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Borders plots empire

31.01.08 Sarah Butler

Luke who? Booksellers had to read up late last year on Luke Johnson, the Channel 4 chairman best known for his way with pizza restaurants, when he emerged as the surprise saviour of the seemingly doomed Borders UK chain.

Speaking to The Bookseller before the news of c.e.o. David Roche's shock exit from the business emerged, Johnson said that he intends to spend in excess of £2m over the next two years on reviving the business. That cash injection comes on top of £10m that his investment firm Risk Capital Partners paid in October for a majority stake in Borders UK, including Books Etc, snatching the American-owned retailer from the jaws of its larger rival W H Smith.

A new website and IT systems, and the introduction of new product categories all form part of Johnson's turnaround plan. Everything is under review, from the chain's inhouse distribution system to the store portfolio.

Manager incentives

Johnson insists that store managers will be at the heart of the revival plan, which is now getting seriously under way after the Christmas rush. Next month he is planning to hand out 10% of the company to managers through an enterprise management incentive scheme, which effectively hands employees free share options in the company.

"I want them to be owners and partners, and that is not something they can get at our rivals," Johnson says. "I have always found that if you treat a retailer as a series of small businesses controlling their own destiny then you get those managers to have a sense of ownership which can make a real difference," he says. He claims such schemes helped make his previous businesses, including Pizza Express, fly.

Each Borders superstore has an annual turnover of more than £5m, making it a sizeable business in its own right, and Johnson believes the opportunity to run one of those mini-empires can attract high calibre management.

The entrepreneur, whose investment firm also owns greyhound stadiums and the East fashion chain, believes that one of Borders' major problems under its former American parent was that strategy and operations were controlled from a head office thousands of miles away in Michigan. "Executives there had a view on what works, and that was it," he says. "I want to empower local managers on events, marketing, ranges and hiring. One of the great strengths of book retailers is booksellers. They are passionate, knowledgeable, committed, intelligent people with loads of enthusiasm."

Of course, Johnson, who is a media-savvy marketer, is flattering you, dear readers, but he insists that the plan to build Borders stores into local literary centres cannot be driven from the centre.

Live events

A large number of Borders shops host book clubs, children's reading sessions, clubs for aspiring writers or author visits, and Johnson says he wants to see more events. He believes that Borders can take advantage of its large stores to enable book fans to interact, and that live experiences are a way for high street retailers to compete against the internet and supermarkets.

"One phenomenon at the moment is the incredible popularity of literary and music festivals," he says. "People want to go out and meet people and do things. None of us want to spend our lives online. There's a role for a big, impressive place in which to interact with other fans of Harry Potter or whatever."

Outside London, in places such as Preston in Lancashire, Kinnaird in Scotland, and Cardiff, Borders stores are a draw for locals, whose book buying options are relatively limited. Glasgow, for example, has the busiest Borders store in the world. "In these places, the stores are an oasis of culture and learning, and the choice is not available anywhere else," Johnson says.

Stores too large

But while having an authoritative offer, and add-ons such as coffee shops and the Paperchase stationery concession, can make the stores an attractive shopping destination, Borders suffers in many places from overly large and expensive stores.

"There is no doubt some stores are oversized," Johnson admits. The chain's range of DVDs and CDs are likely to shrink in tune with the market, and Johnson is looking to fill some of those empty shelves with new product categories such as computer games or educational toys.

Computer games are relatively low margin when compared to books, but Johnson says they will help drive footfall and sales. Having a range of product that appeals to all ages is also seen as important. Johnson's perception is that Borders has a broader appeal than Waterstone's, which he thinks is seen as rather "stuffy". "Borders is for the whole family," he says.

Ideally, Johnson is looking for a third concession to operate alongside Paperchase and Starbucks, which he says will definitely remain.

One industry insider says: "Borders' basic problem is that they have too much space. The concept is interesting, but book stores and music stores are different. Entertainment is lively and buzzy, while book stores are quiet and tranquil. Trying to be a specialist in both is difficult. Going into more product areas carries the risk that the stores will do more things badly."

