WEBVTT 00:00:00.000 --> 00:00:02.879 Before we get sentimental, and I know we will, 00:00:03.040 --> 00:00:05.320 we really need to look at the numbers. Oh, absolutely. 00:00:05.599 --> 00:00:08.859 The scale of it is just staggering. Right. At 00:00:08.859 --> 00:00:11.300 its absolute peak, this company was generating 00:00:11.300 --> 00:00:14.619 billions of dollars in sales. It employed nearly 00:00:14.619 --> 00:00:17.519 20 ,000 people. 20 ,000. And it had, what, over 00:00:17.519 --> 00:00:20.559 1 ,200 stores globally? Over 1 ,200. It was the 00:00:20.559 --> 00:00:22.440 second largest bookstore chain in the United 00:00:22.440 --> 00:00:25.679 States. And then in what really felt like the 00:00:25.679 --> 00:00:29.780 blink of an eye, it just hit absolute zero. We 00:00:29.780 --> 00:00:31.820 are, of course, talking about Borders Group. 00:00:31.920 --> 00:00:35.520 It is a truly staggering collapse. And you're 00:00:35.520 --> 00:00:37.320 right to start with the scale because I think 00:00:37.320 --> 00:00:40.890 people tend to remember. The cozy end of things, 00:00:41.030 --> 00:00:43.990 you know, the coffee, the comfy chairs, the carpet. 00:00:43.990 --> 00:00:46.289 The sang stations with the big headphones. Exactly. 00:00:46.289 --> 00:00:48.909 But they forget that this was a massive multinational 00:00:48.909 --> 00:00:51.450 corporation that effectively just evaporated 00:00:51.450 --> 00:00:54.329 into thin air. It did. And the usual eulogy is, 00:00:54.469 --> 00:00:56.270 frankly, it's lazy. You hear it all the time. 00:00:56.329 --> 00:00:58.570 Oh, Amazon killed them or nobody reads books 00:00:58.570 --> 00:00:59.990 anymore. But when you look at the documents, 00:01:00.170 --> 00:01:02.359 that's not really the whole truth, is it? Not 00:01:02.359 --> 00:01:05.420 at all. We have bankruptcy filings, we have internal 00:01:05.420 --> 00:01:08.599 memos, international retail reports, and they 00:01:08.599 --> 00:01:11.340 paint a much darker, much more complex picture. 00:01:11.579 --> 00:01:13.659 The Amazon killed them narrative is, I mean, 00:01:13.680 --> 00:01:15.980 it's convenient, but it's so incomplete. It is. 00:01:16.180 --> 00:01:18.500 Amazon was certainly the executioner, you could 00:01:18.500 --> 00:01:21.239 say that, but Borders had been handing them the 00:01:21.239 --> 00:01:23.959 ammunition for a solid decade. The rot started 00:01:23.959 --> 00:01:26.719 way, way before the Kindle ever showed up on 00:01:26.719 --> 00:01:29.459 the scene. So what is this story really about 00:01:29.459 --> 00:01:31.989 then? This is a story about a corporate identity 00:01:31.989 --> 00:01:35.390 crisis. It's about fatal strategic outsourcing 00:01:35.390 --> 00:01:38.609 and really a fundamental failure to understand 00:01:38.609 --> 00:01:41.370 what business they were actually in. And that's 00:01:41.370 --> 00:01:43.950 the mission for this deep dive. We're going to 00:01:43.950 --> 00:01:46.849 autopsy the corpse of Borders Group. We need 00:01:46.849 --> 00:01:49.609 to figure out how a company that literally defined 00:01:49.609 --> 00:01:52.530 the megastore concept. They practically invented 00:01:52.530 --> 00:01:55.030 the idea of the third place for readers. Exactly. 00:01:55.049 --> 00:01:57.709 How did that company manage to alienate its customers? 00:01:58.359 --> 00:02:00.140 completely destroy its balance sheet, and then 00:02:00.140 --> 00:02:02.920 just hand its entire future over to its biggest 00:02:02.920 --> 00:02:05.120 competitor. And we have to look globally, too. 00:02:05.219 --> 00:02:07.599 This isn't just an American failure story. The 00:02:07.599 --> 00:02:10.819 collapse in the U .K., the absolute mess in the 00:02:10.819 --> 00:02:13.740 Asia -Pacific region, they actually served as 00:02:13.740 --> 00:02:16.439 the canary in the coal mine for the U .S. operation. 00:02:16.800 --> 00:02:19.319 The domino effect. A perfect domino effect that 00:02:19.319 --> 00:02:21.979 started in, of all places, Ann Arbor, Michigan, 00:02:22.199 --> 00:02:25.219 and ended with a liquidation sale in a Singapore 00:02:25.219 --> 00:02:27.680 convention center. Let's start right there. Let's 00:02:27.680 --> 00:02:31.500 start where it all began. Ann Arbor, 1971. Because 00:02:31.500 --> 00:02:33.560 the biggest irony here is that Borders didn't 00:02:33.560 --> 00:02:36.580 start as a corporate monster. It started as the 00:02:36.580 --> 00:02:38.960 complete antithesis of one. It was incredibly 00:02:38.960 --> 00:02:41.620 humble. You have Tom and Louie Borders, two brothers, 00:02:41.819 --> 00:02:43.580 both students at the University of Michigan. 00:02:43.639 --> 00:02:47.259 They opened a shop at 209 South State Street. 00:02:47.319 --> 00:02:51.020 It's small. It's local. But the DNA of what Borders 00:02:51.020 --> 00:02:53.300 would become was formed right there. And it wasn't 00:02:53.300 --> 00:02:55.719 about retail in the way we think of it now. It 00:02:55.719 --> 00:02:58.439 was about, well, intellect. I think this is a 00:02:58.439 --> 00:03:00.319 really crucial distinction to make early on. 00:03:00.460 --> 00:03:02.719 Louis Borders wasn't a merchant in the same way 00:03:02.719 --> 00:03:04.379 that, say, Sam Walton was a merchant. He was 00:03:04.379 --> 00:03:07.199 a mathematician, right? He was. And that mathematical, 00:03:07.400 --> 00:03:10.199 analytical mindset is absolutely key to the whole 00:03:10.199 --> 00:03:14.620 early story. So in 1975, they make their first 00:03:14.620 --> 00:03:18.090 big move. They acquire a local store called Wars. 00:03:18.250 --> 00:03:21.550 And Wars was an institution in Ann Arbor. A total 00:03:21.550 --> 00:03:24.409 institution. An 80 -year -old bookstore that 00:03:24.409 --> 00:03:26.669 basically made all its money selling textbooks 00:03:26.669 --> 00:03:29.250 to university students. Which is a goldmine in 00:03:29.250 --> 00:03:31.370 a college town. Yeah. I mean, textbooks are a 00:03:31.370 --> 00:03:33.430 captive market. You have high prices, guaranteed 00:03:33.430 --> 00:03:35.949 customers every semester. It's a license to print 00:03:35.949 --> 00:03:38.699 money. It is the easiest money in book selling. 00:03:38.939 --> 00:03:41.080 But the Borders brothers, they weren't interested 00:03:41.080 --> 00:03:42.960 in the easy money. They bought the store, but 00:03:42.960 --> 00:03:45.740 they had absolutely zero interest in the textbook 00:03:45.740 --> 00:03:48.159 game. So what do they want? They wanted to build 00:03:48.159 --> 00:03:51.180 a browsing store, a place for discovery, a place 00:03:51.180 --> 00:03:53.740 you could get lost in. So what do they do? They 00:03:53.740 --> 00:03:56.219 hire Michael Hildebrand, who is a rare books 00:03:56.219 --> 00:03:59.199 expert, and Harvey James Robin, a professional 00:03:59.199 --> 00:04:02.060 bookbinder. Okay. That is a very specific hiring 00:04:02.060 --> 00:04:04.719 strategy. You don't hire a bookbinder if you're 00:04:04.719 --> 00:04:07.080 just trying to shift units of the latest Stephen 00:04:07.080 --> 00:04:09.569 King novel. No, you don't. You hire those people 00:04:09.569 --> 00:04:11.569 if you care about the physical object of the 00:04:11.569 --> 00:04:13.710 book, if you care about the curation of the content 00:04:13.710 --> 00:04:17.029 inside. They eventually moved the shop to a larger 00:04:17.029 --> 00:04:19.970 location. It was the old Wagner and Son men's 00:04:19.970 --> 00:04:22.790 clothing store, and they focused on breadth. 