For Mike Edwards, former CEO of Borders, his brief reign at the troubled retailer was like an “incredibly crazy movie.” Speaking at the Association for Corporate Growth’s Annual Retail Conference, held yesterday at the New York Athletic Club in Manhattan, Edwards frankly recalled the frustration of working to keep Borders, one of the nation’s largest booksellers, from bankruptcy.
Interviewed by Randy Schwimmer, head of Capital Markets at Churchill Financial, Edwards talked briefly about his long resume of successful retail ventures, as well as two of his former companies—CompUSA, and Borders—that were essentially “digitized,” pointing out how even large, dominant businesses can quickly find themselves facing demise.
Edwards, a 30-year retail veteran who was just named chairman of the Wicked Quick apparel chain, joined Borders in September, 2009, as executive v-p and chief merchandising officer. By January, 2010, he was interim CEO—a job, he recalled, that came with some difficult marching orders: raise about $130 million immediately, or the company was gone. “None of that was in the brochure,” Edwards quipped.
In June 2010, now officially Borders CEO, Edwards said he realized the tough road the company faced when he looked to the company’s fourth quarter projections. “In this business, you make almost your entire profits in the fourth quarter,” he explained. Those projections, he said, made him “very, very uncomfortable.”
With its credit tightened, Edwards said the company soon found itself with no choice but to hold back its payables. He recalled how some anxious publishers would often send people to physically pick up checks from Borders headquarters. This time, those people came—but there were no checks, and thus began the cascade of events that ended with the company’s bankruptcy.
Although he said 200 or so Borders stores were making money, the rest were not, and some 120 stores were simply “bleeding cash,” with few options, as the “average” lease for these stores had about 8-10 years left on it, Edwards noted, and landlords were not going to simply allow Borders to walk away, making closures expensive propositions. By the end of 2010, “we knew we were in trouble,” Edwards said, “and so did the banks.” He noted that a possible merger with Barnes & Noble was floated, but that only “one half” thought that deal made any sense, suggesting B&N showed no interest in a deal.
Edwards spoke frankly about the bankruptcy process, describing an agonizing, draining push to restructure the company and negotiate with creditors. “We put together the best business plan of my life,” he said, “for the worst outcome.” When potential investors backed out just hours before a fateful court hearing, the game was over. The next day, Edwards recounted how he told some 10,000 employees they would be losing their jobs. And just like that, a 40 year-old brand that once peaked at over $4.5 billion in sales was gone.
So what were Borders’ fatal mistakes? Edwards said the company’s death spiral began in the late 1990s, when the company embarked on a strategy of “growth for growth’s sake.” An international expansion effort drained cash, and “distracted” officials from the U.S. business, Edwards said. And, a stock buyback at around $30 per share announced in 2005 further crippled the company. An additional $300 million on the balance sheet, Edwards suggested, might have made the difference.
But Borders’ most crucial strategic blunder, he suggested, was not taking the Internet seriously enough in its early days and initially outsourcing its online business to Amazon.com. “We just handed our customer base to Amazon,” Edwards lamented. “The view was that people were going to be in the stores.”
Schwimmer seized on that point to talk about the shift in bookselling, and the cultural shift to e-books. He asked the audience how many people had downloaded a book in the last month—nearly the entire room seemed to raise their hands. He then asked how many people had purchased a book at a bookstore in the same period—once again, a vast majority of hands went up. Scwhimmer suggested that was encouraging, and that e-books, and print books were not mutually exclusive, and there was room for both.
Edwards agreed, but outlined the challenges facing physical retailers. As a percentage of book sales transition to e-book sales, what do stores do with their extra square feet, for example? If half of all sales will soon be digital, how does a bookstore get smaller? And, how do brick-and-mortar retailers compete on price? Edwards recalled his most recent experience buying a television, where he went to a chain store, found the model he wanted, pulled out his iPhone and quickly found a cheaper price online, with free shipping. When presented with the option to match the price, the store declined, and lost the sale. The same thing happened frequently in Borders’ stores, Edwards noted, playfully calling these customers “cheaters,” as they would came to the store, browse, read, have a cup of coffee, then pull out their phones and use the free wifi to buy the book more cheaply from Amazon.
In other words, not only are physical bookstores facing a challenge from more readers downloading e-books direct to devices, Edwards suggested the ability of online competitors like Amazon to manage inventory and deliver physical products quickly and cheaply was also a significant a challenge to brick-and-mortar retailers as consumers can now dial up a cheaper price, usually with free shipping, right from their smartphones. Borders had "22% operating costs that Amazon doesn't have," Edwards noted, saying that made it hard to compete.