Books Beyond Borders

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Now that Borders has declared bankruptcy, matters are progressing rapidly.  Borders has already started the process of liquidation at 200 stores across the country.  This is going to leave giant holes in prime spots at shopping malls, which will be hard for developers to fill in an already-suffering commercial real estate market.  The Washington Post outlines the gory details in my local area:

In its filing for Chapter 11 bankruptcy reorganization last week, Ann Arbor, Mich.-based Borders Group said it would shutter 200 locations, eight of which are in the Washington area: Friendship Heights, Kensington, downtown Washington, Tysons Corner, Bowie, Largo, Winchester and Stafford.

The locations, representing nearly 200,000 square feet of retail space, are expected to go dark by the end of April. Borders, which has about $1 billion tied up in lease obligations, declined to comment on whether it is considering further closings. The company has 31 stores remaining in the District, Maryland and Virginia.

Some landlords are already dealing with the closures, including Federal Realty Investment Trust in Rockville, which leases space to four Borders superstores across the country, including the ones at White Flint Mall in Kensington and 5333 Wisconsin Ave. in Friendship Heights.

Borders has stopped paying the company rent, which amounts to $3 million a year, said Donald Wood, president and chief executive of Federal Realty, in a recent earnings call.

"Certainly, that income stream is at risk in the short run," he said during the call. "You can understand why we'd be anxious to work through these deals as quickly as possible, so that we can release those prime locations."

At that, DC will get off relatively easy, because the local economy is relatively healthy; most of those empty slots will probably be filled with comparative ease.  But in other troubled markets, this will be a blow.


Nor are mall operators and leasing companies the only firms that will be hit by this.  Publisher's Weekly runs down the effect this will have on publishing houses, who already haven't been paid for books they shipped, and will lose retail frontage for their titles.  The smaller publishers will suffer the worse.  And the effects will ripple through to other parts of the industry:

While the largest publishers are owed the most, independent presses could face more serious ramifications. Although a number stopped shipping to Borders, many continued to. NBN, owed just under $2 million, was only shipping books to the outlet after clients agreed that NBN wouldn't be responsible for money lost in bankruptcy. Perseus Distribution Services is owed $7.8 million. The country's largest distributor has various kinds of agreements with its publisher clients regarding the Borders bankruptcy, with some houses more exposed than others. NBN and Perseus battled over acquiring PGW clients when parent company AMS went bankrupt late in 2006, and helped keep some struggling houses afloat. It's unclear if they will be able to help again in a much different publishing environment.
The trickle-down impact will affect everyone from manufacturers to agents. Borders accounted for about 8% of overall industry sales, a higher percentage in some categories. A downsized Borders means publishers are likely to receive smaller orders and in turn place smaller first printings, resulting in less business for printers. The likelihood of lower print sales, one publisher said, means that books acquired one or two years ago when Borders was much bigger will have a more difficult time earning the advance back and that less shelf space could mean lower advances.
At least Barnes and Noble should be happy; this erases their biggest competition for bricks-and-mortar pure book retailing.  But looking to the future, they too have to be nervous.  All that real estate is expensive, and their margins are under pressure from Wal-Mart on the bricks-and-mortar side, and Amazon on the web.  One wonders if the Nook can really make up for those competitive disadvantages.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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