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December 31, 2010 • eBooks, News

Borders: Welcome To The Death Spiral

(Image courtesy StorageMojo)

It’s harsh but there’s no other way to put it. News broke this afternoon that Borders is delaying payments to vendors, and is concerned if their creditors do not help with a restructuring that they’re going to run into a “liquidity shortfall”. In other words, there’s no money in the bank to pay anyone. When you’re a person, it makes you a deadbeat. When you’re a large company, it makes you very, very nervous.

According to the Wall Street Journal:

The nation’s second-largest bookstore chain by revenue, behind Barnes & Noble Inc., said the delays were part of its efforts to refinance its debt and that it had notified the publishers with which it is seeking to restructure payments.

The retailer also said “there can be no assurance” that its larger refinancing efforts will be successful. The company reiterated an earlier disclosure that without refinancing, it could violate its existing credit agreements in the first quarter of 2011 and “experience a liquidity shortfall.”

Further down in the article they quote Hachette Book Group as one of the publishers being denied payment, with the ominous implication that no decisions have been made as to whether Borders will receive more product. This is very bad news. All companies need credit to survive; unless you’re Apple or Microsoft, with enough money in the bank to cover every expense, you borrow and pay as the revenues come in. Some quarters are bad, and others more than make up for the bad quarters. It’s part of business.

But Borders is caught in a spiral they can’t escape. They can’t pay what they owe, and they have no cash to buy more product. No one’s being paid on what they already sent, so they aren’t expanding that credit further. Borders has bet all along that somehow the tide would turn, the cash would come in, and there’d be the chance to catch back up, but it’s just not happening. This is like a person who has a credit card, charges it to the limit, then demands an extension of credit on the line despite not even making the minimum payment.

This doesn’t mean the end of the line quite yet for Borders. There are many famous second acts in business history (even one-time Borders owner K-Mart has had a second chance). The problem is that Borders is heading into this as part of a weakened book industry in a weak economy. And while they’ve staved off their debtors before, at some point everyone from the banks financing their credit to the publishers supplying the books are going to need to get paid. Maybe it’s time to start fishing through the corporate couch cushions for spare change?

11 Responses to " Borders: Welcome To The Death Spiral "

  1. dbmurray says:

    The timing of the announcement is critical as well. Christmas was last week. They’re just coming out of the period of the year when sales are strongest for bookstores. If they can’t pay debts right now, they are definitely in trouble. The Christmas season is when retailers usually catch up on paying their bills.

    • Carly Z says:

      Wow, I can’t believe I didn’t think of that when I wrote this last night. I’ll chalk it up to being tired. You’d think I would have known that, since the only time I ever got my meager, meager “bonus” was if we made sales plan, and we only made our impossible sales plans during Christmas.

      And this conversation with my coworker is why Borders is dying:

      Me: Did you see the news about Borders? Looks like they are running out of money.
      Coworker: No way! But it’s always packed there! I love that place.
      Me: Do you mean Borders or Barnes & Noble?
      Coworker: Oh, I mean Barnes & Noble! Never mind, Borders is crappy, I never shop there.

      Maybe we can turn it into a one-act play-“Death of a Bookstore”.

      • dbmurray says:

        I just hope they can hang on for a few more weeks, since I currently have a small stake in the company.

        I ordered two $25 Borders gift cards through my Discover Card rewards program on December 16. They haven’t arrived yet…

  2. Nicholas Lee says:

    GShared: Borders: Welcome To The Death Spiral:
    (Image courtesy StorageMojo)
    It’s harsh but there’s no other way… http://bit.ly/i33VE0

  3. Daniel Chow says:

    Borders: Welcome To The Death Spiral http://goo.gl/fb/7ZFz4 #ipad

  4. glitch says:

    I liked the Fark headline.

    “Borders approaches Chapter 11 in their choose your own adventure novel”

    Kind sad really though. Waldens was the only book store in a lot of small towns.

  5. JCHYBINSKI says:

    Borders: Welcome To The Death Spiral « Gear Diary http://bit.ly/gK0M0e

  6. Gomotron says:

    This comes as no surprise to anyone who is familiar with the market.

    Right now, Amazon and Barnes & Noble are surviving due to their online e-book sales. They each have their own platform for e-books from which they derive profit from the sale of those e-books. The only platform that Borders sold was the Sony E-Reader and that platform is VERY limited with respect to their e-book catalogue.

    • Carly Z says:

      Actually Borders ebookstore is slightly better stocked because of their partnership with Kobo. If Borders had partnered with Sony and actually branded the devices they probably would have been more successful than selling 15 different ones with no clear strategy.

  7. Christopher Gavula says:

    Being from the southeast Michigan, I have a special fondness for Borders (originally out of Ann Arbor, MI). Where I live now, there are no Borders stores – only one small Waldenbooks store. Barnes and Nobles has a couple of stores in the larger area, but the “big” bookseller is Books-a-Million. Whenever I am up in the Detroit area I make a point of wandering through the Borders stores, and I actually prefer those stores to the B&N stores. I really hope they are able to pull out of this spiral. I suspect it will end up as a merger of some kind with somebody, though. That’s disappointing. THe old Hudson’s department stores were never the same after they became part of Dayton’s (Dayton-Hudson), then Marshal Fields, then Macy’s and I know that Borders will not be the same if it is bought buy another chain either.

    I agree that the eBook stores of Amazon and B&N have get them more solvent than Borders (not to mention Amazon’s lack of retail space), but at the end of the day it would be best if Borders could solidify it’s e-strategy so it can also benefit more from that market. that said – I think it will be a sad day if these retail chains don’t survive in a retail store format – they have always been more than retail stores – they are also often meeting places and destinations beyond just a “place to buy books”. I hope we don’t lose that!

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