Is Borders Cutting Inventory Too Much?

I've been reading a lot of comments on Borders' (BGP) recent quarter. The general theme is that Borders is cutting inventory too much, can't cut it anymore, and in doing either is risking not carrying titles people want.

Some clarifaction is necessary. Notes from the recent earnings call Q&A:

Ron Marshall

What’s important is while I don’t think that we’re going to have another grand announcement on cost reductions this year. I think what you will see and what we’ll be able to talk about as the quarters click off is a continual improvement in some of our core processes. One of the things we’ve talked a lot about is reducing cycle times inside our organization.

A really good example is we used to order from most of our large vendors once every 12 weeks, essentially once a quarter. We’ve already compressed that cycle time from 12 weeks to four weeks. Four weeks isn’t the right number, its either two weeks or one week but four weeks is a lot easier and a lot better to deal with than 12.

As we do that the ability to take additional inventory add as we compress safety stock and obviously it’s easier to forecast four weeks out then 12 weeks out. You’ll see some inventory improvements but you’ll also see some operating cost improvements as we’re only handling the product once rather than two or three times.

David Weiner – Deutsche Bank

Obviously you’ve been cutting inventories pretty substantially. Can you talk about what impact that has on your credit line availability, I think your total line is over a billion dollars but as you cut inventories how does this impact the amount that maybe you can actually borrow?

Mark Bierley

I think the key thing here is we look at the productivity of the inventory. If we’re taking inventory out we’re taking out inventory that quite frankly we own. So it allows us to recapture cash flow and improve our overall liquidity position. What we’re doing with inventory and Ron described it as getting smarter in terms of the replenishment, how frequently we order, how we order our front list.

We’ve sped up our return channel back through the returns process from our stores this year. Quite frankly just getting to a point where you’re improving the overall optimization of that inventory and quite frankly good things come from that in the cash flow and the liquidity standpoint.

The reduction in inventory expense is not just a function of "not carrying books" but one of a more 'just in time' inventory system. It is also clear from the comments that Borders intends to further reduce this time between orders another 50% to 75%.

The inevitable error that occurs when ordering once a quarter is that excess must be requested to avoid shortfalls. There is almost no way to avoid it. By increasing the frequency the cash flow consequences are hugely positive and the inventory levels that must be carried at any given point are dramatically reduced.

Disclosure: Long BGP

Comments

[User 283977:]

This is a classic example of what is wrong with executive management teams in many companies today. The discussion focuses entirely on the economic benefits of reducing inventory costs which results in cash flow increases. In other words, they want to reduce the average shelf time for their titles. They also want to reduce their order cycle times, and even mention the business buzz term "just in time" inventory system. This all sounds wonderful… but what is glaringly missing from the discussion is what do the Borders customers think of these changes?

What are the customer centric consequences of reducing in-store inventories to mostly best selling titles? If less traffic enters the store, how much impulse buying will be reduced? Many people don't go into a books store to purchase a specific title, they go in to browse, they go in to look at shelves of books in specific areas. Many of the more expensive books carried by book stores do not blow off the shelves. My guess is that the average profit per sold title would drop as a result of only carrying a limited selection of "best sellers". If I can't get my hand on the title today, why not just buy it on Amazon?

Just in time supply systems works well in manufacturing because you know how many units you plan to build. With the exception of books such as the Harry Potter series, its very difficult to know the demand for most book titles in advance, so you run the risk of missing a portion of the first wave of sales for a surprise best seller. The second goal of reducing the shelf time for titles means they intend to mostly carry books that inherently move rapidly. That pretty much eliminates a good portion of highly expensive, highly profitable titles that move slower, and who's sales are highly dependent on the presence of a substantial number of IN-STORE titles in the same subject area.

Amazon is killing these guys with inventory. The challenge to Borders and Barnes & Noble is to INCREASE store traffic. They need to increase the number of eyes and wallets in the store. Local stores have huge advantages over Amazon because of zero shipping costs, the ability to hold and touch the books, the ability to make an impulse purchase and take it home NOW, and the presence of knowledgeable and personable sales staff. Having a great snack bar with comfortable seating and low priced goodies also brings people in the store, and that is the name of the business in retail sales. Add to that an inventory of books oriented to needs and wants in their selling area, and stores designed to increase social meetings in particular subject areas and you have a business strategy oriented towards maximizing customer satisfaction. If you manage to maximizing customer satisfaction in each selling area, profitability will increase. Cutting inventories is an inherently defensive business strategy and will very likely result in a spiral of lost customers and ultimate bankruptcy.

I used to spend a lot of money in Borders on technical books. They reduced their inventories, and as a result, I have not been in a Borders for quite some time.

Apr 04 07:15 PM

[User 388980:]

It is so true. Borders is being run like a "business" and not as
a "customer satisfaction" operation. I work at Borders and we are constantly badgered to get the customer to buy "certain" titles. And if we don't our jobs are threatened. As a book lover, I go into to a book store to browse and if I want help I ask for it. I don't want to be badgered by salespeople like I am at a appliance store. No one can "tell" me what I want to read.

Apr 05 09:54 AM

[Joseph Sherman:]

The business of Borders should be the customer. If people think they are too commercial, the shops will fail.

Apr 05 10:22 AM

[burningprop...:]

The results of the 2008 inventory reduction are here in black and white:

-10.8%: Comp-store decline of superstores, 2008

-8.2%: Comp-store decline of books, 2008

$166.5 million: Reduction in book inventory, 2008

~from PW, "Borders Books by the Numbers"

But don't worry: Marshall is just going to whip the stores with threats, write-ups, and terminations until ALL we are selling are the new "make" books. Nothing else matters besides selling "City of Thieves" and "The Middle Place"; sales of these titles are the only measurement by which the stores are now judged.