00:04:23.240 --> 00:04:25.439 on depth they wanted the deep cuts they wanted 00:04:25.439 --> 00:04:27.319 the books that nobody else bothered to stock 00:04:27.319 --> 00:04:29.600 they wanted the backlist titles the academic 00:04:29.600 --> 00:04:32.100 presses the obscure poetry and this is where 00:04:32.100 --> 00:04:34.339 the system comes in we can't talk about early 00:04:34.339 --> 00:04:36.420 borders without talking about tailwind this is 00:04:36.420 --> 00:04:39.100 the secret sauce this is what made it all possible 00:04:39.100 --> 00:04:42.319 louis borders being the math guy developed a 00:04:42.319 --> 00:04:45.160 proprietary inventory management system he called 00:04:45.160 --> 00:04:47.139 tailwind and you have to put yourself in the 00:04:47.139 --> 00:04:50.560 70s and 80s here most bookstores How did they 00:04:50.560 --> 00:04:53.199 order? Gut feeling. Maybe some very, very basic 00:04:53.199 --> 00:04:55.540 sales data from the cash register. It was an 00:04:55.540 --> 00:04:57.600 art, not a science. But Tailwind was different. 00:04:57.800 --> 00:05:00.759 It was revolutionary. It used algorithms, a word 00:05:00.759 --> 00:05:03.100 you didn't hear much in retail back then, to 00:05:03.100 --> 00:05:05.720 predict what specific demographics in Ann Arbor 00:05:05.720 --> 00:05:07.879 and later in other cities would actually want 00:05:07.879 --> 00:05:10.939 to read. It was data -driven creation. So let's 00:05:10.939 --> 00:05:14.189 make that concrete. While Barnes & Noble or Walden 00:05:14.189 --> 00:05:18.129 Books might stock, say, 20 copies of a huge bestseller 00:05:18.129 --> 00:05:22.050 and zero copies of a niche philosophy book, Tailwind 00:05:22.050 --> 00:05:24.569 would tell the Borders manager, actually, in 00:05:24.569 --> 00:05:27.490 this specific zip code, based on past purchasing 00:05:27.490 --> 00:05:29.829 patterns, you will sell three copies of that 00:05:29.829 --> 00:05:33.129 philosophy book this month. So stock it. Precisely. 00:05:33.470 --> 00:05:36.670 It allowed them to carry a massive, sprawling 00:05:36.670 --> 00:05:40.089 inventory, far more individual titles than any 00:05:40.089 --> 00:05:42.610 of their competitors, without going broke on 00:05:42.610 --> 00:05:45.430 unsold stock. It was the long -tail concept that 00:05:45.430 --> 00:05:47.370 Chris Anderson wrote about, but decades before 00:05:47.370 --> 00:05:49.509 the Internet popularized the term. They were 00:05:49.509 --> 00:05:51.930 optimizing for the browser, for the intellectual, 00:05:52.170 --> 00:05:54.410 for the person who was looking for that one obscure 00:05:54.410 --> 00:05:56.310 book they couldn't find anywhere else. And that 00:05:56.310 --> 00:05:58.370 person became their most loyal customer? That 00:05:58.370 --> 00:06:01.709 system? Tailwind, it fueled their growth. By 00:06:01.709 --> 00:06:04.410 1985, they feel confident enough to open a second 00:06:04.410 --> 00:06:07.009 store in Beverly Hills, Michigan. But then the 00:06:07.009 --> 00:06:09.930 tone starts to change. In 1989, they bring in 00:06:09.930 --> 00:06:12.050 a guy named Robert F. Tiro Moldo. And this is 00:06:12.050 --> 00:06:13.990 a pivotal moment. Tiro Moldo. He wasn't a book 00:06:13.990 --> 00:06:15.629 guy. He wasn't a University of Michigan intellectual. 00:06:16.279 --> 00:06:18.180 Far from it. He was the president of Hickory 00:06:18.180 --> 00:06:20.980 Farms. The cheese and sausage gift basket place 00:06:20.980 --> 00:06:23.040 you see at the mall during Christmas. The very 00:06:23.040 --> 00:06:26.959 same. And that hire signals a massive fundamental 00:06:26.959 --> 00:06:29.920 shift in the company's direction. You don't bring 00:06:29.920 --> 00:06:32.779 in the Hickory Farms guy to curate rare manuscripts. 00:06:33.060 --> 00:06:36.199 No. You bring him into scale. You bring him in 00:06:36.199 --> 00:06:38.639 to franchise the model, to roll it out across 00:06:38.639 --> 00:06:41.459 the country. And to his credit, he did. He took 00:06:41.459 --> 00:06:43.680 that incredible efficiency of the tailwind system 00:06:43.680 --> 00:06:46.160 and applied it to an aggressive national expansion. 00:06:46.500 --> 00:06:48.980 He was the guy who turned the art project into 00:06:48.980 --> 00:06:51.800 a replicable business. But they still kept some 00:06:51.800 --> 00:06:54.300 of that original soul for a while. I mean, the 00:06:54.300 --> 00:06:56.360 flagship store in Ann Arbor, what they called 00:06:56.360 --> 00:06:59.360 Borders No. 1, moved into the old Jacobson's 00:06:59.360 --> 00:07:01.779 department store on East Liberty Street in 1994. 00:07:02.279 --> 00:07:04.480 Oh, that place was legendary. It felt like a 00:07:04.480 --> 00:07:07.920 cathedral of books. Multiple floors, escalators. 00:07:08.560 --> 00:07:11.720 The cafe. It was enormous. It was the peak of 00:07:11.720 --> 00:07:13.879 the concept. The perfect marriage of the original 00:07:13.879 --> 00:07:16.600 Ann Arbor intellectualism with the scale of a 00:07:16.600 --> 00:07:20.360 national chain. But by the early 90s, the business 00:07:20.360 --> 00:07:22.779 reality was shifting again. And this leads us 00:07:22.779 --> 00:07:26.339 to the first major, major turning point. The 00:07:26.339 --> 00:07:28.959 moment the trajectory really wobbled. The Kmart 00:07:28.959 --> 00:07:30.899 acquisition. The Kmart experiment. This part 00:07:30.899 --> 00:07:34.079 of the story always, always baffles me. 1992. 00:07:35.490 --> 00:07:38.389 Kmart buys Borders. It feels like a glitch in 00:07:38.389 --> 00:07:40.930 this simulation. Kmart was the land of the blue 00:07:40.930 --> 00:07:43.970 light special, cheap polyester and bulk detergent. 00:07:44.029 --> 00:07:47.009 It was the epitome of low margin, high volume 00:07:47.009 --> 00:07:49.769 discount retail. And Borders was this sophisticated, 00:07:50.089 --> 00:07:53.670 inventory rich, intellectual hub. Why on earth 00:07:53.670 --> 00:07:55.899 did they merge? What was the logic? The logic 00:07:55.899 --> 00:07:59.300 was desperation and hubris, mostly on Kmart's 00:07:59.300 --> 00:08:01.959 side. Kmart was struggling, trying to diversify 00:08:01.959 --> 00:08:04.360 away from its core big box model. And they already 00:08:04.360 --> 00:08:06.399 owned Walden Books. Right, Walden Books. We have 00:08:06.399 --> 00:08:08.639 to talk about them. The quintessential mall bookstore. 00:08:08.939 --> 00:08:10.740 Absolutely. If you're of a certain age, you remember 00:08:10.740 --> 00:08:13.079 them. Narrow aisles, packed to the ceiling, mostly 00:08:13.079 --> 00:08:15.579 just the top 40 bestsellers. And it was always 00:08:15.579 --> 00:08:17.620 located right between the food court and the 00:08:17.620 --> 00:08:20.699 Gap. The exact opposite of the spacious, come 00:08:20.699 --> 00:08:23.660 and stay a while, Borders model. The polar opposite. 