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Borders posts strong 2Q, plans overseas expansion

By Isadore Barmash

“Internationally there’s a lot of opportunity for Borders’ stores, with our sales there up 56% in the second quarter.” — Robert F. DiRomualdo, chairman, Borders Group

One of retail’s most dynamic success stories of this generation is Borders Group, operator of the 300-store Borders Books and Music. With sales of $2.6 billion and net profit of $92.1 million in 1998, the Ann Arbor, Mich.-based chain had a strong 1999 second quarter while coping with high costs and competition in its Internet venture and pursuing temporary store opportunities in hundreds of U.S. malls.

Robert F. DiRomualdo, Borders’ chairman, spoke with SCT about business in general as well as plans for the future.

SCT: How’s business since your second quarter?

We’re pleased with our trends since the July quarter. Our business has improved. We have a very interesting situation. There is a lot of potential for new Borders stores in the malls and substantial potential for our superstores. In our Waldenbooks stores, it’s clear that mall stores have had a tough time due to superstores, but we have remained the residual legatees in malls with Waldenbooks, which now number about 900 stores. They may not have much top-line growth, but their presence has allowed us to move into temporary sites of different types, giving Waldenbooks a sort of profit annuity.

SCT: Would you elaborate?

We now have about 600 Day by Day Calendar stores. Since calendars are only sold at the end of the year, these stores represent a fourth-quarter opportunity for us, particularly since there are no calendar superstores. And we can sell those calendars in the Waldenbooks’ stores, too. In addition, with lots of unleased space in malls, we are opening kiosks for our merchandise and that, too, is made easy for us because we are already in the malls. And then, most recently, we bought All Wound Up, a chain with temporary stores selling toys in motion. We expect to have 150 stores there by year-end, taking up leases formerly held by Edison Bros. Stores Co.

SCT: What do you consider Borders’ most dynamic elements today?

Well, we think that Borders with its great inventory, cafe operations and convergence between the stores and Borders.com, and the domestic and international expansion opportunities, has much growth potential. It’s a very solid concept. At Waldenbooks, we see the growth of kiosks giving us good incremental growth. We see that as the end of Waldenbooks’ flat growth. This is the first year in about eight or nine that the store count isn’t declining.

Internationally, there’s a lot of opportunity for Borders’ stores, with our sales there up 56% in the second quarter. We view selected opportunities abroad and are planning to open three more superstores — we already have six abroad — with two new ones due in the United Kingdom and one in New Zealand before the year is over.

SCT: What’s the situation with your virtual store, which is not yet making a profit?

Borders.com is a full-media site which we launched more than a year ago. The ratings it is getting are high — No. 2 in books, No. 2 in video and No. 3 in music. Dow Jones rated us No. 1 overall. There are dozens of such players on the Internet, but we are right near the top. But it’s very difficult in that arena to make money due to rampant discounting and transportation costs, so it will take us some years to make money. This fall, we made substantial upgrading in our Internet business, and we expect to improve because of it.

SCT: Would you elaborate on your “convergence’’ concept?

We believe in it very much. It means that our Website presence will make our stores better places to shop although the malls will remain the primary communications vehicles with our customers. But we think that the existence of both will make our customers more comfortable so that they will shop in both. The numbers we see show us that 3.5% to 4% of all book sales are on the Internet.

Most of the Borders customers, we think about 80%, are online and use it in a utilitarian manner and that means they are well-adapted to shopping on the Web. We’ve put a lot of new technology into Borders.com, and we also want to apply it to our stores. It will make them better places to shop. We expect to get our share of Internet sales. There may be some erosion from our stores, but then we think shopping in them is a pleasurable experience and that will always help us. At the same time, we want to serve them well in both venues and that’s what drives us.

SCT: The main book retailers seem to be locked in a life-or-death war. Would you describe the climate in it?

This business has always been brutally competitive and always will be. But then, again, if it weren’t for the great competition, all of us would probably be running lousy businesses.

SCT: What are the most important changes Borders will be making in the next five to 10 years?

Over time, we will further converge our physical stores with our online stores and we will continue to expand our presence in the malls, with our regular stores and all the temp stores. We will continue to look for more opportunities overseas.