Sept. 21 (Bloomberg) -- Borders Group Inc. President Michael Edwards says he has hit on a solution for reviving his money-losing bookstore chain: Be less like a bookstore chain.
Edwards, 50, has taken a page from Toronto’s Indigo Books & Music Inc., which prospered as Borders and larger rival Barnes & Noble Inc. lost sales. Indigo, founded by Chief Executive Officer Heather Reisman, brands itself a “cultural department store,” using books as bait to attract shoppers to other items.
Edwards is mimicking that strategy for Borders’ 500 superstores, whose sales have dropped for 10 straight quarters, after consulting with Reisman last year and joining the Borders board on a tour of one of her Toronto superstores in March. Indigo outlets feature items like Pilates balls and wine glasses along with copies of “The Girl with the Dragon Tattoo.”
“They’ve done a cutting-edge approach to providing well-designed, sophisticated products that seem appropriate to a book lover,” said Edwards, who reports to CEO Bennett Lebow. “We found that valuable for us as we think about the future.”
Borders, the second-largest U.S. bookstore chain, has posted four straight annual losses as online retailer Amazon.com Inc. and discount chains won customers. The closing of most of its mall locations and store remodelings failed to stem the losses, and the recession led to even deeper sales declines.
The growing popularity of electronic books adds another challenge. Barnes & Noble has devoted many more resources to e-books, betting millions to make and market the Nook reader and transform the company into an e-commerce retailer.
“We are now putting money behind that business because we see something real,” Chief Financial Officer Joe Lombardi said in an interview. Online sales, which include revenue from digital books, climbed 42 percent in the latest quarter.
Barnes & Noble may have an edge in executing its plan because it has more cash to invest, said Michael Souers, a retail analyst for Standard & Poor’s in New York.
“If I had to bet on one or the other, Barnes & Noble is probably the better off of the two,” said Souers, who has a hold on shares of both companies. “But it’s still really unclear at this point. Doing nothing is not going to work, obviously.”
Borders, based in Ann Arbor, Michigan, rose 15 cents, or 14 percent, to $1.26 at 4 p.m. in New York Stock Exchange composite trading. Barnes & Noble advanced $1.52, or 9.4 percent, to $17.71. Indigo fell 10 cents to C$13.75 in Toronto trading.
Edwards began working with Indigo last year after Borders spent $5 million on a 20 percent stake in Kobo Inc., a Toronto digital book provider partly owned by the Canadian chain. Borders started selling e-books from Kobo on its website in July, a year after Barnes & Noble entered the market, and also offers the Kobo e-reader.
Reisman, 62, founded Indigo in 1996 after earlier stints as a social worker, management consultant and beverage company executive. She also is the wife of Gerry Schwartz, who runs Onex Corp., Canada’s biggest buyout firm, and serves on Indigo’s board.
The concept for Indigo was simple: Millions of people love bookstores so much they would buy almost everything there if they could. In the company’s founding documents, Reisman coined the “cultural department store” phrase to describe her booklover’s paradise.
That idea became a reality at the chain’s first location, a 20,000-foot superstore in the Toronto suburbs, when it began offering a book series on fly-fishing and later introduced brass fly cases for C$30 ($29) that sold out. The store also offered fresh flowers, part of a plan to feature merchandise that “smelled amazing or looked amazing,” Reisman said.
These days non-book items make up 17 percent of sales, more than five times the amount in the 1990s. Reisman expects to double that in three years, partly by building store appearances around special events.
About 30 percent of books are bought as gifts, Reisman says, so it makes sense to pair the wine guides with the brie bakers in the entertaining section or nursery rhymes and pacifiers in the baby area. That’s paid off in sales per square foot, where Indigo’s rate was about $295, more than two-thirds higher than Borders’ $173 last year.
“They give you a lot more reasons to go shopping in their bookstores that have nothing to do with books,” said Antony Karabus, CEO of Karabus Management Retail Consultants, a subsidiary of PriceWaterHouseCoopers Canada LLP. “Those other chains just look like bookstores. Indigo looks like much more.”
More to Buy
Now Edwards wants Borders to look like more too. The chain started by hiring a branding firm, Big Red Rooster of Columbus, Ohio, to make over signs and store layouts to emphasize items other than books for this holiday season. The company also brought on Michele Delahunty-Cloutier, a veteran of retailers Chico’s FAS Inc. and Gap Inc., to oversee the changes as chief merchandising officer.
In the next two years, Borders will fill its superstores with stand-alone sections, such as areas where people can craft stuffed animals through the Build-a-Bear Workshop Inc. brand, that will differentiate it from Barnes & Noble, Edwards said.
“You create more shops within a shop, so you really know you are in a unique part of the store,” Edwards said.
Edwards chose this route because he expects half the chain’s books to be sold online in three years, and other items can boost profits because they have higher margins than books. His time working for defunct computer retailer CompUSA also showed him the wisdom of diversifying, he said.
Bookstores aren’t the first retailers to face down the two-pronged attack of new technology and increased competition. The key for book chains is how quickly and well they can execute their transformations, said Wendy Liebmann, CEO of retail consultancy WSL Strategic Retail in New York.
“The final nail hasn’t shown up, but somebody has the hammer ready to hit it,” Liebmann said. “The coffin has been built.”
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