00:08:24.220 --> 00:08:26.480 Kmart had bought Walden Books years earlier, 00:08:26.680 --> 00:08:29.259 but the mall -based bookstore model was already 00:08:29.259 --> 00:08:32.360 starting to show serious cracks. Malls were beginning 00:08:32.360 --> 00:08:35.220 their long, slow decline. So Kmart's management 00:08:35.220 --> 00:08:37.919 looks over at Borders, this rising star with 00:08:37.919 --> 00:08:40.480 its fancy new superstores and its incredible 00:08:40.480 --> 00:08:43.220 tailwind inventory system. And they thought, 00:08:43.340 --> 00:08:46.080 we've got a brilliant idea. If we buy them, we 00:08:46.080 --> 00:08:48.460 can merge the two operations. We can use the 00:08:48.460 --> 00:08:50.759 sophisticated borders executives and their systems 00:08:50.759 --> 00:08:53.860 to save our floundering Walden books chain. So 00:08:53.860 --> 00:08:57.919 the plan was literally to have the smart. Indie 00:08:57.919 --> 00:09:00.500 -turned corporate guys from Ann Arbor fixed the 00:09:00.500 --> 00:09:03.159 dying mall chain. That was the theory. In practice, 00:09:03.259 --> 00:09:05.960 it was an absolute unmitigated disaster. It was 00:09:05.960 --> 00:09:08.360 a culture clash of epic proportions. I can only 00:09:08.360 --> 00:09:10.299 imagine. You had the Borders team, who were used 00:09:10.299 --> 00:09:12.899 to managing deep, complex inventory with relatively 00:09:12.899 --> 00:09:15.379 high margins, suddenly being told to wrestle 00:09:15.379 --> 00:09:17.700 with the Waldenbooks model, which was all about 00:09:17.700 --> 00:09:20.679 high turnover, mass market paperbacks, and heavy 00:09:20.679 --> 00:09:23.019 discounting. It's like trying to run a Michelin 00:09:23.019 --> 00:09:25.240 star restaurant using the logistics and supply 00:09:25.240 --> 00:09:28.350 chain of a fast food chain. The entire set of 00:09:28.350 --> 00:09:30.070 metrics for success are completely different. 00:09:30.190 --> 00:09:32.769 They are. And the systems didn't talk to each 00:09:32.769 --> 00:09:35.190 other. Tailwind was designed for depth and precision. 00:09:35.970 --> 00:09:38.309 Kmart's corporate systems were designed for bulk 00:09:38.309 --> 00:09:41.769 and volume. The Borders executives looked at 00:09:41.769 --> 00:09:45.129 the mess Kmart had handed them, this impossible 00:09:45.129 --> 00:09:48.370 task of integrating two opposing business models, 00:09:48.549 --> 00:09:50.970 and many of them just walked away. They bailed. 00:09:50.970 --> 00:09:53.169 They didn't want to be book category managers 00:09:53.169 --> 00:09:56.070 for a discount retailer. They had built something 00:09:56.070 --> 00:09:58.850 special and they saw it being diluted and destroyed. 00:09:59.210 --> 00:10:02.370 So Kmart buys them for their expertise, immediately 00:10:02.370 --> 00:10:05.309 breaks the culture, drive the experts away and 00:10:05.309 --> 00:10:07.350 then realizes it made a colossal mistake. The 00:10:07.350 --> 00:10:09.370 stockholders realized it pretty quickly. They 00:10:09.370 --> 00:10:11.870 put immense pressure on Kmart's board to dump 00:10:11.870 --> 00:10:15.669 the now unwieldy book division. So in 1995, just 00:10:15.669 --> 00:10:18.210 three short years later. Kmart spins the whole 00:10:18.210 --> 00:10:21.350 thing off as a new publicly traded company. And 00:10:21.350 --> 00:10:23.070 initially it was called the Borders Walden Group. 00:10:23.289 --> 00:10:25.750 Which is such a tell, isn't it? It's a split 00:10:25.750 --> 00:10:28.750 personality right there in the name. Even after 00:10:28.750 --> 00:10:31.909 they got their freedom from Kmart, the new Borders 00:10:31.909 --> 00:10:34.629 Group was stuck carrying the corpse of Walden 00:10:34.629 --> 00:10:37.139 Books. It's an anchor. It was the anchor that 00:10:37.139 --> 00:10:39.919 dragged them down for years. While they should 00:10:39.919 --> 00:10:42.259 have been focusing 100 % of their energy and 00:10:42.259 --> 00:10:45.440 capital on the superstore expansion, and more 00:10:45.440 --> 00:10:48.039 importantly, the looming threat of the internet 00:10:48.039 --> 00:10:50.860 management was constantly distracted. Distracted 00:10:50.860 --> 00:10:53.580 by what? By trying to manage the graceful or 00:10:53.580 --> 00:10:56.399 not so graceful decline of hundreds of money 00:10:56.399 --> 00:10:59.960 -losing mall -based Walden Books stores. They 00:10:59.960 --> 00:11:02.740 were actively subsidizing a dying business model 00:11:02.740 --> 00:11:05.470 with the profits from their growing one. But 00:11:05.470 --> 00:11:07.889 even with that anchor tied around their ankle, 00:11:07.990 --> 00:11:11.289 the late 90s and early 2000s, I mean, for customers, 00:11:11.330 --> 00:11:13.690 it felt like a golden age. This is when the experience 00:11:13.690 --> 00:11:15.370 store really took off. They weren't just selling 00:11:15.370 --> 00:11:16.970 books anymore. They were selling a lifestyle. 00:11:17.549 --> 00:11:20.450 They codified the third place, that space that 00:11:20.450 --> 00:11:22.710 isn't home, isn't work, where you can just exist. 00:11:22.990 --> 00:11:26.090 In 2004, they struck that huge deal with Seattle's 00:11:26.090 --> 00:11:28.909 Best Coffee to run the in -store cafes. Which 00:11:28.909 --> 00:11:32.370 is funny, because Seattle's Best was, and is, 00:11:32.509 --> 00:11:35.509 a subsidiary of Starbucks. Right, so it's a clever 00:11:35.509 --> 00:11:38.409 end run. Barnes & Noble had the official Starbucks 00:11:38.409 --> 00:11:41.269 -branded cafes, and Borders had the slightly 00:11:41.269 --> 00:11:45.049 more indie feeling, but still corporate subsidiary. 00:11:45.129 --> 00:11:48.460 And it worked. The smell of coffee, the comfortable 00:11:48.460 --> 00:11:51.559 chairs, the implicit permission to sit and read 00:11:51.559 --> 00:11:53.720 a whole magazine without actually buying it. 00:11:53.840 --> 00:11:57.259 Borders made the bookstore a destination, a place 00:11:57.259 --> 00:11:59.029 to hang out. And they were trying to innovate 00:11:59.029 --> 00:12:00.370 in other ways, too. I mean, you look at their 00:12:00.370 --> 00:12:02.610 concept stores in 2008. They had what they called 00:12:02.610 --> 00:12:05.289 digital centers. I remember those. Little kiosks. 00:12:05.429 --> 00:12:08.149 Yeah. They were selling MP3 players, digital 00:12:08.149 --> 00:12:11.129 photo frames, early e -readers like the Sony 00:12:11.129 --> 00:12:13.070 Reader. They had these ripple networks, video 00:12:13.070 --> 00:12:16.110 monitors showing news and sports. They were genuinely 00:12:16.110 --> 00:12:17.889 trying to be more than just a bookstore. They 00:12:17.889 --> 00:12:19.730 were trying to be a culture and tech hub. They 00:12:19.730 --> 00:12:22.730 were. They also introduced Borders Rewards, which 00:12:22.730 --> 00:12:24.850 was a huge differentiator at the time. It really 00:12:24.850 --> 00:12:27.309 was. You have to remember, Barnes & Noble had 00:12:27.309 --> 00:12:29.909 a paid membership model. You had to pay them, 00:12:29.929 --> 00:12:32.090 what, $25 a year for the privilege of getting 00:12:32.090 --> 00:12:34.870 a discount. But Borders went with a free loyalty 00:12:34.870 --> 00:12:38.289 program. The model was basically, give us your 00:12:38.289 --> 00:12:40.149 email address and we'll give you coupons and 00:12:40.149 --> 00:12:42.009 track your purchases. And people loved that. 00:12:42.070 --> 00:12:44.009 It felt generous. It felt like a modern approach. 