If you build it, they will come

In the five years since Borders arrived in the UK, both the American brand and its British acquisition Books Etc have grown steadily to challenge for the position of third largest bookselling group. Philip Downer, the new m.d. and c.o.o. of Borders UK, talks to Joel Rickett.

An icy morning, after the long January night which saw road and rail shutdowns across the UK, and only a few cars have made it to the Borders superstore in the Waterfields retail park, Watford. But people are picking their way determinedly across the slippery pavements from the nearby town centre, and the store's seemingly endless aisles are gradually filling up. Some have made it up the stairs to the Starbucks to thaw out.

Asking for a latte is Philip Downer, who this month became managing director and chief operating officer of Borders UK, including Books Etc. Downer joined Borders as operations director just after it bought Books Etc in October 1997. His brief was to oversee the logistics of the US brand's first steps into the UK market, and he has helped steer its steady expansion to 18 stores. Now he takes responsibility for the future of both Borders and the 37-branch Books Etc, which, with combined sales last year estimated at £138m, are in fierce competition with Ottakar's to become the UK's third largest bookselling chain behind Waterstone's and W H Smith.

Downer is a pragmatic, professional retailer. He began his retail career as an assistant at the Lewisham branch of Our Price Records in south-east London, and in a decade worked his way up to a seat on the Our Price board. He spent three years in the US overseeing Waterstone's North American expansion, which was eventually aborted. Then, after a short spell back in the UK at upmarket shirt retailer Thomas Pink, he joined Borders--where he again found himself talking to bosses on the other side of the Atlantic. "My speciality is failing to be understood," he jokes.

Borders, Etc

The first question is one that many of the staff at Books Etc must have asked themselves when Downer was made head of the whole group. Is the Borders name going to take over? A dual branding approach has never been sustained in modern British book retail. From Waterstone's and Dillons, Hatchards and Claude Gill to Thin's and Volume One, the pressure to achieve critical mass has meant that a dominant brand has always won through. Can Borders set a precedent?

"I can never say never," Downer admits. "But Dillons and Waterstone's stores were doing the same job out of similar real estate. The argument that they could keep a Waterstone's and a Dillons in the same town was going to be hard to sustain, because the two had been competing so absolutely against each other."

It is more logical, he argues, to have Borders in Charing Cross Road and Books Etc in Covent Garden just half a mile apart. "They are doing a very different job. While they're both selling the new John Grisham, and the great majority of what is in stock in Borders will be in stock in Books Etc, it is a different environment."

He is keen to show an understanding of the fundamental differences that underpin the Books Etc business, but stresses that he has only just taken up responsibility for the chain and has "a great deal to learn". The primary distinction is that Borders relies on central ordering with local input, while Books Etc is the opposite--mostly local buying with a small degree of central input. Downer stresses that it would be impossible to adopt one of the systems across the whole group without making "some long-term strategic decisions".

He praises the flexibility of the Books Etc brand, which can accommodate the 500 sq ft outlet in Heathrow's Terminal Four--with "breathtakingly high sales per square foot"--the 10,000 sq ft branch in Finchley Road, London, and all sizes in between. "We can trade a Books Etc format in the City, the West End, in suburbs, provincial shopping centres and airports. The biggest Borders store is about 40,000 sq ft and the smallest is about 15,000 sq ft, but in essence they're much more alike than are the largest and the smallest branches of Books Etc."

Such flexibility is particularly useful in airport retail--this year both the Stansted and the Heathrow Terminal Two branches will relocate to more attractive airside locations. But high rents have forced rethinks elsewhere--the London Piccadilly and Oxford Street leases are to be sold.

A two-way exchange

The flow of ideas has always been two-way, Downer says. "Initially the Books Etc experience was used to anglicise the American brand: it changed Borders rather than the other way round." This was partly the result of listening to the local management. "The big attraction for Borders in acquiring Books Etc was that it was an established business, and that it had people such as Richard Joseph and John Monk who really understood the UK book trade." Of course, the US buyer also saw a solid, profitable business that could underpin its UK expansion.

Downer bridles at the suggestion that Books Etc has grown more slowly than Borders in recent years, pointing out that the current 37 Books Etc branches compares to 20 at the time of the acquisition. He cites the poaching of David Riley, head of UK operations for The Gap, for the new divisional directorship of Books Etc as evidence of the group's commitment to the brand.

But there will be changes ahead, including some sprucing up of the older shops. "We need to look at how effectively each Books Etc store is serving its neighbourhood." He wants to ensure that successes with title selection and range-building in particular categories are quickly replicated across the rest of the business where applicable. He recently visited two stores which were geographically close and yet had history sections of radically different sizes--"I'm not quite sure why."

