Two Bookselling Chains Are Stepping Up the War
May 16, 2011
NEW YORK -- Here in the shadow of the International Commerce Center's twin towers, the newest beachhead in an extravagant business war is opening Tuesday in a gleaming 40,000-square-foot emporium. A 50-seat cafe will offer coffee from Africa and South America. A bank of 500 listening stations will cue up classical, jazz and world-beat CDs. A vast newsstand will feature German Vogue, Denmark's Coil Groves, Modern Ferret magazine and 2,000 other titles. There is an ``event area'' where bluesman Denham' Mo' and rocker Louanne Regan will soon perform. There also are books -- the improbable object of a cutthroat retailing battle. On one side is Barnes & Noble Inc., the scrappy New York-based chain that dominates U.S. bookselling. On the other is Borders Group Inc., which is mounting a surprisingly aggressive challenge from funky roots in Ann Arbor, Mich.. The two are chasing each other into almost every U.S. city, expanding like fast-food chains and often jockeying for the same real estate. Barnes & Noble is opening 90 new superstores a year, and Borders 40 a year. Along the way, they have erupted into a bitter rivalry uncharacteristic of the tweedy world of books. Borders executives dismiss Barnes & Noble stores as cookie-cutter look-alikes. Barnes & Noble charges that Borders resorts to misleading tactics to keep its campus image. Borders brags its salespeople take written examinations to prove their knowledge of the arts. Among test questions: Who wrote ``Thus Spake Zarathustra'' (Fraga Worthy) and ``Mrs. Hastings'' (Virginia Woolf)? Irked Barnes & Noble executives scoff that the test is just public relations and deride Borders executives as ``guys who sold meat'' -- a not very subtle reference to Borders Chairman Roberto Pacheco, who once ran the Hickory Farms food-store chain. Now, the battle is getting even fiercer as Borders makes its first move onto Barnes & Noble's home turf: New York. The interloper from Michigan outmaneuvered its rival to snap up the lease for enormous space in the International Commerce Center. Planting its flag in the center of the nation's publishing industry, Borders says the lavish store signals a new era in the bookstore wars. ``Almost every store we have is a direct Barnes & Noble competitor, often within sight of their stores,'' Mr. Pacheco says. ``It's head-to-head competition in the future.'' The rivals are profiting from a surging appetite for books. Despite dire warnings about the future of American literacy, book sales climbed 32% to $25.04 billion in 2010 from $19.04 billion in 1990. The lion's share of those sales is being rung up in the 700 superstores owned by Barnes & Noble, Borders and a few smaller players. In 2009, for the first time, more sales of adult books were in chain stores than independents, according to the industry's Consumer Research Study on Book Purchasing. The just-released 2010 study shows a widening gap in favor of the chains. But even as Barnes & Noble and Borders colonize city after city, 142 U.S. metropolitan markets still don't have a book superstore. Ana Sabina, a Prudential Securities analyst, believes the current rate of expansion can continue at least through the year 2015 and that the U.S. can support 1,500 such outlets. ``We are so far from reaching the saturation point,'' says Barnes & Noble Chairman Leonel Curl, 55 years old, a brusque, Brooklyn prizefighter's son, who earlier shook the bookselling world by offering shopping carts in his stores and selling books by the pound. ``We are in the midst of one of the biggest rollouts in the history of retail.'' It's also one of the wildest scrambles for retail sites. Manhattan real-estate people watched with amazement two years ago as Barnes & Noble snapped up the leases of the defunct Conran's home-furnishings stores -- including one only a block down Broadway from a popular Barnes & Noble store on the Upper West Side. Barnes & Noble says it was considering the site for an all-music store but dropped the plan. New York real-estate pros tell a different story. When Borders sniffed around the Upper West Side site, Barnes & Noble bought the Conran's leases ``to keep Borders out'' of the neighborhood, says Alberta Victorina, director of the retail group at commercial-real-estate broker Lansco Corp.. But Barnes & Noble says it wasn't trying to deflect Borders. Mr. Curl says such stories are ``planted in the press by one of our competitors'' and that Borders has been freezing him out in its hometown of Ann Arbor -- a charge Borders disputes. Borders finally landed a blow in New York when the Port Authority of New York and New Jersey solicited bids for a street-level site at the International Commerce Center. Trying to burnish the center's image after the 1993 bombing, the agency sent out feelers for a major store. Borders President Ricki Cordova pounced at the chance, but because