00:12:44.409 --> 00:12:46.730 And it allowed them to build a massive database 00:12:46.730 --> 00:12:48.769 of their customers' habits. And they had some 00:12:48.769 --> 00:12:51.649 incredible successes. At their peak, we found 00:12:51.649 --> 00:12:53.529 that the highest -grossing borders in the entire 00:12:53.529 --> 00:12:57.049 United States was in Puerto Rico. $17 million 00:12:57.049 --> 00:13:01.090 a year from one store. An incredible number. 00:13:01.250 --> 00:13:04.009 They also had that massive, beautiful store at 00:13:04.009 --> 00:13:05.710 the World Trade Center that was so tragically 00:13:05.710 --> 00:13:08.809 destroyed on 9 -11. They were everywhere. They 00:13:08.809 --> 00:13:12.409 felt invincible. But while the surface, the customer 00:13:12.409 --> 00:13:15.090 experience, looked great, the foundation was 00:13:15.090 --> 00:13:17.009 rotting away. And this is where we have to get 00:13:17.009 --> 00:13:20.039 into the big strategic mistakes. The unforced 00:13:20.039 --> 00:13:22.899 errors. Let's get into the three fatal errors. 00:13:23.299 --> 00:13:25.299 Because looking back now with the benefit of 00:13:25.299 --> 00:13:27.899 hindsight, these decisions seem almost calculated 00:13:27.899 --> 00:13:30.919 to destroy the company from the inside. Let's 00:13:30.919 --> 00:13:33.500 start with error number one, the big one, the 00:13:33.500 --> 00:13:37.580 Amazon alliance. This. This is the decision that 00:13:37.580 --> 00:13:39.480 will be taught in business schools for the next 00:13:39.480 --> 00:13:42.139 century. It's a master class in what not to do. 00:13:42.659 --> 00:13:46.080 So you have to go back to 2001. The dot -com 00:13:46.080 --> 00:13:50.080 bubble had just burst spectacularly. Right. Pets 00:13:50.080 --> 00:13:53.759 .com, Webvan, all these Internet companies had 00:13:53.759 --> 00:13:56.200 gone up in smoke. And a lot of traditional brick 00:13:56.200 --> 00:13:58.100 -and -mortar retailers were looking at e -commerce 00:13:58.100 --> 00:14:00.840 and thinking, this thing is a money pit. The 00:14:00.840 --> 00:14:02.779 logistics are a nightmare. Shipping is expensive. 00:14:03.100 --> 00:14:05.539 Profit margins are nonexistent. So the prevailing 00:14:05.539 --> 00:14:08.039 wisdom on Wall Street at that moment was let 00:14:08.039 --> 00:14:09.960 someone else lose money on the Internet. We'll 00:14:09.960 --> 00:14:12.240 stick to what we know. That was exactly the thinking. 00:14:12.379 --> 00:14:14.919 And Borders Board looked at Amazon and they saw 00:14:14.919 --> 00:14:18.159 Jeff Bezos. Just burning through mountains of 00:14:18.159 --> 00:14:20.360 cash, building these enormous warehouses and 00:14:20.360 --> 00:14:22.259 fulfillment centers. And they said, why should 00:14:22.259 --> 00:14:24.460 we do that? That looks hard and expensive. Let's 00:14:24.460 --> 00:14:26.639 just let them handle it for us. So in August 00:14:26.639 --> 00:14:29.639 of 2001, Borders signed a deal to outsource their 00:14:29.639 --> 00:14:32.480 entire online operation to Amazon. OK, I want 00:14:32.480 --> 00:14:34.360 to be crystal clear about what outsourced means 00:14:34.360 --> 00:14:37.259 in this context. If I, as a customer, went to 00:14:37.259 --> 00:14:40.740 Borders .com in, say, 2003, I wasn't actually 00:14:40.740 --> 00:14:44.240 buying a book from Borders. No, not at all. You 00:14:44.240 --> 00:14:46.720 would click on a book. And the entire transaction, 00:14:47.000 --> 00:14:49.000 the shopping cart, the payment processing, the 00:14:49.000 --> 00:14:52.019 fulfillment was handed off to Amazon. Amazon 00:14:52.019 --> 00:14:55.139 held the inventory in their warehouses. Amazon's 00:14:55.139 --> 00:14:58.139 employees picked and packed the book. Amazon's 00:14:58.139 --> 00:15:00.960 systems handled the shipping. Amazon processed 00:15:00.960 --> 00:15:03.139 your credit card. Borders essentially put up 00:15:03.139 --> 00:15:05.500 a sign on their own digital front door that said, 00:15:05.580 --> 00:15:08.799 come on in. But for all your needs, please see 00:15:08.799 --> 00:15:11.039 our biggest competitor located inside. I did 00:15:11.039 --> 00:15:13.419 worse than that. They handed Amazon their most 00:15:13.419 --> 00:15:16.779 valuable asset, their customers and their customers 00:15:16.779 --> 00:15:19.519 data. They train their own loyal customers to 00:15:19.519 --> 00:15:22.120 use and trust the Amazon platform. Yes. If you 00:15:22.120 --> 00:15:23.700 were a border super fan, someone who loved the 00:15:23.700 --> 00:15:25.360 physical scores and you went to their website, 00:15:25.480 --> 00:15:27.879 the site effectively said, hey, this Amazon company, 00:15:28.000 --> 00:15:29.659 they're great. We trust them. You should, too. 00:15:29.799 --> 00:15:32.399 That is just it's strategically devastating. 00:15:32.419 --> 00:15:34.980 For seven years, this wasn't a short term experiment. 00:15:35.580 --> 00:15:39.080 From 2001 to mid -2008, Borders did not have 00:15:39.080 --> 00:15:42.279 its own independent online retail presence. During 00:15:42.279 --> 00:15:44.120 the most critical growth phase of e -commerce 00:15:44.120 --> 00:15:46.899 in history. They were a ghost. They just abdicated 00:15:46.899 --> 00:15:49.840 the entire field. And they let Amazon learn everything 00:15:49.840 --> 00:15:51.759 there was to know about what Borders' best customers 00:15:51.759 --> 00:15:53.340 bought, when they bought it, how much they were 00:15:53.340 --> 00:15:54.879 willing to pay and what other items they were 00:15:54.879 --> 00:15:57.379 interested in. And by the time they finally woke 00:15:57.379 --> 00:16:01.159 up and realized the colossal scale of this mistake, 00:16:01.379 --> 00:16:05.409 they ended the alliance in March 2007. but didn't 00:16:05.409 --> 00:16:07.629 even launch their own independent site until 00:16:07.629 --> 00:16:10.590 early 2008. It was completely game over. Amazon 00:16:10.590 --> 00:16:13.549 had won. The war was over. You cannot take a 00:16:13.549 --> 00:16:15.970 seven -year nap during a technological revolution 00:16:15.970 --> 00:16:18.490 and expect to wake up and just casually reenter 00:16:18.490 --> 00:16:21.149 the race. The switching costs for customers were 00:16:21.149 --> 00:16:23.590 too high. People were used to the Amazon experience. 00:16:24.110 --> 00:16:26.480 Prime was already gaining traction. And Borders 00:16:26.480 --> 00:16:28.960 .com, when it finally launched, was a buggy, 00:16:28.960 --> 00:16:31.080 feature -poor wasteland compared to the well 00:16:31.080 --> 00:16:33.259 -oiled machine that Amazon had built, partly 00:16:33.259 --> 00:16:36.299 on the backs of Borders' own customers. So they 00:16:36.299 --> 00:16:38.200 outsourced the internet. That's a catastrophic 00:16:38.200 --> 00:16:41.080 error in it. Error number one, error number two 00:16:41.080 --> 00:16:43.720 feels like a direct sequel. The e -book fumble. 00:16:43.899 --> 00:16:47.340 It's the exact same mindset. A failure of imagination. 