Doomed to Repeat It

So as Borders makes its way through the bankruptcy process, they've gotten the OK to terminate their relationship with Starbucks to have Seattle's Best Cafes. The filings to get out from under say how the royalty rates are too high and make it difficult for Borders to make money on the cafe operations, so it would be better for Borders to take back the operation.

Hmmm. If you substituted the Borders website and Amazon for cafes and Seattle's Best, you'd be getting a strong sense of deja vu.

Borders went with Seattle's Best because they had, over time, a very big problem that they just weren't running their cafes very well. B&N had that relationship selling Starbucks coffee and desserts from Cheesecake Factory from cafes with attractive menus and bright fixtures with everyone in their very nice and consistent uniforms. Borders kind of slowly scraped over time toward having some vague degree of consistency in their wares, but overall the cafes just never looked as nice. Borders would sell Kim & Scott's pretzels at all of their stores but they wouldn't be branded as Kim & Scott's pretzels. Since Borders couldn't run the cafes well, farming out the business to Seattle's Best and having some degree of consistency and a recognizable brand and all that sort of thing seemed like a pretty good idea at the time. Just like, since Borders was late to the internet and a distant third and not running things very well, farming Borders.com off to Amazon was kind of a good idea at the time.

In both cases, however, the better solution would have been to run things better within Borders.

But even after the Seattle's Best conversions and the money spent fixing up the cafes, the cafes were better but still not as good. There was still less variety than at a B&N cafe, still not as attractively presented, and some stores were never converted, and even those that were it dragged on over several years. And of course those conversions were one part of the endless rounds of store remodels, and ultimately even this seeming good thing in the remodel process was maybe not so good after all.

Smooth move.

There may also be another few dozen Borders locations closing, as many as 20 superstores and 30 mall and/or airport stores.

And these, Borders would actually like to keep open.

The problem here is that these are stores that are very profitable and well trafficked in very good locations or stores that have really really good leases. Under the calendar that's in effect for the bankruptcy, Borders had x months to decide if it wants to keep or reject store leases, clock will be up in September. While there are some buyers circling around a substantial portion of the business, there's no way a sale can close in time for the new buyer to take over the leases before that September deadline.

And Borders is still a little tight on cash until a buyer is found. In a Chapter 11 bankruptcy proceeding, a company has to find a lendor who will float cash for the company to operate during the reorganization. This is called "debtor in possession" or DIP, and the company that's giving the DIP money is first in line to get paid back ahead of everyone else. For Borders, the DIP financing was on the low side because of the challenging circumstances facing the company, and this is exacerbated because Borders lost a lot of money in March and April, maybe somewhat less in May, but they've burned through a lot of their DIP money.

And because these are good stores, like the Penn Plaza location in Manhattan or downtown Boston, in good rentable locations, the landlords aren't rushing to compromise with Borders and extend the deadline for rejecting leases. All the other locations, there's a signed piece of paper that in most instances is pushing the September 2011 deadline into the opening weeks of 2012. Not these.

So there are these 50 stores with millions of dollars in inventory in them, that Borders might have to vacate in September, like it or not, on account of the interaction of these various factors. If you are going to vacate the stores by September, you need to start liquidating the inventory by the end of June, to allow July and August for the going out of business sales and a couple of weeks in September to clear out. And in order to do that, you need the court to approve the sales and the liquidators to put in their bids for the honor of running the sales right about now.

With its back to the wall, Borders is struggling to get the DIP lendors to give them more time, or to find some way of getting the extension papers signed by the landlords, but with no certainty of getting anywhere with either, they have to put in their filings and motions to approve the sales. They think maybe it will end up being closer to 15 stores than 50 that end up having to shutter, but who knows.

The manager of the Borders store in downtown Boston has said it's 100% certain his store will close. The closest major bookstore would then be the Barnes & Noble in the Prudential Center, around two miles away. That's practically like having it another city. If you're wondering if there's any effect on the ability of people to buy books as a result of losing these stores, I can't think of any better example.