costumed crowds snaking around the corner for the release of the latest Harry Potter. He said revenue there had actually increased during his tenure, from $5.5 million to around $7 million a year.

Despite rising online book sales and digital downloads and the Great Recession, bookstores in the area were profitable—right up until they closed. Even Davis-Kidd, locally owned until the Joseph-Beth Booksellers chain purchased it in 1997, had been solvent, undone not by the collapse of the local market but by the bankruptcy of the parent company. (The local Barnes & Noble, at the Opry Mills mall, was closed after a 2010 flood.) Nashville lost its bookstores not because people there had abandoned physical books and retailers. For the most part, it lost them remotely, at the corporate level.

Nashville’s story is not unique. When Borders declared bankruptcy in February, more than 200 of its 400 outlets were still “highly profitable,” says its final chief executive officer, Mike Edwards. There’s no question that the book industry is in flux, with digital sales last year making up about $900 million of the $28 billion-a-year market and increasing fast. But a sizable portion of the book business is still taking place in actual stores. Barnes & Noble (BKS), the nation’s largest book retailer, hasn’t been forced to close its 700 locations. Thus, it wasn’t Amazon (AMZN) —or Amazon alone—that sank Borders. “When there’s a massive transition in an industry, the strong players make it through to the other side,” explains David A. Schick, a retail analyst who covers booksellers for Stifel Nicolaus Equity Research (SF). “What gets caught up in the change are the weaker players.”

For the past decade and a half, Borders seems to have been in the business of making mistakes. Consider the company’s efforts to develop an online presence. Amazon was launched in 1995, and Barnes & Noble responded with its own website two years later. It took Borders another year to get started online, and the venture quickly lost tens of millions of dollars. In 2001, Borders made a deal with Amazon to run all of its online business—a partnership, in retrospect, that comes across as tragically shortsighted. Danielle Fox, an equity analyst then covering Borders for J.P. Morgan, says many investors were actually excited about the idea of outsourcing Borders’s online sales to Amazon, which they believed would allow the physical retailer to focus on running physical stores. Amazingly, Borders wouldn’t end the Amazon deal and launch its own website until 2008.

Borders managed to be on the wrong end of several upheavals. It invested heavily in CDs and DVDs just as music and movies were going digital; in 2006, nearly a fifth of all Borders revenue came from music sales. And though this would be the company’s last year of profitability, it continued to expand, building huge stores of 25,000 and 30,000 square feet right into the Internet boom. Sales per square foot in its superstores plummeted from an average of $261 in 1997 to $173 by 2009. Borders even purchased a stationery company, Paperchase, in 2004, as handwritten correspondence withered. And then there’s the company’s entry into digital books: If you didn’t know Borders had an e-reader called Kobo, you’re not alone.

Borders’s demise, though, has as much to do with real estate as any metaphysical market shift. During the superstore boom of the 1990s, Barnes & Noble paid close attention to where it put its outlets, which were usually in prime locations. Many of the profitable Borders stores were also centrally located, but numerous industry observers characterized the company as grasping for growth. It had a policy of picking “B locations,” says Fox, and trying to turn these sites into “A economics.” Leases on its stores were also “unproductively long,” adds CEO Edwards. As the company’s fortunes turned, it was difficult for Borders to buy its way out of leases that still had seven and eight years remaining on them.

Analysts predict that Barnes & Noble will have to shrink the number and size of its stores, and it hasn’t tried to gobble up many of the vacated Borders locations—70 percent of which, Barnes & Noble says, were within five miles of one of its outlets. (Barnes & Noble did purchase the remainder of Borders’s Web business.) But so far Barnes & Noble is holding on to its stores, focusing on e-books and filling its outlets with high-profit-margin nonbook items, such as educational toys and games.

The one thing Borders did have going for it was its huge selection, yet even that wasn’t worth as much as the company thought. An average Borders superstore stocked around 140,000 titles at immense cost, but if a customer craves selection, no store can compete with the long tail of the Internet. Maybe more crucially for Borders, the assortment of titles that provided the key to its identity didn’t give it a competitive edge over Barnes & Noble. Mark Evans, a director of merchandising strategy and analytics at Borders until 2009, says that the company surveyed customers to understand why Barnes & Noble, with its slimmer selection, continued to clobber them in terms of year-over-year growth, average sales per store, and even the number of books sold at each location. “Customers didn’t notice our larger assortment of books,” Evans laments. “They didn’t care.”

The Borders story began in Ann Arbor, where Louis and Tom Borders opened their first store in 1971. Students at the University of Michigan, the brothers developed a then-revolutionary system to track sales and inventory; for years Borders executives called it the company’s “secret sauce.” Their “Book Inventory System” could oversee the flow of a huge number of titles broken into thousands of different subject categories across multiple stores. By evaluating sales data, the system could understand local tastes and predict demand in specific communities. Initially, the brothers hoped to sell the program to independent stores across the country, but bookshop owners proved resistant, asserting that they—and not some punch-card computer—intimately understood their clientele. Instead, Borders opened additional stores, first in suburban Detroit, Atlanta, and Indianapolis, ultimately forcing out many of those reluctant independents. By the 1990s it had stores all over the country, and together with Barnes & Noble controlled 40 percent of the bookselling market.

