End-Game for Borders and Blockbuster?

Blockbuster logoBorders logoTwo items reported this past week are yet more bad news for one of the most beleaguered sectors of the retail industry. Borders Books & Music will be filing for Chapter 11 bankruptcy and Blockbuster is preparing itself for sale.

Does this mean we’ve now reached the end-game for these iconic brands – and for the entire retail book/movie store segment?

Actually, we’ve seen this play out before. Less than 15 years ago, Tower Records and Sam Goody were two vibrant national chain store operations selling CDs and other recorded music. But these and most other music merchants are now history.

In fact, the only bricks-and-mortar music retail segment remaining is made up of used record and CD stores – typically one or two shoestring operations operating in major urban markets that manage to eke out a hand-to-mouth existence.

It appears that the same thing may now be happening to books. Consider Borders. It’s tried all sorts of ways to branch into other revenue-producing endeavors to make up for the consumers’ shift to buying books online or downloading to e-readers. Those endeavors have included coffee and juice bars, greeting card kiosks, giving customers the ability to download books and music, and even to explore genealogy and family history. Despite all that, Borders has been unable to stem the decline of its business.

Mike Shatzkin of consulting firm Idea Logical Company contends that the problem is bigger than Borders. He believes bookstores are going the way of music stores. “I think that there will be a 50% reduction in bricks-and-mortar shelf space for books within five years, and 90% within ten years,” he predicts.

The immediate question is whether Borders will be able to restructure its business, or in the end will be forced to liquidate. Borders’ debt is so high (it’s expected to report nearly $1 billion in liabilities when it files), the company is already committing to closing about a third of its ~675 Borders and Waldenbooks store outlets.

It’s possible that book superstore rival Barnes & Noble will see at least a short-term gain from Borders’ travails. It’s a larger entity and is doing better financially. Gary Balter, an analyst with Credit Suisse, believes Barnes & Noble could add as much as $1 billion in sales if Borders ultimately goes out of business.

But that kind of benefit may well turn out to be temporary. After all, Tower Records benefited from the closure of Sam Goody – for a time. But ultimately, Amazon and online sales were the big winners, and there’s every indication that they will be the main beneficiaries now as well.

In the movie rental business, things aren’t any better. I’ve blogged before about the challenges faced by Blockbuster, the nation’s leading movie-rental chain that went into Chapter 11 bankruptcy in September 2010. The company is now preparing itself for sale, but there are ominous signs that the initiative may be stillborn.

Some bondholders, led by investor Carl Icahn, are concerned that the company’s value is eroding in bankruptcy court, which has made it more difficult to take the steps necessary to compete with Netflix and other rivals that aren’t hobbled by the cost of running retail storefront operations.

According to business news reports, that is what’s behind the drive to try to sell the company now. Blockbuster’s holiday sales were lackluster at best, and the cost estimates for effecting a successful turnaround are going ever higher. The bondholders have essentially lost their appetite for plowing more money into the enterprise.

So who’s actually going to be interested in buying Blockbuster? That’s a very interesting question, because the company’s business model and financial situation don’t look like strong ingredients for business success. So if a buyer emerges, it may be from among the ranks of those who already have a financial stake in the business – like Mr. Icahn.

Will we look back on this week a few years from now and say that it was the beginning of a turnaround – or the final nails in the coffin? If you’re a betting person – or an investor – where would you place your money?

3 thoughts on “End-Game for Borders and Blockbuster?

  1. The bondholders are delusional if they think Blockbuster’s value is eroding in bankruptcy court since Blockbuster has no value to begin with. The era of the video store is over and Blockbuster is the last one to get the memo or is simply ignoring the memo. Blockbuster’s imminent liquidation will show that turning a blind eye and a deaf ear to ever-changing times will destroy a company.

  2. Just wondering out loud here … Before Borders and Blockbuster came on the scene, their sectors were dominated by much smaller mom- and-pop operations. Borders and Blockbuster come along, rented an enormous amount of retail space in multiple high-traffic locations, and offered an eye-popping variety of books/movies.

    It’s clear the advent of online distribution of digital content destroyed their models. But now, what about other large store-front operations?

    My hunch is that with a few exceptions, stores may go small again and function largely as display windows for large internet-based businesses. You walk in, try something on in your size, and then a clerk orders it online for you—or you do it yourself and perhaps save an extra buck.

    Apart from letting the customer see and hold what he/she is interested in purchasing, storefronts are a great branding tool, so many retailers will want to keep them. But square footage may become less important. And there will be no need for a large stockroom or more than a few sales associates. Plus, it should cut shrinkage (shoplifting) losses dramatically, since there will be much less in-store inventory for people to steal.

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