The Cold Equations

I'm going to follow up yesterday's Borders post mortem with some numbers.

For the year ending Jan. 30 2010, Borders had 508 superstores at year-end, with average sales of 4.5M at each of those superstores. Jan 2008, same # of stores, average sales more like $5.6M. B&N thru early May 2010, average store $6M in sales, more like $6.5 three years earlier. So, Borders had a 20% loss in average per store sales over two years, and dropping from being 15% off your average competitor's average store to being 25% off the pace of the competition. We go back far enough, we will find a day when sales Borders vs B&N were near parity for the average superstore.

To achieve this, Borders has invested considerable sums in remodels. I have been in some that have gone through each of these three rounds:.

1. 2000/2001, the ones where the diagonal lines were taken out and Kohls-like central "racetrack" aisles added to make the stores more shoppable. Not a big expense, mostly moving stuff around.

2. 2005. It was August 13, 2004 when Borders announced it would start to rebrand its coffee shops in 2005 to sell Seattle's Best. A lot of these were the major remodels where they pretty much took out everything in the center of the store, did away with the old-style shelving, often took down the partitions between the books and the music/movie sections. These had to cost some real money, can we say $500K/store? And these remodels ended up being done to almost all of the pre-existing store base, easily 200+ stores.

3. 2009 was a busy and expensive time as Borders spent lots of money to get rid of the music department and try and make stores look attractive with 20% of the square footage uprooted and gone.

If you spend $500K remodeling your typical store that does $6.5M in business, how long a time frame are you going to have to pay off that spend? Considering that music sales have been on the decline for the past decade and book sales kind of flat, a good result for those remodels might have been flat sales. a 5% sales increase amazing. Where's the sense in spending so much money on that? And to me, I can only say that each new round of remodels made the stores less interesting. We can say it's just me, but when you look at those sales results, I'm not sure we should.

Some of the remodel money needed to be spent. Music and movies had to be reduced in size. The Seattle's Best remodels I think did pay off reasonably. B&N was selling Starbucks and Cheesecake Factory, Borders was selling "Borders Cafe Espresso."

And how much does inventory cost?

If you took the crappiest Borders like Commack NY with very bad selection and just put in 10,000 more mass markets to window dress, $7.99x.55x10K is $44K in extra inventory sitting in the store. Forget about all that talk about their slow supply chain and slow reorder cycles, just go back in time and spend an extra $10M in inventory investment across the chain, that's so little vs. what they spent on remodels make it $20M even. Borders would be way, way healthier today. And because that is so much less money than was actually spent on remodels, maybe could have made the supply chain more efficient, invested in web site or other digital initiatives, done other things more productive than spending money so you could have the hardcovers and the mass markets on the same shelves in the sf and mystery sections.

Well, that's not what happened.

I hope for a turnaround. Maybe there's some ray of hope hiding in the holiday sales numbers to justify major publishers extending payment terms, maybe Jeff Bezos is doing that "Steve Jobs thing" where "nobody reads anymore" means "iBooks coming soon," and will want 300 good Borders stores cheap.

I hope. I have felt that the people who've been at the Borders helm since George L. Jones was belatedly fired in late 2008 have been doing some good things within the cash-poor constraints they've had, and I will say again that on balance both this holiday season and last I've preferred the Borders offerings of JABberwocky fare to those at B&N. But the customers haven't been coming back yet, may not have a chance to. It's hard when you look at how hard Borders has fallen in recent years to see where the silver lining will be found.

To compare with another company I like... Whole Foods made mistakes. Built some stores that were too big, too fancy, had a bad value image going into the economic meltdown. But they reacted quickly and sanely. That sit-down cafe space in the Fairfax store was too much, close it off. Talk value, value, value as much as you can. And remodel in sane ways. Just in DC, they poured money into huge remodel efforts. Upper Georgetown, Arlington, Tenleytown, P Street. Whole Foods has poured money into these stores, some of them not even all that old. The difference is that those remodels have always made Joshua Bilmes happier to walk in, given him more ways to spend money in good ways for Whole Foods. I don't know what the payoff period is, these remodels have to cost a fortune. But I can see all the time how it's money well spent. But other than bribing me with Borders Reward coupons, Borders hasn't done much for all of its money and decisions to make the stores clearly and inarguably better places to spend my money. B&N hasn't either, for that matter. Wake me up when they finally realize how icky a fixture the "octagon" is. But B&N hasn't spent money at the store level doing frivolous things. Borders has. For years. In quantity.