Early on, Borders offered the knowledge and the feel of the independents, with distinctive architecture, comfy chairs, reading nooks, and such. The stores carefully screened and trained employees, paying them relatively well and offering health benefits and a generous monthly merchandise credit, among other perks. For many years and in many communities, a Borders was the only place a reader could find certain literary journals, books from academic presses, and new fiction and nonfiction from authors who weren’t bestsellers.

From 1999 onward, though, Borders was headed by six different CEOs, none of whom stayed long enough to make the company work. In 2008, Borders launched 14 “concept stores,” as part of what it called “a new shopping experience.” Customers were expected to travel to these massive stores to use download stations for books and music, which just isn’t how e-commerce works. Edwards says that by the time he became CEO in 2010, Borders had already lost “the founders’ DNA, why the company was successful in the first place.” He blames the 1992 acquisition by Kmart—which he feels ran Borders like a general merchandising company—and a three-year stock buyback that began in 2005 and cost the company $600 million. (Kmart spun off the bookseller in 1995, when Borders went public.) No contacted analysts thought there was anything improper in the stock buyback—online sales had seemed to plateau at the time, and the company had generated more money than it did in each of the preceding five years. But the book industry runs on an ancient credit system, with booksellers at any moment indebted to publishers for more than the value of the books on their shelves. (At the time of its bankruptcy, Borders owed Hachette $36.9 million, Simon & Schuster $33.8 million, Random House $33.5 million, and HarperCollins $25.8 million, to name just a few of its publishing creditors.) In arrears and undercapitalized even in good times, Borders lost with the stock buyback the slim buffer it had. Edwards says the company was too saddled with debt to navigate properly. It had no capital to invest in online retailing or to separate its good stores from its bad ones.

Maybe most stunning is how Borders proved incapable of upgrading the systems and processes it had pioneered. In 1992, Borders merged with Waldenbooks. For years afterward, the two chains continued to run separately, each with its own system for ordering books, monitoring inventory, and restocking shelves. The grand effort to unify the two operations, called Common Systems, never happened. Mark Evans, who oversaw a team trying to function within these conflicting networks, says Borders simply couldn’t design the necessary operating system. What eventually was implemented, after millions of dollars and countless hours, Evans calls “worse than useless. It destroyed the Walden chain.” He had previously worked at the discount chain Bookstop when Barnes & Noble acquired it in 1991. While Bookstop was much smaller than Walden, Evans says a successful consolidation of operations occurred almost immediately. So much for Borders’s secret sauce.

In Nashville, retailers are springing up to fill the bookstore void. In November, Vanderbilt moved its university bookstore into the 27,000 square feet formerly occupied by Borders. Just a mile away, BookMan BookWoman, a used bookstore, has started stocking new titles, mostly New York Times bestsellers or books by local authors.

Novelist and local resident Ann Patchett, author of Bel Canto and State of Wonder, will open a bookstore in Nashville in November. Called Parnassus, after the Greek mountain that is the mythological home of poetry and learning, Patchett’s store will be a 10th the size of the average Borders. “I want to do it brilliantly at 2,500 square feet,” she says, “not struggle in something the size of Macy’s.” Like many others in Nashville, she was waiting for someone to do something about the city’s bookstore drought. Eventually she took it upon herself to act. People have thanked her while she’s out walking the dog. “They say they get it, that they’ll be there,” Patchett says. “There’s something about the whole trajectory here—we know we lost something valuable, and so there’s been an incredible amount of support for what seems like a second chance.”

Small independents such as Parnassus may actually stand to gain the most from Borders’s passing. Plenty of shoppers don’t want to give a digital download to a niece for her birthday and often don’t think far enough ahead to order a book through Amazon for an upcoming trip. Many simply like the experience of going to a bookstore. Jeff Green, president of Jeff Green Partners, a retail-consulting firm based in Phoenix, believes bookstores of around 2,500 square feet offer a perfectly viable—if only modestly profitable—business model. John Rubin runs Above the Treeline, an Ann Arbor–based company that provides sales and inventory analytics as well as digital catalogs to booksellers. According to point-of-sale data he’s compiled, business at locally owned stores has, in fact, held steady in recent years. And while advances in technology have certainly made hardcover books a bit passé, they have also enabled small stores to operate far more efficiently. “It’s the only retail industry I can think of that will go full circle, back to the way it originally was,” says Green. “From the small-village bookstore to the big-box retailer and then back again. That doesn’t ever happen in retail.”

Patchett pointed out that this cycle has contributed to Parnassus in a real and somewhat poetic way. Her partner in the venture, Karen Hayes, a former sales representative at Random House, traveled the South in the past months buying up bookshelves from the Borders that were going out of business. Says Patchett: “We’re building our store from the bones of the superstores.”

Austen is a Bloomberg Businessweek contributor.