To Downer, one of the main attributes of Books Etc is the convenience of the branch locations. His vision for Borders stores is different: he wants customers to see these as destinations in their own right. He tells the story of a family from Carlisle who drove down to Borders Cheshire Oaks for a day out: "That's what I call a catchment: the entire M6."

Accessibility is Borders' watchword, reinforced through its "unthreatening, unelitist" ambiance, marketing activities and vast programme of author signings. "I've always been keen to strike a balance between celebrating the unique nature of books--their power to change the way people think--and not making that intimidating. The customer who wants to browse through Haynes car maintenance manuals is as valuable to us as the one who wants to look at 10 different editions of Moby Dick." The stores become a social space, changing nature throughout their long day from a family environment to "a singles scene in the evening".

Downer also insists that he is "completely comfortable" with customers reading books and even studying from them in Starbucks without buying--despite the spoiled stock that can result. He remembers seeing a customer in the famous US independent Tattered Cover settle into an armchair, take a book off the shelf, and remove her bookmark. "Here was somebody very at home in the store. If she ever wanted to buy then this is where she's going to come, and where she's going to tell her friends about."

Booked up?

When Borders entered the UK market, some observers felt that its product mix would enable it to scale back its books offer in favour of other product if necessary. But the chain's commitment to books has remained strong: "Borders is fundamentally a bookstore, and everything that we do flows out of being a bookseller," Downer says. "Books generate the majority of sales, and it will always be thus."

The product mix is tailored to the local area. Space for music has retreated in London's Oxford Street, where Borders faces the giant HMV, but elsewhere music and video are both prominent parts of the offer. "We're never at a point where we say we've arrived at the ideal store."

Downer praises the work of Louise Collinge--now promoted to merchandise and marketing director--in standardising the way the stores are merchandised so that there is "reliability of the brand offer". But does this risk anaesthetising the experience? "They are colourful stores. We are always looking for balance between delivering the central programme and ensuring the voices of the individual bookseller can still be heard."

Leading the way around the Watford store to show what he means (instinctively tidying loose CDs and books as he walks), he talks through the science behind the "finely tuned" front-of-store layout: from a "decompression zone" to the first tables, Borders Best shelves, local interest, children's books, themed promotions, and mixed music and video displays. A number of promotional tools, including the category signage, were designed in London and have migrated back to the US and international stores. A version of Books Etc's famous Staff Picks shelf cards are now used across Borders worldwide.

The chain's product management has also evolved since 1998, after initial criticism of the quality of the backlist range and the high level of American titles. Downer says that the early selection was based on Books Etc's sales records for 30,000 or so titles. The rest--there are at least 100,000 titles in the average Borders--were picked using "informed guesswork".

Now, the chain's inventory management system, based on the US practice of stickering each title with its own code, is used to manage replenishment and instant sharing of sales data. Buyers still draw on US stock for categories such as mind, body and spirit and music magazines, where range is stronger and deeper than in the UK.

Is there a danger that book buyers may perceive Borders as an Americanised brand? In the US there have been bitter protests against new Borders stores by those supporting local independents, and there is substantial anti-Starbucks sentiment in the UK. But Downer is robust. "The nature of a big general bookstore is that you don't have a political agenda--in fact we have a deliberately apolitical agenda." As an aside he points out that Borders' market share on Naomi Klein's anti-corporate manifesto No Logo was "sensational".

Culture gap

In the early days of Borders in the UK, a culture gap opened between the UK and US management teams. But Downer says that both sides now "understand each other well" despite the constraints of differences in infrastructure and culture.

It is believed that some of the initial expansion targets set by the US parent proved unworkable in a radically different UK market, and were recast. But the pressure for top-line sales growth, driven by Wall Street, is still strong. "We've always taken the view that we will open as many stores as we can find suitable locations for. We haven't had to work to a programme that says, 'you will open 10 stores this year'. The message from Greg Josefowicz [c.e.o.] is a clear one: deliver us more stores like these, and a profitable, growing business."

After the first UK stores opened, Borders took the "financial model apart and rebuilt it". A steady flow of three new stores a year was upped to five in 2002. This year the chain will have added at least seven more, representing 170,000 sq ft of retail space. Add to this the two forthcoming London Books Etc branches (at Canary Wharf and in Wandsworth), and the group will be trading from more than 800,000 sq ft by December--edging ever closer to Waterstone's 1.3m sq ft across 197 branches.

