Conversation: Borders Files for Bankruptcy

BY Jeffrey Brown  February 16, 2011 at 4:18 PM EST

A Borders Group Inc. bookstore that closed last month stands in Farmington Hills, Michigan, U.S., on Wednesday, Feb. 16, 2011. Photo by Jeff Kowalsky/ Bloomberg via Getty Images

A Borders Group Inc. bookstore that closed last month stands in Farmington Hills, Michigan, U.S., on Wednesday, Feb. 16, 2011. Photo by Jeff Kowalsky/ Bloomberg via Getty Images

 
On Wednesday, the bookstore chain Borders filed for Chapter 11 reorganization after accumulating more than $1 billion in debt and failing to pay publishers that supply its inventory. In recent years, the company has struggled to meet changing demands in publishing, like the consumer shift from shopping in bricks-and-mortar stores to online, and lagged behind other retailers in offering new products like e-books. Borders will stay in business, but will be closing about 30 percent of their locations across the country.

Jim Milliot, co-editorial director of Publishers Weekly, joined me by phone to discuss the story:

[Full transcript after the jump]

JEFFREY BROWN: Welcome once again to Art Beat. I’m Jeffrey Brown. Today we are discussing Borders, which has just filed for bankruptcy protection. On the phone with me is Jim Milliot. He’s the co-editorial director for Publishers Weekly. Welcome to you.

JIM MILLIOT: Thank you very much.

JEFFREY BROWN: You wrote today in your report that Borders had “given into the inevitable.” Now explain that — why was it inevitable to file for bankruptcy?

JIM MILLIOT: Well, there’s a couple of things. The most immediate, which is, just before the end of the year, they notified their largest publishers that they would skip a payment — in other words, not pay for the books that they had sold in December. And after that, they quickly changed and said they wanted to enter into a negotiation to maybe change those payables for a note. In essence, helping them to finance the company. Publishers were a little cool to that idea, and at the end of January, they skipped the January payment.

JEFFREY BROWN: So there were a lot of signs out there.

JIM MILLIOT: So, and, yeah, this is a company — Borders — that you have to remember hasn’t made money in four years.

JEFFREY BROWN: Four years. Well look, what have been the particular problems for Borders leading up to this?

JIM MILLIOT: Well, a couple of things. You know, going back one of the stumbling blocks that they ran into was they turned over their online store to Amazon. So instead of competing in online book sales they basically had, you know, partnered one of their major competitors to help them manage their online component, and it really didn’t work very well. You know, Amazon did what they did, but Borders did very little to promote it. You know, and secondly they were very slow to move into digital, which is, you know, a killer right now.

JEFFREY BROWN: So those were sort of management decision problems at Borders itself. That’s a big part of the specific problem here.

JIM MILLIOT: Right. And even going back even a little further, you know, Borders and Walden’s books are actually two companies once upon a time, and they were never really fully integrated very well. And, you know, their inventory systems and their management systems were known throughout the industry, especially on the Walden side, to be slow and relatively inefficient.

JEFFREY BROWN: But it also, of course, fits in to what everyone has been watching for the last few years, and we’ve talked about a lot here on Art Beat, is the larger problems for the publishing and book industry.

JIM MILLIOT: Right, well, there has been a lot of competition for, you know, both consumer time and consumer dollars. There is no doubt about that. As all things digital compete for playing time and for dollars be it, you know, video, social networking and the whole nine yards. And there is no doubt one of the problems in all bookstores has been a decline in the number of people just going into the stores.

JEFFREY BROWN: And so there you have Borders, and you have Barnes & Noble — they can’t both survive? Where are we in that competition?

JIM MILLIOT: It’s clear — I mean, until today, Borders was fairly close to Barnes & Noble in size, although Barnes & Noble was certainly the number one bricks-and-mortar retailer. But after today, you know, having somewhere, maybe 400 stores when this is all done — it still has stores across the country, but, you know, its presence obviously is going to be very diluted compared to Barnes & Noble.

JEFFREY BROWN: Well, explain what Borders is planning to do now, because this is Chapter 11, this is restructuring the company, and they are at least saying they want to have a plan to be viable going forward, right?

JIM MILLIOT: Yeah, and the publishers will certainly be rooting for them to survive. I mean, they don’t want to live in a world where, you know, Barnes & Noble is basically your sole bricks-and-mortar retailer, and Amazon is your dominant online retailer, although Barnes & Noble has a pretty robust online site of its own. But Borders, you know, what they have outlined in the court papers, is to do some things they’ve been doing in the past, but maybe to do them better, one of which is to get a bigger imprint, bigger footprint on the digital side. I mean they do sell the Kobo digital reader. Doesn’t quite have the market presence that Barnes & Noble’s Nook does, or Amazon’s Kindle does, but it’s growing, and they want to hopefully increase the sales to their ebook store. Again it’s a distant— I don’t know if it’s third, but it’s far down the line compared to Amazon and Barnes & Noble in terms of selling ebooks. They are very focused on trying to improve the customer loyalty factor through their stores. They really push heavily their discount program, something called Borders Rewards. So they are going to kind of try to do that, and through that they hope to be able to, by capturing names, do some better direct marketing, and get people, you know excited to come into the stores, or buy online through more targeted promotions. As we talked about a few minutes ago, their supply chain was not the most efficient in the world. They want to try to make that better. So there is some opportunity out there. The big question is for all publishers and book sellers and, you know, most acutely here for Borders, is: will the shift to digital allow time for Borders to do this? Because, I mean, the fact of the matter is, there’s just fewer print books being sold to bookstores.

JEFFREY BROWN: And, finally, I mean you mentioned publishers will be rooting for them to come through. Publishers are owed a lot of money, I guess, still by Borders, right?

JIM MILLIOT: Right. Obviously, Chapter 11 — everything they were owed is at least frozen for the time being. I think the top 30 creditors are owed something like $300 million dollars. Penguin Books, top of the list, and they’re owed roughly $41 million. So, you know, what amount of that will be recouped through the bankruptcy process is still to be learned. I mean, publishers have been, you know, expecting this. I mean, like I said, they’ve been losing money for four years, and so some of it, you know, they’ve taken reserves against it. But there is no question that it’s going to hurt. And then the question going forward is, you know, we’re down 250 stores. It affects the whole economics of how you publish and print, the number of titles you want to put out, and the amount of copies might drop. If you had to get into all those stores you might want to do a print run of 100,000, but tomorrow that print run could be, you know, 75,000.

JEFFREY BROWN: Alright. The bankruptcy filing by Borders and the ripple effects through the industry. Jim Milliot of Publishers Weekly, thanks a lot.