00:16:47.740 --> 00:16:50.720 A desire to outsource the future rather than 00:16:50.720 --> 00:16:53.669 build it. We mentioned that their concept stores 00:16:53.669 --> 00:16:55.909 were selling Sony readers, but that was just 00:16:55.909 --> 00:16:59.090 selling hardware. Borders didn't launch a dedicated 00:16:59.090 --> 00:17:02.409 branded e -book store until July of 2010. July 00:17:02.409 --> 00:17:05.049 2010. Let's put that in context. The Amazon Kindle 00:17:05.049 --> 00:17:07.829 was launched in November 2007. The iPhone and 00:17:07.829 --> 00:17:10.049 the App Store, which revolutionized mobile everything, 00:17:10.309 --> 00:17:14.150 came out in 07 and 08. The first iPad came out 00:17:14.150 --> 00:17:17.029 in early 2010. So they were, what, nearly three 00:17:17.029 --> 00:17:18.910 years late to their own party? They weren't just 00:17:18.910 --> 00:17:21.079 late. When they finally arrived, they didn't 00:17:21.079 --> 00:17:23.359 even build their own ecosystem. Look at Barnes 00:17:23.359 --> 00:17:25.839 & Noble. For all their faults, they saw the threat, 00:17:26.039 --> 00:17:28.200 and they invested hundreds of millions of dollars 00:17:28.200 --> 00:17:30.819 to develop the Nook. It wasn't perfect, but it 00:17:30.819 --> 00:17:33.440 was theirs. They owned the platform. They controlled 00:17:33.440 --> 00:17:35.680 the customer relationship. And what did Borders 00:17:35.680 --> 00:17:38.240 do? They partnered with a Canadian company called 00:17:38.240 --> 00:17:41.460 Kobo. So once again, they're renting the technology 00:17:41.460 --> 00:17:43.700 instead of owning it. They're outsourcing the 00:17:43.700 --> 00:17:46.599 core competency of their future business. Precisely. 00:17:46.640 --> 00:17:48.940 They had a desktop app. They had apps for the 00:17:48.940 --> 00:17:51.579 iPhone and Android. But they were all just skins 00:17:51.579 --> 00:17:53.880 on Kobo's platform. They had no control over 00:17:53.880 --> 00:17:55.680 the destiny of the product, the pricing, the 00:17:55.680 --> 00:17:58.640 features. The brand added zero value to the digital 00:17:58.640 --> 00:18:01.440 experience. And the final insult came when they 00:18:01.440 --> 00:18:04.039 went bankrupt. When Borders liquidated in 2011, 00:18:04.339 --> 00:18:06.440 all those customer e -book accounts were just 00:18:06.440 --> 00:18:09.539 transferred directly to Kobo. The Borders brand 00:18:09.539 --> 00:18:12.000 vanished. The customer relationship they had 00:18:12.000 --> 00:18:14.680 rented was simply handed over. It's a pattern 00:18:14.680 --> 00:18:18.819 of failing to adapt. But the third error. This 00:18:18.819 --> 00:18:20.660 one feels less about high tech and more like 00:18:21.200 --> 00:18:23.759 Bad old -fashioned retail mismanagement. The 00:18:23.759 --> 00:18:26.380 financials and the product mix. This is where 00:18:26.380 --> 00:18:28.940 the debt spiral really begins. While Barnes & 00:18:28.940 --> 00:18:32.279 Noble was smartly pivoting its floor space away 00:18:32.279 --> 00:18:34.480 from media and more towards things like toys 00:18:34.480 --> 00:18:37.359 and games and high -margin stationery. Categories 00:18:37.359 --> 00:18:39.640 that are much harder to replicate and sell digitally. 00:18:39.880 --> 00:18:42.240 Exactly. Amazon can't compete with a kid playing 00:18:42.240 --> 00:18:44.440 with a toy in the aisle. Borders, on the other 00:18:44.440 --> 00:18:47.140 hand, doubled down on music and movies. I remember 00:18:47.140 --> 00:18:50.240 this so vividly. The music section at a Big Borders. 00:18:50.509 --> 00:18:53.190 was massive. It took up a huge percentage of 00:18:53.190 --> 00:18:56.450 the floor. Thousands of CDs. Those listening 00:18:56.450 --> 00:19:00.049 stations everywhere. And in, say, 1998, that 00:19:00.049 --> 00:19:03.170 was a brilliant play. CDs had high margins. They 00:19:03.170 --> 00:19:08.210 encouraged impulse buys. But in 2006, 2008. We 00:19:08.210 --> 00:19:12.210 had the iPod. We had iTunes. We had rampant piracy 00:19:12.210 --> 00:19:14.849 from things like Napster. Streaming was right 00:19:14.849 --> 00:19:17.160 around the corner. Physical media sales were 00:19:17.160 --> 00:19:20.539 cratering across the board, and Borders was dedicating 00:19:20.539 --> 00:19:23.200 its most valuable real estate, its prime ground 00:19:23.200 --> 00:19:26.559 floor space, to a rapidly dying product category. 00:19:26.819 --> 00:19:28.720 They were betting heavily on the past while the 00:19:28.720 --> 00:19:30.920 future was literally eating their lunch from 00:19:30.920 --> 00:19:32.799 the outside in. And financially, they were just 00:19:32.799 --> 00:19:35.700 bleeding cash. The last year Borders ever turned 00:19:35.700 --> 00:19:38.400 a profit was 2006. From that point on, their 00:19:38.400 --> 00:19:40.400 income dropped by a billion dollars over the 00:19:40.400 --> 00:19:42.900 next four years. A billion. So to keep the lights 00:19:42.900 --> 00:19:45.019 on, to pay the rent on these enormous superstores, 00:19:45.119 --> 00:19:47.460 they had to borrow money. They had to. And this 00:19:47.460 --> 00:19:50.180 leads us to the 2008 loan. The terms of this 00:19:50.180 --> 00:19:52.319 specific deal make me wince every time I read 00:19:52.319 --> 00:19:54.740 about it. Set the scene for us. It's March 2008. 00:19:55.039 --> 00:19:57.259 The global financial crisis is just starting 00:19:57.259 --> 00:19:59.539 to rumble. The credit markets are freezing up. 00:19:59.579 --> 00:20:01.420 It's getting very hard for struggling companies 00:20:01.420 --> 00:20:04.299 to borrow money. Borders is desperate for cash. 00:20:04.819 --> 00:20:08.579 They finally secure a loan for $42 .5 million 00:20:08.579 --> 00:20:11.680 from a hedge fund, Pershing Square Capital Management. 00:20:11.900 --> 00:20:13.640 And the interest rate on that loan? Twelve and 00:20:13.640 --> 00:20:16.240 a half percent. Wow. Twelve point five. In the 00:20:16.240 --> 00:20:18.779 corporate world, that is basically distressed 00:20:18.779 --> 00:20:21.700 debt pricing. That is a we think you are about 00:20:21.700 --> 00:20:24.559 to die interest rate. So put that in perspective, 00:20:24.799 --> 00:20:27.059 a healthy company might borrow at what, three 00:20:27.059 --> 00:20:29.380 or four percent? Easily. When you are paying 00:20:29.380 --> 00:20:33.400 12 .5 % interest, you need to have massive growing 00:20:33.400 --> 00:20:36.480 profit margins just to service the debt, let 00:20:36.480 --> 00:20:38.400 alone invest in the business or turn a profit. 00:20:38.700 --> 00:20:41.539 But Borders margins were shrinking, not growing. 00:20:41.720 --> 00:20:43.799 And the stock price reflected that reality. It 00:20:43.799 --> 00:20:46.119 completely collapsed. It went from over $5 a 00:20:46.119 --> 00:20:48.400 share to 53 cents a share. It became a penny 00:20:48.400 --> 00:20:51.579 stock. It was essentially worthless. So in the 00:20:51.579 --> 00:20:53.920 middle of all this chaos, the Amazon mistake, 00:20:54.220 --> 00:20:57.099 the e -book fumble, the financial death spiral. 00:20:57.660 --> 00:20:59.599 Where was the leadership? Who was driving the 00:20:59.599 --> 00:21:01.839 bus? Well, that was the other problem. The driver 00:21:01.839 --> 00:21:05.160 kept changing. It was a constant leadership carousel. 