The collapse of REDGroup Retail, the owner of Borders Australia and Angus & Robertson, sent shockwaves through Australia’s retail and publishing world.
While the episode has much to do with problems specific to the book sector – such as the rise of online booksellers like Amazon and Book Depository, the government’s decision last year not to drop its parallel import restrictions for books and growing eBook sales – there are important lessons for all entrepreneurs.
Here are 10 lessons business owners should consider:
One trend emerging from the GFC is the danger of being in the middle ground of any sector. Take the collapse of consumer electronics retailer Clive Peeters – it wasn’t big enough to match it with the likes of Harvey Norman and The Good Guys and it wasn’t small enough to specialise in a profitable niche.
Borders appears to have been caught in a similar spot. It wasn’t able to compete with the big discounts on offer at department stores like Big W and Target and it wasn’t small enough to take on specialist inner-city independent book stores.
The “superstore” model that Borders used in Australia and the United States looked like the future of retailing just 10 years ago – huge stores with big ranges and other amenities such as cafes that could be a shopping destination rather than just a store.
But big stores mean big costs – high rent bills (REDGroup Retail was Westfield’s second largest specialty tenant) and high labour costs.
The general trend in retail appears to be towards smaller store footprints supported by other channels such as web stores. The Borders model got very dated very quickly.
The latest best-selling books are sold on permanent discount of 35% at Big W and Target and overseas online booksellers offer discounts up to 50%.
For a relatively small, portable and standardised product like books (the text in the US version is generally the same as the Australian version) meeting industry price points is a necessity.
Private equity firm Pacific Equity Partners bought the Borders and Angus & Robertson businesses for $225 million in separate transactions in 2004 and 2008. It’s easy to say the valuations look too high with hindsight but it is questionable whether PEP was looking 10 years into the future when it made those acquisitions. Had it considered the potential for a GFC? The rise of online retail? The rise of ebooks?
Maybe PEP didn’t worry too much about those things – private equity firms generally aim to be in and out within five years. But other entrepreneurs should take the tip – look as far into the future as possible when assessing the value of an acquisition.
Don’t forget that it’s just over a year since PEP was actively discussing exiting REDGroup Retail via a float – PEP had even got to the point of appointing a manager for the IPO. Float plans were indefinitely shelved but this episode is likely to confirm the suspicions of many investors – when private equity firms are selling you don’t want to be buying.
Borders worldwide appears to have been horribly slow to realize the direction in which its customers were moving. The company outsourced its online store to Amazon before 2007 and only launched its eBook reader last year, two years after Amazon’s Kindle – way too slow for a business that should be perfectly positioned to spot retail trends.
Borders Australia has been famous for its email marketing discount program – most weeks subscribers would receive a page of coupons redeemable in-store. But incredibly the company only launched a formal loyalty program in December 2010. The idea that a major retailer – and particularly one that appeared to have a reasonably engaged customer base – would not be formally gathering information on customer preferences is unbelievable.
The collapse of REDGroup Retail is likely to cause a little heartburn for managers at Australia’s biggest retail landlords, including Westfield, GPT and GFS Retail. According to reports REDGroup was the second-largest speciality tenant at Westfield. The collapse raises lots of questions for landlords. Are big store formats (that attract big rents) actually viable? Which categories will come under increasing pressure? What rents will be sustainable into the future? Long-term trends are worrying.
We see this every year – companies scrape through Christmas thanks to seasonal sales and then hit the post-holiday retail slowdown. Cashflow dries up, bills mount and suddenly corporate undertakers are on the phone. Entrepreneurs must plan their way through that period – it happens every year.
The collapse of REDGroup and of the Top Ryde Shopping Centre in Sydney yesterday as well as warnings from RBA about continuing consumer caution do not bode will for Australia’s retailers. The first nine months at least of 2011 will be tough and if we get more rate rises later in the year the pain could extend longer than that.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