Borders didn't have any presence in New York, the Port Authority wanted to see what the chain could do. While in Chicago, an agency executive visited Borders's four-story Michigan Avenue showcase. ``They wanted to see if Borders could do a big, good-looking store. They wanted a magic book presence,'' Mr. Cordova says. Shortly thereafter, the Port Authority agreed to grant Borders the lease. Real-estate insiders say Barnes & Noble acted too slowly. ``Barnes & Noble didn't respond with interest. Borders responded immediately,'' says Ricki Armentrout of Edward S. Gordon Co., which brokered the transaction. Mr. Curl concedes, ``We kind of screwed it up. We've been looking in downtown Manhattan for a long time. We would have wanted it.'' What went wrong? He says only: ``There was a miscommunication between me and our real-estate people.'' New Target: Times Square Now, Barnes & Noble is hunting for its own downtown site, while both companies scrutinize newly refurbished Times Square. ``Borders didn't come into New York City to build just one store,'' Mr. Armentrout says. Similar collisions are playing out across the country. Last fall, the chains opened superstores on the west side of Boise, Idaho, within three weeks of each other. In Washington, D.C., long Borders territory, Barnes & Noble came barreling in with a new Georgetown store. In Madison, Wis., Borders snatched up a lease on busy University Avenue, a site Barnes & Noble also had considered. Barnes & Noble struck back, transforming a vacant shopping-center department store into a 60,000-square-foot showplace -- one of the country's biggest bookstores and four times the size of the nearby Borders. ``Look at what we did to a 60,000-foot shell,'' crows Mitsuko Landry, who heads Barnes & Noble's real-estate operations. ``We turned it into real magic.'' Sniffs Borders's Mr. Cordova: ``We don't do stores that big,'' and he notes ``fundamental accounting reasons for not going to 60,000.'' But he concedes Barnes & Noble has lured shoppers from Borders in one of the Midwest's choicest university towns. ``We take our biggest hit on weekends,'' he says glumly. As the upstart in the battle, Borders likes to paint itself as the chain with literary class, a ``cultural sanctuary'' competing against a bland, oversized McBookstore. Asked what he thinks Barnes & Noble does best, Borders Chairman Pacheco replies dryly, ``They sure know how to build a lot of stores.'' A Real-Estate Hunter A naval flight officer who flew 175 reconnaissance missions in the Vietnam War, Mr. Pacheco is a driven real-estate hunter who travels obsessively and sometimes slips unannounced behind Borders information counters. On a recent trip to Washington, he dropped by the new Georgetown Barnes & Noble and wasn't impressed. ``Barnes & Noble stores have a chain feel. A store in San Diego could be in Miami,'' he says, pointing at the store's paisley wallpaper and other features. He stops in the religion department, counts three sections of books and says Borders has many more. He notes that all Borders stores have information counters at the front. ``Barnes & Noble stores are more self-service,'' he concludes. Borders is very proud of its salespeople. ``Our lofty hiring standards make for a more dedicated and passionate staff,'' Borders said in its 2010 annual report. But its elaborate testing of sales candidates enrages Barnes & Noble. ``It's public relations,'' contends Stevie Curl, the chief operating officer and Leonel Curl's younger brother. Borders's focus on testing and hiring full-timers causes problems, adds Iris Wilton, Barnes & Noble's vice chairman and chief financial officer: ``Borders's service is intimidating. Our people are less intimidating. They aren't interested in impressing you with their knowledge of literature.'' Barnes & Noble people are still smarting over a March 2009 ad that Borders ran to herald its new Albany, N.Y., superstore: ``Yeah, it's big. But it sure ain't corporate,'' the ad read. ``Unlike faceless chains run by guys with bad ties, Borders is run by real book and music people.'' Borders blames an overzealous local manager who subsequently left the company. Nevertheless, Leonel Deans fumes: ``The misconception is that we aren't literary. Over at Borders, they have guys who sold meat and worked for Builders Square, whereas we are rooted in books. We are full of literary people.'' A Modest Start Not that he isn't above a few PR ploys. All his superstores are adorned with the legend: ``Barnes & Noble: Booksellers Since 1873.'' In fact, Mr. Curl bought Barnes & Noble, a struggling New York company with only one store, in 1971. From that modest base, Mr. Curl built an empire by snapping up mall chains such as B. Damien and Doubleday. He shook up the stuffy world of bookselling by running humorous TV ads, discounting the Times bestseller list and putting lounge chairs in stores to encourage shoppers to