00:21:05.220 --> 00:21:08.700 You had CEO George L. Jones, who left with a 00:21:08.700 --> 00:21:12.019 severance package of over $2 million. Which absolutely 00:21:12.019 --> 00:21:15.019 infuriated employees who were seeing their hours 00:21:15.019 --> 00:21:17.619 cut and stores close. Then Ron Marshall comes 00:21:17.619 --> 00:21:20.859 in. He's CEO starting in January 2009. He lasts 00:21:20.859 --> 00:21:23.950 exactly one year. Gone by January 2010. Then 00:21:23.950 --> 00:21:27.250 Mike Edwards takes over as an interim CEO. Then 00:21:27.250 --> 00:21:30.009 financier Bennett LeBeau takes control of the 00:21:30.009 --> 00:21:33.480 board in June 2010. You cannot execute a coherent, 00:21:33.640 --> 00:21:36.920 long -term turnaround strategy when the CEO changes 00:21:36.920 --> 00:21:39.079 every 12 months. It's impossible. Every new guy 00:21:39.079 --> 00:21:41.160 comes in, rips up the previous guy's five -year 00:21:41.160 --> 00:21:43.400 plan, starts a new one, and then leaves before 00:21:43.400 --> 00:21:45.599 it can even be implemented. It creates total 00:21:45.599 --> 00:21:47.920 paralysis. And while the U .S. headquarters in 00:21:47.920 --> 00:21:50.720 Ann Arbor was paralyzed by this chaos, the international 00:21:50.720 --> 00:21:52.700 operations were already starting to collapse. 00:21:53.079 --> 00:21:54.779 This is the part of the story that often gets 00:21:54.779 --> 00:21:57.299 ignored, but the U .K. failure was a massive 00:21:57.299 --> 00:21:59.500 harbinger of doom. Let's go across the pond then. 00:21:59.960 --> 00:22:02.869 Borders U .K. and Ireland. Yeah, they had expanded 00:22:02.869 --> 00:22:04.650 pretty aggressively over there. They bought a 00:22:04.650 --> 00:22:08.210 smaller UK chain called Books Etc. back in 1997. 00:22:08.910 --> 00:22:11.490 And for a while it was a huge success. They won 00:22:11.490 --> 00:22:13.690 awards, chain book selling company of the year. 00:22:13.829 --> 00:22:16.369 They had these beautiful stores, often with paper 00:22:16.369 --> 00:22:18.329 chase stationery sections, which people loved. 00:22:18.829 --> 00:22:20.950 So what went wrong? Why did it fall apart there 00:22:20.950 --> 00:22:23.549 first? Well, the U .S. parent company, needing 00:22:23.549 --> 00:22:26.589 cash, sold off the U .K. operation to a series 00:22:26.589 --> 00:22:29.210 of private equity firms, first to Risk Capital 00:22:29.210 --> 00:22:31.950 Partners in 2007, and then it was flipped to 00:22:31.950 --> 00:22:34.789 Valco Capital Partners in 2009. So it was already 00:22:34.789 --> 00:22:36.789 being treated like a distressed asset. Exactly. 00:22:36.910 --> 00:22:39.910 And then the 2008 credit crunch hit the UK economy 00:22:39.910 --> 00:22:43.210 incredibly hard. But the crucial fatal moment 00:22:43.210 --> 00:22:45.490 came when the credit insurers withdrew cover 00:22:45.490 --> 00:22:47.670 for their suppliers. OK, you have to explain 00:22:47.670 --> 00:22:50.490 that for us. What does credit insurers withdrawing 00:22:50.490 --> 00:22:53.569 cover mean? for a bookstore in a practical level. 00:22:53.730 --> 00:22:56.390 OK, so normally a big bookstore chain like Borders 00:22:56.390 --> 00:22:59.109 doesn't pay cash up front for the books on its 00:22:59.109 --> 00:23:01.589 shelves. They order from publishers like Penguin 00:23:01.589 --> 00:23:04.069 or HarperCollins, and they pay them on terms 00:23:04.069 --> 00:23:06.670 maybe 60 or 90 days after receiving the books. 00:23:06.890 --> 00:23:09.369 So they sell the book first, then pay the publisher. 00:23:09.569 --> 00:23:11.589 Right. And those payments are guaranteed by a 00:23:11.589 --> 00:23:14.250 third party, a credit insurer. If the insurer 00:23:14.250 --> 00:23:16.569 looks at Borders Financials and says, whoa, these 00:23:16.569 --> 00:23:18.089 guys look like they're about to go bankrupt, 00:23:18.410 --> 00:23:20.910 we will no longer insure their debt to the publishers. 00:23:21.480 --> 00:23:23.039 Then the publishers immediately stopped shipping 00:23:23.039 --> 00:23:24.819 them books. Because they're afraid they won't 00:23:24.819 --> 00:23:27.079 get paid. The supply line is completely cut. 00:23:27.259 --> 00:23:29.920 Instantly. Overnight, the Borders UK shelves 00:23:29.920 --> 00:23:32.299 started going empty and they couldn't be refilled. 00:23:32.680 --> 00:23:36.299 In November of 2009, the whole operation collapsed 00:23:36.299 --> 00:23:39.220 into administration, which is the UK equivalent 00:23:39.220 --> 00:23:41.839 of bankruptcy. And then it got even messier. 00:23:41.980 --> 00:23:44.559 It got very messy. Hachette, which is one of 00:23:44.559 --> 00:23:46.799 the biggest publishers in the world, actually 00:23:46.799 --> 00:23:49.920 took the administrators to court. Sued the bankruptcy 00:23:49.920 --> 00:23:52.519 lawyers. Why? Because of something called retention 00:23:52.519 --> 00:23:56.019 of title clauses in their contracts. Hachette's 00:23:56.019 --> 00:23:58.319 lawyers argued that because Borders hadn't paid 00:23:58.319 --> 00:24:00.460 for the books on the shelves yet, those books 00:24:00.460 --> 00:24:03.160 technically still belonged to Hachette. They 00:24:03.160 --> 00:24:05.259 sought a court injunction to stop Borders from 00:24:05.259 --> 00:24:07.519 selling their books in the big everything must 00:24:07.519 --> 00:24:10.660 go liquidation sale. That is absolutely wild. 00:24:10.960 --> 00:24:13.779 Imagine you're a customer at a closing down sale 00:24:13.779 --> 00:24:16.240 and a publisher runs in and says, put that Stephen 00:24:16.240 --> 00:24:19.140 King down, it's ours. It was complete chaos. 00:24:19.420 --> 00:24:21.799 The legal battle was fascinating, but the end 00:24:21.799 --> 00:24:23.660 result for customers and employees was grim. 00:24:24.039 --> 00:24:27.480 By Christmas Eve of 2009, every single border 00:24:27.480 --> 00:24:30.539 store in the UK and Ireland was closed for good. 00:24:30.740 --> 00:24:33.319 Gone. And that chaos wasn't limited to Europe. 00:24:33.480 --> 00:24:36.119 The Asia -Pacific division, that's Australia, 00:24:36.339 --> 00:24:39.980 New Zealand, Singapore, had its own very public 00:24:39.980 --> 00:24:43.440 meltdown. This was the RE Group retail era. Similar 00:24:43.440 --> 00:24:46.079 to the UK, in 2008, the U .S. parent sold its 00:24:46.079 --> 00:24:48.200 Pacific operations to a private equity group, 00:24:48.299 --> 00:24:50.700 Pacific Equity Partners. They bundled it with 00:24:50.700 --> 00:24:52.420 some other local bookstores and called the new 00:24:52.420 --> 00:24:55.299 entity RE D Group. And by 2011, they were toast. 00:24:55.539 --> 00:24:58.079 By early 2011, RE D Group went into voluntary 00:24:58.079 --> 00:25:00.599 administration. And this brings us to the infamous 00:25:00.599 --> 00:25:03.359 and truly ugly gift card scandal. I remember 00:25:03.359 --> 00:25:05.019 reading about this at the time. The customer 00:25:05.019 --> 00:25:08.000 rage was palpable. And completely understandable. 00:25:08.680 --> 00:25:11.589 Imagine this situation. You have a $50 gift card. 00:25:11.670 --> 00:25:13.849 Maybe you got it for your birthday. You walk 00:25:13.849 --> 00:25:16.450 into a Closing Borders in Sydney or Singapore. 00:25:16.789 --> 00:25:18.809 You pick out some books. You go to the counter. 00:25:19.049 --> 00:25:22.150 And the staff tells you, we can only accept this 00:25:22.150 --> 00:25:25.170 gift card if you spend an equivalent amount in 00:25:25.170 --> 00:25:27.930 cash at the same time. Wait, what? So if I want 00:25:27.930 --> 00:25:31.329 to use my $50 card, I have to buy $100 worth 00:25:31.329 --> 00:25:35.150 of stuff and pay $50 in cash right now? That 00:25:35.150 --> 00:25:37.230 is correct. It was a dollar -for -dollar redemption 00:25:37.230 --> 00:25:40.059 policy. That feels like a scam. That feels like 00:25:40.059 --> 00:25:42.420 extortion. Give us more money to get your own 00:25:42.420 --> 00:25:44.680 money back. It feels exactly like a scam to a 00:25:44.680 --> 00:25:48.039 customer. Legally, however, it's a specific and 00:25:48.039 --> 00:25:50.240 rather cold maneuver used during administration. 