Outlet closures?

Aside from finding the right mix for the large stores, Johnson will also sell off and renegotiate terms on unprofitable outlets. He insists that the level of closures will depend on negotiations with landlords. He says "virtually all" Borders superstores make a contribution to the bottom line; but this perhaps indicates that it is the smaller Books Etc sites that are more likely to go on the market.

Indeed, if property gossips are to be believed, the entire Books Etc chain is up for grabs at the right price. Johnson will not confirm plans to close the chain, but says: "The economics of operating small central sites are not great, and our unique selling point in those stores is harder to find."

Sorting out a store portfolio is not a quick process and could take most of 2008 to resolve. In the meantime, no new stores will open as the business focuses on driving footfall and transaction values at the existing stores.

Multi-channel investment

The one new territory that Borders will take on is the internet. The firm will relaunch its transactional website later this spring without Amazon, its current partner. In a move that echoes Waterstone's bid for independence 18 months ago, Johnson wants to use the site to help create communities around each local store. He also intends the service to be fully multi-channel, enabling customers to order in the store or online, with the option to get things delivered to their home or pick them up at the till.

This complex system requires modernised IT, which will be a major part of Johnson's turnaround investment over the coming year.

New electronic point-of-sale and back-of-house systems are a necessity, as Borders' current system is plugged into its former American owners' network. "That was a disaster for the business," Johnson says. He believes the existing systems are outdated and that the former parent company did not invest well in IT over the years. "We hope [the new system] will mean a more efficient, responsive organisation," Johnson says.

He wants Borders to make more of its local information, not only on stock and sales, but also the one million customer email addresses it holds, a vital resource which the chain does not yet exploit. New relationship marketing initiatives such as a loyalty card will be introduced to help keep customers coming back.

Stretch targets

The Borders team are going to need all the loyalty they can muster if they want to pull off a turnaround in a retail environment that is not likely to get easier this year.

Freddie George, a retail analyst at Evo Securities, says: "Risk [Capital Partners] has negotiated a pretty good deal with Borders in the US, and so in the short term they are going to be OK." However, he adds: "It's not going to be easy being the poor number two specialist to Waterstone's, which has quite a bit of momentum at the moment from its loyalty card and so on."

Johnson says that he is pleased with Borders' progress so far, and that Christmas was "good and better than we were expecting". He says like-for-like sales rose 2.9% in the five weeks to 5th January and margins were maintained.

That sales performance, teamed with tight cost controls, left the business with net cash of £15m at its year end, having cleared its debts through the sale process. This year, it is exected that the business will make more than the £2m profit it made last year. So how will we know if and when Borders has been successfully turned around?

If the business meets certain sales targets over the next few years, then, under the terms of his agreement with Borders US, which retains a 17% stake in its UK off-shoot, Johnson will have to pay another £10m. That would be a sure sign of success.

Johnson says that he will be ecstatic if Borders meets these "stretch targets", but he would judge success more on profit levels. He believes that the business could make a profit margin of 3% to 4% before tax, interest, depreciation and amortisation, doubling the 1% to 2% it currently makes.

Johnson says: "Clearly there are challenges ahead, and it is going to be a tough year in 2008 for retail in general. All turnarounds are hard work, and never go according to your initial plan, but on many of the crucial measures we are doing well and there is lots of potential."

Johnson believes that WHS could have negotiated its way through potential competition issues and was "mad" not to have bought Borders. He taunts: "They are a big plc, and cowardy custards."

Many in the retail world see Johnson as the mad one in taking on a relatively small specialist chain in a market challenged by the supermarkets and the internet.

Johnson admits that he is "obsessed" by book stores, having tried to buy Waterstone's and Blackwell in the past. "Books are one of the cornerstones of civilisation. They are where potentially all of human knowledge is set down. They are a very ancient technology that is entirely valid today, despite the internet and so on."

And he is equally passionate about taking on his larger rivals: "We are not going away."

Retail Flagship Feature Borders Luke Johnson Sarah Butler

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