On Apr 04 07:15 PM User 283977 wrote:

> This is a classic example of what is wrong with executive management
> teams in many companies today. The discussion focuses entirely on
> the economic benefits of reducing inventory costs which results in
> cash flow increases. In other words, they want to reduce the average
> shelf time for their titles. They also want to reduce their order
> cycle times, and even mention the business buzz term "just in time"
> inventory system. This all sounds wonderful… but what is glaringly
> missing from the discussion is what do the Borders customers think
> of these changes?
>
> What are the customer centric consequences of reducing in-store inventories
> to mostly best selling titles? If less traffic enters the store,
> how much impulse buying will be reduced? Many people don't go into
> a books store to purchase a specific title, they go in to browse,
> they go in to look at shelves of books in specific areas. Many of
> the more expensive books carried by book stores do not blow off the
> shelves. My guess is that the average profit per sold title would
> drop as a result of only carrying a limited selection of "best sellers".
> If I can't get my hand on the title today, why not just buy it on
> Amazon?
>
> Just in time supply systems works well in manufacturing because you
> know how many units you plan to build. With the exception of books
> such as the Harry Potter series, its very difficult to know the demand
> for most book titles in advance, so you run the risk of missing a
> portion of the first wave of sales for a surprise best seller. The
> second goal of reducing the shelf time for titles means they intend
> to mostly carry books that inherently move rapidly. That pretty much
> eliminates a good portion of highly expensive, highly profitable
> titles that move slower, and who's sales are highly dependent on
> the presence of a substantial number of IN-STORE titles in the same
> subject area.
>
> Amazon is killing these guys with inventory. The challenge to Borders
> and Barnes & Noble is to INCREASE store traffic. They need to
> increase the number of eyes and wallets in the store. Local stores
> have huge advantages over Amazon because of zero shipping costs,
> the ability to hold and touch the books, the ability to make an impulse
> purchase and take it home NOW, and the presence of knowledgeable
> and personable sales staff. Having a great snack bar with comfortable
> seating and low priced goodies also brings people in the store, and
> that is the name of the business in retail sales. Add to that an
> inventory of books oriented to needs and wants in their selling area,
> and stores designed to increase social meetings in particular subject
> areas and you have a business strategy oriented towards maximizing
> customer satisfaction. If you manage to maximizing customer satisfaction
> in each selling area, profitability will increase. Cutting inventories
> is an inherently defensive business strategy and will very likely
> result in a spiral of lost customers and ultimate bankruptcy.
>
> I used to spend a lot of money in Borders on technical books. They
> reduced their inventories, and as a result, I have not been in a
> Borders for quite some time.

Apr 07 10:21 AM

[mrmotosuwa:]

I agree as I use to work as a manager there for 7 years and have friends who still do.They are being told which books to "make" customers buy and if they don't personally sell a certain number they are written up and all that is being measured is how many of book "a" or "b" has been sold that day or week.These are usually tiltes they get the most discount on when they order but the problem is they offer almost the same discount to get people to buy them and with the lack of anything real variety in inventory that's ll they are selling.The customers can get these at Target and Wal-mart and many other things and this is something the past 2 and now apparently 3 CEO'S haven't seemed to figure out.3 CEO'S in 4 years hasn't helped and cutting people's hours and inventory combined with threats and ever sinking morale seems to be a recipe for failure.


On Apr 05 09:54 AM User 388980 wrote:

> It is so true. Borders is being run like a "business" and not as
>
> a "customer satisfaction" operation. I work at Borders and we are
> constantly badgered to get the customer to buy "certain" titles.
> And if we don't our jobs are threatened. As a book lover, I go into
> to a book store to browse and if I want help I ask for it. I don't
> want to be badgered by salespeople like I am at a appliance store.
> No one can "tell" me what I want to read.

Apr 07 02:42 PM

[AJB7:]

User 283977 wrote < I used to spend a lot of money in Borders on technical books. They reduced their inventories, and as a result, I have not been in a Borders for quite some time. >

This is exactly my experience also where I have stopped visiting the midtown Manhattan Borders. Whether they have any other viable alternative plan is another matter, given B&N's overwhelming cost and customer advantage. I suspect they are trying to survive on the secretary walk in trade. For all that, there may be just enough survival in shrinking so they don't completely go under, but the days of growth here are probably long over.

Apr 07 10:03 PM

[1980raerae:]

I also work at Borders. Part of the problem is the lack of hours available to us anymore. I used to be responsible for shelving and maintaining history, psychology, religion, and the smaller subsections within. I used to work 16-20 hrs/week but now I'm down to 5. I no longer can keep with the sections and barely have to time to shelve, let alone do maintenance. If I can't get the product on the sales floor, how am I supposed to sell anything??

Apr 17 06:45 PM

[polymath_in...:]

The Borders in Memphis is the only local bookstore I used to go to, even though we have 3 Barnes and Nobles, 1 Bookstar, and 1 Books-a-Million in the area. The book inventory in Borders was just so much better, more like college or graduate school compared to B&N's high school and BAM's junior high, for an analogy. Over the years, Borders has reduced its more advanced books in philosophy, science, and math, and is no better than the Barnes and Nobles. Now I go to the B&N's just as much as I do the Borders. But I order online far more often (NEVER from Borders, because their prices are too high), because Amazon always has the book I'm looking for.

The Borders in Memphis cannot hope to survive much longer since they currently have nothing to distinguish them from Barnes and Noble. Unfortunately, executive management rarely listens to the ONLY party that matters: the customer.

May 09 05:58 PM