Borders' Creditors Should Avoid Repeat Of Labels' Experience With Tower Records

Borders, a shrinking but still important U.S. music account, faces troubles that go beyond its recent Chapter 11 bankruptcy filing. And as its supplier-creditors mull their next move, it would behoove them to tread carefully.

Despite the stigma attached to being in Chapter 11, the reorganization process can be a vital lifeline for a company and may even turn out to be a good thing for suppliers.

Consider the case of Alliance Entertainment. Whatever creditors lost when the Coral Springs, Fla.-based wholesaler filed for Chapter 11 in 1997, I would bet that amount has been more than made up by the profits that suppliers have realized from the CDs and DVDs sold to the one-stop in the 14 years since.

But if Borders continues down the path it's been following, the chain could see its Chapter 11 reorganization turn into a Chapter 7 liquidation.

Industry observers say the company has dug itself a deep hole through chronic mismanagement, a revolving door of CEOs and filing for Chapter 11 later than it should have. It further alienated its suppliers by keeping them in the dark about the depth of its problems and then belatedly coming up with cockamamie half-formed plans, first asking them to convert what they are owed into equity in the chain and then requesting that its debt be converted into long-term loans.

After securing $505 million in debtor-in-possession financing from GE Capital in February, Borders turned to its suppliers to ask for credit on product while it tries to reorganize. But the chain has yet to provide enough financial data and a semblance of a plan to give suppliers enough confidence to extend credit.

"They are in a delusional state," an executive at a large book publisher says. "Their ineptitude and inability to get their shit together is overwhelming. They have yet to show a plan to the creditors. There is no expectation that they will be floated more credit, not based on the sketchy information they have provided us."

Borders spokeswoman Mary Davis says that the company is focused on developing and executing its business plan as part of its reorganization. "We look forward to working with our vendors with the overarching goal of emerging from this process a stronger and more vibrant bookseller, to the benefit of our publishers, readers and all other Borders stakeholders," she says.

So far, trade creditors appear indifferent to Borders' fate.

"If they go down, there are plenty of places still around to sell books," the book publishing executive says. "This isn't like the music industry where there aren't hardly any record stores left." The head of an independent music distributor adds that "if they go away, it won't take us down."

So far, none of the major labels is giving Borders any credit for purchases, and according to the book publishing executive, neither is the book industry.

LESSONS FROM TOWER RECORDS

But despite their frustration with Borders' missteps, book publishers shouldn't be so blase about letting the chain commit suicide. Yes, book retailing, like music retailing, is undergoing a transition from physical to digital sales. But as the labels' bitter experience with the Tower Records liquidation demonstrated, letting a physical retailer go under still poses big risks.

So far, book publishers haven't been as heavily reliant on a single digital retailer the way the music industry has been on iTunes. And they have managed to sell digital books that carry digital rights management or copy protection, without consumer uproar.

Even though physical books still dominate book sales, 2010 was "a watershed year" for digital, with Amazon reporting that fourth-quarter sales of books for its Kindle e-reader outnumbered sales of paperbacks to become its top-selling book format for the first time.

The book industry seems convinced that its digital future will remain rosy. "Piracy is not a factor here and I don't think it will be," the book industry executive says. "For one, our main audience is not teenagers," and the industry has copy-protected devices, he adds.

What's more, unlike the music industry, which has seen sales cut in half during the last decade, book sales have remained fairly steady since 2003 when U.S. book sales totaled $22.3 billion, according to estimates from the Assn. of American Publishers. Sales peaked at nearly $25 billion in 2007 before dropping by 2.6% in 2009 and 1.8% in 2009 to $23.9 billion. (2010 data isn't due until April.)

But the book industry is too early in its digital distribution ramp-up to yet have a clear view of how this will play out. So my advice to book publishers would be that they think long and hard about keeping physical retail strong for as long as they can, because they just don't know how their digital hand is going to work out.

As reluctant as publishers are to extend credit to Borders, they might be grateful a decade from now, just as labels are still happy to be selling CDs and DVDs to Alliance Entertainment.Not a week goes by when I don't hear a label sales executive lament the demise of Tower Records, the last physical retailer where smaller subgenres could still find shelf space. "We, all the labels, should have reached deep into our pocket to keep Tower alive," a label sales executive told me recently.

The music industry lost its chance to have a backup plan if digital salvation continued to prove elusive. The book industry would be stupid to throw away its own potential safety net by not extending a helping hand to Borders.