Bad internet or just bad management?

Opinion Last week saw two national bookseller chains announce financial problems  – Borders in the US and The RedGroup here in Australia.

I feel sad for all the good workers who may lose their jobs. It’s always bad when people lose their jobs but it’s downright annoying when “the Internet” gets blamed instead of poor management and a lack of strategic planning.

Indeed it seems the amorphous Internet gets blamed for a lot these days: the demise of retailing, civil unrest, childhood obesity, pornography and the shallow “look at me” culture. But is it fair to blame the Internet for allowing independent thought and free speech to flourish? Is it fair to blame the internet for the whims and vanity of teenagers? Is it fair to blame the internet for management inaction?

Of course not.

The demise of bookstore chains has been a long time coming. Borders has had an awkward potted history and always seemed to run third to its much bigger rivals Amazon and Barnes & Noble. They missed the Internet altogether in the mid-1990s and then again the recent eBook revolution and only started selling eBooks in May 2010 – well after their competitors had grabbed the initiative. Under the protection of Chapter 11, Borders are going to close numerous stores and refocus on eBooks. Time will tell if this is too little too late.

The RedGroup owns a number of brands in Australia including the Borders Australia brand and their flagship chain – Angus & Robertson. Borders Australia is a mirror image of their US counterparts (and suffers similar problems) whereas Angus & Robertson are a stock-standard lowbrow mall-based chain of bookshops.

The Internet is clearly not to blame for the demise of the RedGroup. According to this report the issue is far more sanguine – a private equity group took on too much debt and paid too much for an asset that has failed to perform. Sales have been declining for years and losses have been mounting.

The reason sales have been declining is not due to the Internet per se but, rather, failing to compete in general. Competition is not all about price; it’s also about the “shopping experience” – making consumers more willing to open their wallets.

Rather than choosing the expensive model of Borders or Barnes & Noble, the RedGroup took Angus & Robertson downmarket. So much so that their bookstores felt more like dingy remainder clearance shops (and in truth that’s what they became). No service, no knowledgeable staff, just rows and rows of crap, cheap books stacked as high as the tables would take them. I stopped shopping there years ago, the “experience” just wasn’t fun anymore. Not surprisingly sales suffered.

And then there’s price. On Angus & Robertson’s Australian e-commerce site you can purchase books and have them delivered, but they are not even close to competing on price.  Take one of their current bestsellers Shadowfever by Karen Marie Moning. You can purchase the hardcover from the A&R website for A$41.95 plus A$6.00 shipping (total $A47.95). A&R quote an appalling delivery time of 2 to 3 weeks – even though the item is apparently in stock! Same book at Amazon is US$14.86 and US$10.24 shipping to Sydney (total US$23.10). If we assume A$/US$ parity then I can land the exact same item from the US at my door for less than half the price than it costs locally. Oh, and if I want it electronically I can read it on my Kindle today for only $9.99.

Not that this is news. Everyone knows books are expensive in Australia. But instead of realising their business was under mortal threat and competing, the local publishing industry signed their own death warrant by convincing the federal government to protect them by making it illegal for booksellers to import books from the US – even if they were substantially cheaper and a better deal for the consumers.

The local publishing industry has had 15 years to get used to the Internet and Amazon under an artificially protected market. But what did they do with this opportunity? They squandered it. They built e-commerce sites to sell the same price-inflated books with three week delivery times. They built more stores to fill with crap books and kept exploiting the Australian reading public with artificially inflated high prices.

So instead of being proactive and leading the industry into a competitive post-Internet future, the managers and owners just continued the old business model and rang up huge debts. An innovative RedGroup would have got the law changed and used their brand and size to renegotiate wholesale prices with international publishers. An innovative RedGroup would have passed on these cheaper prices to their stores and set up an “Australian Amazon” e-commerce site. It should have been a no-brainer – after all your only competition is forced to ship small orders of heavy books over the Pacific.  Given the exchange rates of the last 10 years – even if they just price matched Amazon – they still had plenty of room for margin.

But they didn’t. Instead we have the ridiculous situation where, as an individual, I can buy a single book from the US and have it arrive in my letterbox 50% cheaper than all the buyers buying by the pallet load for our largest bookstore chains. Now the industry that the Government was convinced to protect is in dire straits.

The Internet is a great equalizer. It magnifies failed markets and highlights inefficient or out of date business models and industries.

All this was predicted by Nicholas Negroponte in the early nineties. I saw a television interview with him around that time and I recall him describing a future where bits moved rather than atoms – it being far more efficient to move bits over the Internet than it ever is to move atoms. He foresaw that any existing industry that could have its products digitized would be dramatically impacted by the rise of the Internet. He went further though and surmised that any intermediaries that added little value would be eliminated. He used the example of travel agents. Who needs a travel agent now when you can book your own plane flights? Why pay someone a commission for something you can do for free on the Internet?

After a long and painful fight, the music and film industries have stopped pining for the old days and are slowly coming to grips with the opportunities that come from a free ubiquitous distribution platform. You can now purchase or rent music and films online. A far more efficient and productive distribution method than CDs and DVDs.

The Internet makes industries and societies as a whole more productive. There are going to be more painful adjustments but protecting inefficient business models just makes the pain worse when it eventually comes.

UPDATE: It just gets worse. Today we find that board and management of RedGroup left only $1 million cash in the bank with $7.8 million owed to staff. Not that the staff will see much of that as the management have hocked the firm so badly that even if they sold all their stock, they wouldn’t have enough to cover all their debts. Its about time executives and directors were made personally responsible for debts to employees. What a debacle.

2 comments to Bad internet or just bad management?

  • Bruce H.

    As a former retail bookseller who left the industry towards the end of 1999, I agree with the majority of the comments in thiss article. The introduction of GST on an industry that was already beginnining to decline with competition from Amazon and cut-price loss-leaders from chains like BigW & Target made me realise that perhaps too many headaches were coming.. it was either adapt or die. Anyway I left and began to expore the possibility of electronic publishing… bad timing… the dot com bubble burst and that was another story. As for Borders & A&R, I visited a Borders city store in November and could not believe what I was witnessing. It looked & felt like a remainder shop, the staff were indifferent, possibly because the work environment looked like trash & empty of customers despite thousands of people walking past the doors. I had a $20 Gift voucher to use and it was a battle to find anything let alone find staff (knowledgeable or otherwise) to help so that I could use it. I walked out feeling that it just wasn’t worth the effort and I visited another bookshop across the road were the “shopping experience” returned and I made a purchase.

  • Hi

    It was Bad Management and a lack of Vision for the future.

    After spending several years in North America it was a matter of time before Bricks & Mortar only stores died.

    Their is no sustainable business model for Only Bricks and Mortar, you need small outlets, large online presents and a 3rd party distribution network.

    Sell the brand with strategic locations not the size of your store and be innovative by leveraging off solution orientated people.

    Create partnerships with your vendors and competitors as some competitors can enhance your business.

    As the world successfully implements digital technology more and more industries will have the same issue book stores have struck, eg the Music, Film, Automotive, Banking and Finance industries.

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