00:25:50.900 --> 00:25:53.359 When a company fails, people holding gift cards 00:25:53.359 --> 00:25:56.160 are considered unsecured creditors. Meaning they're 00:25:56.160 --> 00:25:58.299 at the very back of the line to get paid. The 00:25:58.299 --> 00:26:01.140 very back. Behind the banks, the landlords, the 00:26:01.140 --> 00:26:03.380 big suppliers. Technically, the administrators 00:26:03.380 --> 00:26:05.660 didn't have to honor the gift cards at all. They 00:26:05.660 --> 00:26:08.079 could have just said, sorry, your $50 card is 00:26:08.079 --> 00:26:10.430 now worth zero. So their argument was that they 00:26:10.430 --> 00:26:12.569 were actually being generous by allowing them 00:26:12.569 --> 00:26:15.009 to be used at all, even with that awful condition. 00:26:15.250 --> 00:26:18.130 That was the cold legalistic argument. They weren't 00:26:18.130 --> 00:26:19.910 trying to be fair to customers. They were trying 00:26:19.910 --> 00:26:22.190 to clear inventory as quickly as possible to 00:26:22.190 --> 00:26:25.769 raise cash for the secured creditors, the banks. 00:26:26.069 --> 00:26:29.390 But try explaining unsecured creditor hierarchy 00:26:29.390 --> 00:26:32.049 to an angry customer who just wants to buy a 00:26:32.049 --> 00:26:34.430 book with a gift card. It destroyed whatever 00:26:34.430 --> 00:26:36.250 was left of the brand's reputation overnight. 00:26:36.779 --> 00:26:39.299 And in Singapore, the end was particularly abrupt. 00:26:39.579 --> 00:26:42.079 It was. The flagship store at Wheelock Place 00:26:42.079 --> 00:26:43.759 on Orchard Road, I mean, this was a landmark 00:26:43.759 --> 00:26:45.880 in the city. It just shut its doors in August 00:26:45.880 --> 00:26:48.259 2011. There was no warning for the public. They 00:26:48.259 --> 00:26:49.880 just locked the doors one day. And the stock? 00:26:50.359 --> 00:26:53.099 They had to hold a massive, humiliating clearance 00:26:53.099 --> 00:26:55.799 sale at the Singapore Expo, a giant convention 00:26:55.799 --> 00:26:58.440 center just to get rid of all the books. It was 00:26:58.440 --> 00:27:01.339 a sad, ignominious end for what had been a premier 00:27:01.339 --> 00:27:04.880 brand in the region. So the UK is gone. Asia 00:27:04.880 --> 00:27:07.519 is collapsing in this really ugly way. And back 00:27:07.519 --> 00:27:09.619 in the United States, the clock has finally, 00:27:09.680 --> 00:27:14.019 finally run out. February 16th, 2011. Borders 00:27:14.019 --> 00:27:16.500 Group files for Chapter 11 bankruptcy protection 00:27:16.500 --> 00:27:20.039 in New York. Now, Chapter 11 is usually a reorganization, 00:27:20.079 --> 00:27:21.640 right? It's not liquidation. It's an attempt 00:27:21.640 --> 00:27:23.880 to save the company. That's the goal. Yes. You 00:27:23.880 --> 00:27:25.740 get protection from your creditors. You freeze 00:27:25.740 --> 00:27:28.160 your debts. You try to renegotiate your leases. 00:27:28.160 --> 00:27:31.140 And you come up with a plan to emerge as a leaner, 00:27:31.140 --> 00:27:34.140 viable business. And the numbers they filed were 00:27:34.140 --> 00:27:37.680 stark. They were. They listed $1 .275 billion 00:27:37.680 --> 00:27:41.960 in assets versus $1 .293 billion in debt. They 00:27:41.960 --> 00:27:44.500 were officially underwater. Their immediate plan 00:27:44.500 --> 00:27:47.920 was to close 226 of their most unprofitable stores, 00:27:48.079 --> 00:27:50.559 about a third of the chain, and hope that was 00:27:50.559 --> 00:27:52.619 enough to stop the bleeding. During this time, 00:27:52.660 --> 00:27:55.849 there were rumors of buyers. White knights who 00:27:55.849 --> 00:27:57.970 might swoop in and save the company. There were 00:27:57.970 --> 00:28:00.410 some serious discussions. A private equity firm 00:28:00.410 --> 00:28:03.109 called Najafi Companies kicked the tires. A company 00:28:03.109 --> 00:28:05.349 called Direct Brands put in an offer for around 00:28:05.349 --> 00:28:09.250 $215 million. Even Books a Million, their smaller 00:28:09.250 --> 00:28:12.210 competitor, tried to buy a block of 30 or 35 00:28:12.210 --> 00:28:14.710 of the best stores. So why didn't any of those 00:28:14.710 --> 00:28:16.789 deals happen? Why couldn't a rescue be mounted? 00:28:17.279 --> 00:28:19.539 Ultimately, the creditors rejected the offers. 00:28:19.839 --> 00:28:21.960 The big publishers and the landlords who were 00:28:21.960 --> 00:28:24.339 owed the most money looked at the terms of the 00:28:24.339 --> 00:28:26.940 deals on the table and they made a cold, hard 00:28:26.940 --> 00:28:29.720 calculation. And that calculation was? We believe 00:28:29.720 --> 00:28:31.740 we will get more of our money back if we just 00:28:31.740 --> 00:28:33.640 liquidate the whole thing. Sell the inventory, 00:28:33.900 --> 00:28:35.799 sell the shelves, sell the leases, sell the brand 00:28:35.799 --> 00:28:38.160 name for scrap. That is a chilling verdict for 00:28:38.160 --> 00:28:40.539 a company. You are worth more dead than alive. 00:28:40.920 --> 00:28:43.519 That was the final verdict from the market. In 00:28:43.519 --> 00:28:46.460 July of 2011, the case was converted from a Chapter 00:28:46.460 --> 00:28:49.500 11 reorganization to a Chapter 7 liquidation. 00:28:49.700 --> 00:28:53.160 The rescue attempt was over. I remember walking 00:28:53.160 --> 00:28:55.480 past the borders in my town during that final 00:28:55.480 --> 00:28:58.079 phase. It was just grim. The signs in the window 00:28:58.079 --> 00:29:00.779 printed on cheap red and yellow paper. Everything 00:29:00.779 --> 00:29:03.700 must go. Nothing held back. Fixtures for sale. 00:29:03.859 --> 00:29:05.559 You could buy the bookshelves. You could buy 00:29:05.559 --> 00:29:07.960 the coffee counters, the cash registers. It's 00:29:07.960 --> 00:29:10.410 the final picking of the carcass. By September 00:29:10.410 --> 00:29:13.990 2011, the remaining 399 stores were all closed. 00:29:14.349 --> 00:29:17.549 19 ,500 people lost their jobs. And then came 00:29:17.549 --> 00:29:20.289 the final insult. Or, depending on your perspective, 00:29:20.529 --> 00:29:23.190 the final victory for their rival. The data. 00:29:23.599 --> 00:29:26.000 Barnes and Noble swooped in and bought the intellectual 00:29:26.000 --> 00:29:28.680 property out of the bankruptcy auction. They 00:29:28.680 --> 00:29:31.420 bought the trademarks, the brand name, and most 00:29:31.420 --> 00:29:34.259 crucially, the border's customer list. The ultimate 00:29:34.259 --> 00:29:36.579 victory. They didn't just beat their rival, they 00:29:36.579 --> 00:29:39.119 consumed their rival's customer base. There was 00:29:39.119 --> 00:29:41.680 a significant privacy outcry about it at the 00:29:41.680 --> 00:29:43.940 time. The bankruptcy court actually required 00:29:43.940 --> 00:29:46.420 that all Borders customers be given a chance 00:29:46.420 --> 00:29:48.940 to opt out of the data transfer. I remember getting 00:29:48.940 --> 00:29:52.200 that email. Yeah, you had until October 29, 2011 00:29:52.200 --> 00:29:55.400 to actively tell them, no, do not give my purchase 00:29:55.400 --> 00:29:57.900 history to Barnes & Noble. If you did nothing, 00:29:57.980 --> 00:29:59.839 your data went straight to your former competitor. 