I was catching up on some blog posts after returning from vacation, and was intrigued by Chris Webb's take on Borders' decision to display more book covers in their stores, which in turn will reduce a typical store's inventory by 5% to 10%.
There are a lot of different opinions on what kind of effect this will have on not only their in-store business, but the web business as well. In my opinion, this is a big fat WIN all the way around for Borders.
In-store: In a physical store - even a "big box" like Borders, you have limited shelf space to merchandise your product. This environment is where you see The Long Tail and The Paradox of Choice collide. Borders can cram every book they can on their shelves in order to maximize inventory, but it's all for naught if the end result is a shopper so bewildered by choices and poor merchandising that they ultimately elect not to make a choice.
I think there several reasons to applaud this change:
- It's a ballsy move, and goes against what most consider to be conventional wisdom.
- They actually tested their front-facing strategy and saw a 9% increase in revenue in those stores. Border's 2007 revenue was just north of $4.1B. You do the math.
- They increased revenue in those stores, while reducing inventory. A 9% increase in top-line revenue while decreasing your cost of goods by 5% to 10%?? That's real money, baby!
- Customer research in these test stores revealed that most customers left with the perception that they were actually stocking more books, not less!
So, what does this mean to their web business? At this juncture, probably not much. On the surface, it would appear that a drop in inventory levels should have a negative effect on web sales. But, this is also a business where it's pretty easy to leverage distribution channels with Ingram and Baker & Taylor to model a "virtual" inventory system.
In the end, I don't think it will have a negative effect on their web business because up until just recently, they didn't really have one. If you look at Borders' last quarterly report, it shines a light on their web business through last year:
" The Company, through its subsidiaries, has agreements with Amazon.com, Inc. ("Amazon") to operate Web sites utilizing the Borders.com and Waldenbooks.com URLs (the "Web Sites"). Under these agreements, Amazon is the merchant of record for all sales made through the Web Sites, and determines all prices and other terms and conditions applicable to such sales. Amazon is responsible for the fulfillment of all products sold through the Web Sites and retains all payments from customers. The Company receives referral fees for products purchased through the Web Sites."
This, folks, is what we call a glorified affiliate program. No risk - no reward, and you pass on what could be your best customers right through to your biggest competitor.
So, did they make any money in their relationship with Amazon? You tell me - remember, this is a $4B retailer:
"Other revenue for the Borders and International segments primarily consists of income recognized from unredeemed gift cards, as well as revenue from franchisees. Other revenue for the Borders segment also includes wholesale revenue earned through sales of merchandise to other retailers, as well as referral fees received from Amazon as part of the Web Site agreement. Other revenue in the Waldenbooks Specialty Retail segment primarily consists of income recognized from unredeemed gift cards. Other revenue has increased $2.0 million, or 31.3%, to $8.4 million in 2007 from $6.4 million in 2006."
This is a quarterly report, so you can probably extrapolate some annual number out of this and get to about $40M, which lines up with their Income Statement disclosure of "Other Revenue" accounting for 1% of total company revenue. And keep in mind that this number includes revenue from unredeemed gift cards, international segments, wholesale, etc. and not just Amazon referral fees.
I'm guessing that in just a couple of years, Borders will be in a position where they will have no choice but to consider the effect that a decision like this would have to their online business, but today it's a zero-sum equation...and then some.