Borders Alternate Model Makes Sense

| About: Borders Group, (BGPIQ)

The WSJ Reports

Borders Group Inc. has agreed to accept books from HarperStudio on a nonreturnable basis, departing from a decades-old publishing tradition. Under the terms of the deal, the nation's second-largest bookstore chain by revenue will get a deeper discount on initial orders of books published by the new imprint of News Corp.'s HarperCollins Publishers -- 58% to 63% off the cover price, instead of the usual 48%. In exchange, Borders won't return any unsold books to HarperStudio, instead probably discounting them in the store. (News Corp. owns The Wall Street Journal.)

"The idea of taking inventory and then shipping it back isn't a good idea for anybody. We're open to all publishers to discuss alternatives to the traditional return model," said Robert Gruen, executive vice president of merchandising and marketing at Borders, of Ann Arbor, Mich. Under standard industry practice dating to the 1930s, retailers can send back whatever new titles don't sell for full credit, with publishers paying for shipping. This has created a mass of titles that are trucked from one warehouse to another until they eventually are sent back to the bookstore chains, where they are sold for a significant discount to the list price.

People in the industry estimate that between 30% and 40% of all consumer adult titles are eventually returned to their publishers. "Returns have never made sense in our business, and with the recent economic downturn, publishers and booksellers are more open than before to experimenting with models that might decrease waste and increase profit," said Robert Miller, president and publisher of HarperStudio. When he started the imprint earlier this year, Mr. Miller said he intended to shake up traditional book-publishing economics.

Pros are that the new arrangement instantly increases margins or, should Borders elect not to go that route, the company is now able to become more competitive on prices to the consumer without pressuring current ones. The key to making it work is inventory. It now becomes more important than ever to maintain proper levels to maximize sales of new titles at higher prices.

This year Borders has shown that it is able to do that and having control of the website from Amazon (NASDAQ:AMZN) does give it a far more profitable clearing house for unsold titles.

Disclosure: Long BGP