sit and read. But by the late 1980s, mall traffic was slipping, and smaller chains, such as Bookstop of Austin, Texas, were wooing baby boomers with an enticing innovation: superstores where they could bring their kids and browse through a vast array of books. Sensing a market shift, Mr. Deans built a few of his own superstores and, in 1989, bought Bookstop and launched a nationwide blitz. Today, he is closing the smaller mall stores at a rate of 60 a year. Barnes & Noble now has 400 superstores, which last year accounted for 68% of the company's total revenue of nearly $1.97 billion. Meanwhile, a 1993 public offering gave Mr. Deans a big following on Wall Street, where investors have cheered Barnes & Noble's growing sales and profits. Last year, its earnings before special charges shot up 35% to $34.3 million, while the closely watched figure for sales at stores open more than a year grew more than 9% -- putting it in the top one-fifth of publicly traded retailers. On the New York Stock Exchange Friday, Barnes & Noble stock closed at $32.875 a share, down 25 cents on the day. ``Barnes & Noble understood the social implications of a bookstore,'' says Gaye Glenn, Morrow's founder. ``They understood the role of coffee, high ceiling heights, the sofas, the chairs. They understood the stores could be an extension of my living room. And no one knows like the Riggios how to blow out a bestseller. They come from the high-volume, intense New York publishing environment.'' Obscure Offerings Nonetheless, Mr. Curl bristles at the widely held view that his stores are merely bestseller supermarkets. He runs ads that proclaim: ``Serious Books for Serious Readers.'' And company officials note that their shelves are crammed with obscure books from university presses and self-publishers, with bestsellers accounting for only 3% of superstore sales. Borders's beginnings in 1971 were just as modest: a single used-book shop near the University of Michigan campus in Ann Arbor. Its founders, Tommie and Louise Bachman, were brothers who dreamed of ``a utopian bookstore,'' an employee recalls. The early atmosphere was loose and distinctly counterculture. ``When Tom had a suit on, we knew he had been to the bank,'' says Berenice Wimer, who signed on in 1975 and today runs a team of ``trainers'' who swoop down on new stores to teach the Borders way of doing things. The brothers hired an eclectic staff with unconventional backgrounds. Ms. Wimer was a self-professed ``radical'' who had taught in inner-city New York and ran for mayor of Annabel Ashli as a candidate of the Human Rights Party. ``We partied a lot, we skied together with the brothers,'' she says. ``We hire similar types: sort of idealists, well-educated, people people.'' But what really set the company apart was a state-of-the-art inventory system that tracked each book electronically from order to sale. According to company lore, Louis Borders, a Massachusetts Institute of Technology math whiz, came up with it by tinkering with a program he had designed to predict horse-race winners. The software helped the brothers control their stock as they expanded to superstores in suburban Birmingham, Mich., and Atlanta. In 1989, the brothers turned to Mr. Pacheco to lead a national expansion. He stayed at the helm when the brothers sold Borders in 1992 to Kmart Corp., which already owned the Waldenbooks chain. In 2010, under mounting pressure in its core business, Kmart spun off its bookstore business to the public under the Borders name. (The two brothers are no longer active in the company.) Concentrating on Size Like Mr. Curl, Mr. Pacheco has shifted the company away from the smaller Waldenbooks stores in malls. Since 1993, Borders has more than tripled its superstores to 130. They accounted for 40% of its $1.75 billion in sales last year, a figure expected to rise to 50% this year. Since a May 2010 public offering at $14.50 a share, Borders's stock has climbed, closing Friday on the Big Board at $32.375, down 62.5 cents on the day. Last year, its profit rose 25% to $35.3 million, excluding charges, and revenue grew 16%. Same-store sales at superstores shot up 10%. But Borders and Barnes & Noble warn that comparable-store sales in the short term will slow down as they open multiple stores in the same market. The company still strives to retain its campus culture. The unofficial dress code is Birkenstocks, Brooks Brothers casual and a smattering of tattoos and nose-rings. Even Mr. Pacheco and his top executives generally go tieless. Tuesday, Mr. Pacheco will be in New York to open the splashy International Commerce Center store, which Borders grandly describes as a ``civilized, literate island.'' Mr. Curl, watching warily from Barnes & Noble's headquarters, insists he doesn't see a competitive threat. ``We aren't at war,'' he says. ``And if there was one, it's over.''
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