Borders ending sad but not surprising

Have you ever had the end of a business affect your day-to-day life?

If you owned or worked for a company that closed its doors, then the obvious answer is “yes.” But I’m thinking as a customer. For example, disappointment still lingers on my wife’s side of the family over a favorite bakery closing several years ago.

For me, it’s the liquidation of Borders Group Inc, the nation’s once-second-largest bookstore chain.

For nearly two decades, Borders has been a regular and favorite stop of mine. As a bibliophile, researcher and writer, Borders’ large book and periodical selections were a treasure. And Borders’ cafes and Wifi service served as tremendous benefits when working mobile. Throw in some comfy chairs, and Borders had it all to meet my reading, writing, working and book-loving needs.

But alas, the big, bright “Going Out of Business” signs have been up since it was announced in July that Borders would be liquidated.

How did this firm go from the high-flying ranks of an industry innovator to filing for bankruptcy protection this past February to selling off all of its assets? It’s not all that unusual in a dynamic, competitive marketplace. A combination of bad business decisions, a failure to keep up with industry changes, and a poor economy closed the book on Borders.

Keep in mind that Borders was a key player in changing the industry by spreading book superstores across the nation, particularly in the 1990s. Shoppers appreciated the huge selection, along with the inviting store environments. Indeed, it was not that long ago that Borders was being blamed for the demise of the small, independent bookstore.

But poor decision-making took hold in the 2000s. Most glaring was Borders’ inability to grasp the significance of two earth-shaking changes to the industry.

First was the impact of Internet book sales. As it struggled online, Borders handed over the operations of its Internet business to top-competitor Amazon in 2001. By the time Borders retook its online reins in 2008, was the Internet book king. It’s hard to imagine a worse decision in the book business.

But Borders managed to match this level of incompetence by coming to e-books far too late. By the time Borders partnered with Canada’s Kobo Inc. to introduce the Kobo e-reader last year, it was nearly three years after had launched the Kindle. Borders also was beaten to the market by Barnes & Noble’s Nook and Apple’s iPad.

Broadband Internet and e-books rank as the biggest revolutions to hit the book universe since Gutenberg’s printing press in the 15th century — and Borders missed the boat on each.

But still more contributed to the fall of Borders.

The firm’s debt load exploded to drive overseas store expansion and stock buybacks. The Wall Street Journal reported that the firm’s debt grew from $159 million in 2001 to $554 million in 2008, while “Barnes & Noble eliminated all its $667 million in debt” over the same time.

For good measure, the company jumped from CEO to CEO. Four CEOs in three years meant ever-changing business plans, and a company in trouble with no idea of where it was going.

Put these choices together with the one of the worst recessions since the Great Depression running from December 2007 to mid-2009, followed by one of the poorest recoveries, and it’s not surprising that Borders entered bankruptcy early this year.

The plan initially was not liquidation. When it entered bankruptcy, Borders had 642 stores and 19,500 employees. The idea was to close 228 unprofitable stores, and emerge smaller but profitable. But Borders’ woes only accelerated, and when no buyer could be found, the decision to liquidate was made in mid-July. At that time, Borders had 10,700 employees and 399 stores.

Interestingly, the Borders’ brand still might survive in some form, as the company’s website and intellectual property will be auctioned off on September 14. But by the end of September, this onetime industry leader, as we once knew it, will be gone.

The end of Borders certainly makes me sad as a longtime customer. Obviously, though, the people hurt most are the thousands forced to look for new jobs in a bad economy. For good measure, others in the book industry have felt, and will continue to feel, the fallout.

At the same time, however, this is an example of what economist Joseph Schumpeter called “creative destruction.” That is, innovation, invention and new ways of doing business destroy old companies and even industries to make way for new enterprises, with more jobs. That is the process of economic growth and development. In the end, technological changes will expand opportunities for authors, publishers and retailers. And remember, we, as consumers, make the final call as to what works and what does not in the marketplace.

The bookstore will not completely disappear. But as consumers continue to shift to online purchases and e-books, there are bound to be fewer brick-and-mortar stores. And they’ll have to find business models that work. Borders failed, as will others. But some existing and new businesses will get it right, and eventually they’ll have to deal with the next big market revolution somewhere down the road.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council, and author of Warrior Monk: A Pastor Stephen Grant Novel.