Thursday, June 07, 2007

Will Borders Survive?

Borders Group has been downgraded to a "Sell" by one major investment company this week and speculation about the survival of Borders bookstores is becoming more and more common in the financial press. And, as discussed earlier, the expectation that Borders and Barnes & Noble will merge seems to be growing also because of the rate at which Borders is bleeding money. (The photo shows the London Borders bookstore before Borders announced that it was pulling out of the U.K. I spent many a happy Saturday morning in this store.)

Sadly, though, any merger of the two giant bookstore chains will result in the existence of fewer bookstores because of the overlap in territory that the two chains share today. I suspect that would mean longer lines and fewer book choices for most of us.
...a combined Borders / Barnes & Noble would sell about $8.5 billion. What is being overlooked here is the # of duplicate stores that would need to be closed, affecting total sales. This is not a 1+1=2 equation. This is more of a 1+1=1.5 equation.

What would be improved from the merger would be profitability, rather that size. Borders is currently going downhill fast, and has not had a profitable quarter in over a year now. Cash flow, negative in 2004 and 2005, was positive in 2006 only because of $317 million in borrowing. Borders need to merge to survive, not create a powerhouse. With national bookstore sales declining and less than 10% of its books sold online (Borders jointly owns its site with Amazon), a Barnes & Noble-Borders combination is not going to challenge Amazon anytime soon, it just assures they survive.
But there is now some speculation that a merger of Borders and Barnes & Noble is not as likely because of a recent FTC decision to oppose another proposed merger of similar giants.
The firm (Goldman Sachs) believes a merger with Barnes & Noble (BKS) is less likely following the FTC's decision to oppose the Whole Foods Market (WFMI) and Wild Oats Markets (OATS) deal.
But here's the kicker:
Heck, if they just wait long enough, Borders will probably go under and Barnes & Noble can just pick it up on the cheap.
Honestly, I never would have dreamed that Borders or Barnes & Noble would be in this predicament. It all makes me wonder now that they have grown so large, with so many locations, whether or not they will ever have the volume and the margins to cover all the expenses involved with that kind of growth. Would they have been better off by settling for fewer stores and less "dominance" of the market? Is it easier for a chain like Books-A-Million to make it with fewer stores?


  1. I confess that I would most upset if they closed the Borders near me. It has only been open for perhaps six years and, should it close, I'd be back to buying from Amazon regardless of preference. There is a Barnes and Noble near me, but it's definitely on the smallish side. I can't imagine that we want to reduce the book selling world solely to Amazon.

  2. I suspect that the large new Borders near you would just change its name if the two merged and that the small Barnes & Noble would be shut down. I honestly don't see how either chain is going to be able to compete with an Amazon burdened with relatively no overhead when compared to them.

  3. Oh, no, you mean my recent Borders purchases haven't been enough to keep them afloat?? :) Actually, I would be devastated to lose either Borders or Barnes & Noble.

  4. You're doing your bit to keep them afloat, that's for sure. :-)

  5. Over the years I wonder how many independent book stores Borders has put out of business? I find a certain irony in their current situation.

  6. It's extremely ironic, isn't it, Nick? So many old sayings work in this instance..."live by the sword, die by the sword," etc.

  7. I would be sad to lose Borders, but not because of the books. I've always felt they were stronger on music and I love going there for classical CDs. You can be assured of finding more than just those CDs of Mozart that claim to make you smarter and the collected recordings of the Sony Limelight Orchestra. I'd still hate to see it go under, though. I think your last comment is dead-on, though: they grew more than they could handle.

    Thanks for the link, BTW!

  8. Good point, Diva. I like the music selection in Borders much more than what I find in most B&N stores, although the B&N nearest me does have a large CD/DVD section (but usually over priced).

    Your welcome, BTW. I hope the link drives at least a little traffic your way. I like your blog...