A bullish document prepared for property agents says that management envisages opening another 50 to 70 stores over the next five years across both brands. The new 50,000 sq ft distribution warehouse in Cornwall will support more than 30 Borders, and a distribution "game plan" has been drawn up to meet the needs of any further expansion. Such a programme has called for a deep financial commitment: Borders UK results for 2001 showed it owed £68m to the parent company, with pretax losses of £1.6m; the business returned its first operating profit of £257,357.

Tipping point

Downer compares the UK expansion model to that pursued in the original expansion of Borders across North America. "There were several years of exceptionally high investment and very limited returns until you reached the tipping point at which there were enough stores out there to drive increasing profitability. Having seen that working in the States, the management of the group is comfortable in looking at the international business and saying we can see the same patterns developing. That gives us in the UK a level of comfort."

The "tipping point" is reached when one opens a large number of new stores in a year but only increases the size of the overall chain by 20%, he estimates. "In the US, about 40 stores will open this year on a base of 400, so it's a 10% increase--you've got a huge profit-generating business providing capital. Whereas we're opening seven or eight on the back of 17--about a 40% increase."

Downer will not be drawn on the performance of the established Borders branches. "We looked at others' results [in January] and felt we did all right." Neither will he elaborate on the exact structure of the deals with Paperchase and Starbucks--normally a concession would pay rent and a cut of sales if it exceeded a certain level--but he insists that they make a "reasonable contribution". "There's always a complexity when you introduce a third party into your business--you're not going to do it just because it's nice; it has to drive some real benefit."

Getting out of town

To find sites for new UK superstores, Borders has turned to new out-of-town and edge-of-town retail developments, some in US-style strip malls. Four of the five Borders stores that opened in 2002--and five opening this year--are in such locations, nestling alongside retail giants such as Tesco, Homebase and JJB Sports. The typical new Borders is between 20,000 sq ft and 25,000 sq ft, made up of a large, single floor plus mezzanine.

Downer knows that the products Borders sells are not essential purchases. But, increasingly, consumers view trips to these developments as part of their leisure time--aided by the convergence of retailers with leisure facilities such as Pizza Hut and Warner Village Cinemas.

Where do the aggressive expansion plans for Borders leave Books Etc, which not so long ago also had ambitions to conquer the UK? Downer is frank: "We are approaching the development of Books Etc outside London relatively cautiously, while looking at the rest of the country for Borders extremely bullishly."

Will this approach restrict Books Etc to London and airport locations, as all the large cities are eyed up for new Borders? For example, would a property opportunity suited to Books Etc in Swansea--where the first Welsh Borders will open this March--be taken up? "For a community the size of Swansea, you want to open a Borders store. That way you are establishing yourself very quickly as the pre-eminent chain bookseller." So Borders boldly goes, and Books Etc may follow.

Government sentiment has turned against out-of-town developments, with deputy prime minister John Prescott rejecting a string of proposals for new sites. So competition for space on new schemes has further intensified, and rents have been forced up. Downer concedes that it is "always difficult" to secure the best locations, but he does not believe suitable property is drying up. He also insists that Borders is still "alert to city centre opportunities", as evidenced by the forthcoming Bristol (Clifton) and Birmingham (Bull Ring) openings.

Squaring the footage

The sheer floorspace that Borders devotes to books turns more traditional models of bookselling on their heads, and sceptical commentators continue to ask if books can generate the returns demanded.

A crude analysis shows that Ottakar's last year made estimated sales of £300 per square foot; Borders UK made an estimated £212. There were a number of complicating factors: Borders opened about 80,000 sq ft in the last few months of the year; a large chunk is taken by concessions; and it is impossible to unpick the mix of high margin and low margin product.

"I refer you back to the American model," Downer says. "Some of the ratios will differ [in the UK], but we've already demonstrated that the model works." But the playing field is different in the US, where commercial property leases are much lower. "And so is their ability to manage their margin," he replies, citing the flexibility that UK retailers have to negotiate terms on a title by title basis with publishers--both locally for Books Etc and at head office for Borders.

With the steady single-digit growth of UK book sales slowing to a trickle last year, there is also the fear that the market has reached saturation point. "I believe that we do grow the market. I'm not foolish enough to believe that every book bought in Borders is a new addition. But I would not be sitting here today if I didn't believe we were not only different but fundamentally better than all our competitors."

He attacks the snobbery of those who would sneer at the potential for heavy book buying in Swindon or Inverness. "Just because it may be a part of the country that isn't home to one of our finest universities doesn't mean there aren't people who want to buy computer books in depth, or psychology books in depth, or explore American fiction. There's a hunger for exposure to good books."

The Waterfields store is busier now. Those browsers who have made a determined trip may be outnumbered today by those seeking refuge from the chill, but Borders and Downer are happy either way.

joel.rickett@bookseller.co.uk