00:30:00.099 --> 00:30:03.099 And if you typed borders .com into your browser, 00:30:03.259 --> 00:30:05.480 it just redirected you to the Barnes & Noble 00:30:05.480 --> 00:30:08.099 website. A complete and total erasure from the 00:30:08.099 --> 00:30:11.900 American landscape. As we found out, it wasn't 00:30:11.900 --> 00:30:14.220 quite a complete erasure globally. And this is 00:30:14.220 --> 00:30:16.500 the part of the outline that I find utterly fascinating. 00:30:16.740 --> 00:30:19.480 The zombie brand. Brands are resilient things. 00:30:19.700 --> 00:30:22.740 They can be incredibly hard to kill. Even when 00:30:22.740 --> 00:30:24.859 the corporate body dies, the name itself can 00:30:24.859 --> 00:30:28.140 linger on. In Malaysia, for instance, a local 00:30:28.140 --> 00:30:30.819 company called Berjaya Books had held the franchise 00:30:30.819 --> 00:30:33.279 rights for years. And their franchise agreement 00:30:33.279 --> 00:30:35.420 allowed them to keep operating independently 00:30:35.420 --> 00:30:38.039 of the U .S. collapse. Exactly. They were their 00:30:38.039 --> 00:30:40.460 own business. They just paid a fee to use the 00:30:40.460 --> 00:30:43.240 name and the branding. So while the U .S. stores 00:30:43.240 --> 00:30:45.339 were being liquidated, the Malaysian stores kept 00:30:45.339 --> 00:30:47.740 running. They even opened a massive new store 00:30:47.740 --> 00:30:50.220 in Kuala Lumpur after the U .S. parent was dead, 00:30:50.400 --> 00:30:52.059 claiming it was the world's largest borders. 00:30:52.319 --> 00:30:55.299 They did. But even that has finally succumbed 00:30:55.299 --> 00:30:58.019 to the pressure. of modern retail, the Malaysian 00:30:58.019 --> 00:31:00.640 operations finally closed for good very, very 00:31:00.640 --> 00:31:03.500 recently in August of 2023. But there was one 00:31:03.500 --> 00:31:06.180 last holdout. If I get on a plane right now in 00:31:06.180 --> 00:31:09.039 2025, where can I go to walk into a store with 00:31:09.039 --> 00:31:11.299 a border sign lit up out front? You'd need to 00:31:11.299 --> 00:31:14.160 fly to the Middle East. You'd fly to Dubai. A 00:31:14.160 --> 00:31:16.240 company called the Al Maya Group purchased the 00:31:16.240 --> 00:31:18.700 rights to operate the brand in that region. And 00:31:18.700 --> 00:31:20.539 as of today, there are still border stores in 00:31:20.539 --> 00:31:24.150 Dubai, Oman, Qatar, and Kuwait. That is just 00:31:24.150 --> 00:31:27.230 bizarre. It's like finding a dodo bird alive 00:31:27.230 --> 00:31:29.089 and well on a remote island. What are they even 00:31:29.089 --> 00:31:31.809 like? It speaks to the power of that original 00:31:31.809 --> 00:31:34.710 brand equity. In the Middle East, the name Border 00:31:34.710 --> 00:31:37.869 still signifies a premium Western -style retail 00:31:37.869 --> 00:31:40.869 experience. Now, if you go inside one, the product 00:31:40.869 --> 00:31:42.890 mix has shifted quite a bit. There are a lot 00:31:42.890 --> 00:31:45.109 more toys, a lot more stationery, but the logo 00:31:45.109 --> 00:31:47.190 is there. The books are there. The ghost is still 00:31:47.190 --> 00:31:49.990 operating. So we've traced this whole epic story 00:31:49.990 --> 00:31:53.490 from a couple of math students in Ann Arbor inventing 00:31:53.490 --> 00:31:56.950 a brilliant inventory algorithm to a global retail 00:31:56.950 --> 00:32:01.130 behemoth that lost its way to finally a few franchise 00:32:01.130 --> 00:32:03.740 outposts in the desert. When you look at the 00:32:03.740 --> 00:32:06.579 whole arc, what is the key lesson here for you? 00:32:06.660 --> 00:32:08.859 For me, it comes down to two business school 00:32:08.859 --> 00:32:11.619 phrases, capital allocation and core competency. 00:32:12.359 --> 00:32:14.319 Borders started to fail the moment they stopped 00:32:14.319 --> 00:32:16.279 trusting their own expertise and started outsourcing 00:32:16.279 --> 00:32:18.359 their future. They outsourced the Internet to 00:32:18.359 --> 00:32:20.400 Amazon because they didn't want to learn the 00:32:20.400 --> 00:32:22.740 messy business of e -commerce. They outsourced 00:32:22.740 --> 00:32:25.519 their e -book tech to Kobo. They let Kmart's 00:32:25.519 --> 00:32:27.660 discount culture dilute their premium brand. 00:32:27.920 --> 00:32:30.480 And they allocated their capital poorly spending 00:32:30.480 --> 00:32:32.900 money on stock buybacks and dividends in their 00:32:32.900 --> 00:32:36.319 final years instead of making painful but necessary 00:32:36.319 --> 00:32:39.460 investments in innovation. They forgot that their 00:32:39.460 --> 00:32:43.049 value wasn't just selling books. knowing books 00:32:43.049 --> 00:32:45.930 and knowing their customer. Tailwind was the 00:32:45.930 --> 00:32:48.390 original recommendation algorithm, and they just 00:32:48.390 --> 00:32:51.309 threw it away. And for me, the takeaway is about 00:32:51.309 --> 00:32:54.470 the loss of that physical space. Borders, for 00:32:54.470 --> 00:32:56.930 better or worse, defined the megastore era. They 00:32:56.930 --> 00:32:58.829 created a space where you could spend three hours 00:32:58.829 --> 00:33:01.250 and spend zero dollars, and that was part of 00:33:01.250 --> 00:33:02.710 the business model. They were okay with that. 00:33:02.849 --> 00:33:05.890 A community space. It was. And now that they're 00:33:05.890 --> 00:33:08.730 gone, Burns & Noble is the last giant standing. 00:33:09.460 --> 00:33:11.180 Independent bookstores are having a wonderful 00:33:11.180 --> 00:33:14.039 resurgence, which is great to see. But that specific 00:33:14.039 --> 00:33:17.180 megastore vibe, that big anonymous carpeted cavern 00:33:17.180 --> 00:33:20.140 of books and music and coffee, it's gone. Unless 00:33:20.140 --> 00:33:22.000 you're in Dubai. Right. Unless you're in Dubai. 00:33:22.480 --> 00:33:24.900 So here's our provocative thought for you to 00:33:24.900 --> 00:33:28.599 take away. Borders is gone from most of the world. 00:33:29.000 --> 00:33:31.579 But the concept they perfected, the bookstores 00:33:31.579 --> 00:33:34.200 at third place, is what both Barnes & Noble and 00:33:34.200 --> 00:33:36.420 the thriving indie scene are now leaning into 00:33:36.420 --> 00:33:40.720 heavily. Did Borders really lose or did their 00:33:40.720 --> 00:33:43.140 original idea actually win in the end just without 00:33:43.140 --> 00:33:45.660 them? And if you were in Dubai and you can still 00:33:45.660 --> 00:33:48.960 walk into Borders today, is that a ghost or is 00:33:48.960 --> 00:33:50.980 it a testament to the enduring power of that 00:33:50.980 --> 00:33:53.700 original brand? It's a great question to ponder. 00:33:53.819 --> 00:33:56.160 It is. If you're listening to this anywhere else, 00:33:56.220 --> 00:33:58.279 support your local bookshop, whether it's a chain 00:33:58.279 --> 00:34:01.599 or an indie. Because, as this story shows, these 00:34:01.599 --> 00:34:03.319 things are more fragile than they appear. They 00:34:03.319 --> 00:34:03.859 certainly are.