Border Books: Business Environment and Marketing Strategy - Case Study Example

Border Books: Business Environment and Marketing Strategy Introduction Border Books, a retail book chain in the United Kingdom, came into existence in 1988 when the US-based chain took over Books Etc. and opened its first store in the country. The company also owns the e-commerce website Borders.com and US subsidiaries, Borders Group Inc., include Borders Inc., Walden Book Company (which has 885 mall-based bookstores) (Modi et al., 2000). At present, the company, with 42 Border Books stores and 28 Books Etc., is the third-largest book seller in the United Kingdom, with an 8 percent market share, revenues of GBP 223 million and profits of GBP 2 million. Recently Luke Johnson, owner of the Pizza Express retail chain, bought Border Books in the UK (Smith). The US-based group sold out its UK operations, deciding to concentrate on its domestic US market, facing intense competition from supermarkets and online retailers and posting loss of GBP 50 million last year (Teather, 2007). In this paper, I will analyze the business environment of Border Books in the United Kingdom and its marketing strategy, including the segmentation, targeting and positioning possibilities. Business Environment The book market in the United Kingdom is the largest in Europe and growing faster than those in France and Germany. The retail book market in the UK was estimated at GBP 4.11mn in 2005, a 3.5 percent growth over the previous year. About two-third of the sales is accounted for by consumer sales while the remaining is accounted for by academic, professional and sales books. The leading booksellers in the UK are WH Smith, Waterstone's, Amazon.co.uk. Borders, Ottakar's and Book Club Associates. Amazon.co.uk (researchandmarkets.com). In the UK, publishers produce about 12,000 titles a year and about 30 to 40 percent of the people ever buy a book (Smith). The book market is increasingly becoming competitive, with the brick and mortar independent and chain book stores are facing competition from online stores and supermarket stores. Globally, the book market is in a matured stage of the business cycle. In the 1970s and 1980s, the book market was in an upswing, with new stores opening to serve increasingly new segments of the market, new authors and publishers coming into the market every year. By the 1990s, the industry reached a matured stage, with the market getting saturated and the evolution slowing down. The demand for books too began to slow down. It has been found that with faster economic growth, growth in book sales slows down. Typically in good times, the more prosperous groups of consumers slows down book purchases as spending on more luxury items increases (Modi et al., 2000). PEST (tutor2) analysis, that is studying the political/legal, economic, social and technological environment, is concerned with analysing the business environment that a company faces. There are four detailed analysis objectives: 1) The political and legal: Border Books has a favourable political and legal environment since UK has a stable democratic system. 2) The economic: The economic environment in the UK is also favourable with the economy reviving the slowdown in the recent past. 3) The social: The social environment is moderately favourable and the company has to overcome the competition from other media distractions like ipod, itune and mobile phones. 4) The technological environment: The technological environment, too, is favourable since book publishing does not involve very sophisticated technology. The competition from book selling on the internet can be turned from a threat to an opportunity if the company increases its focus on online selling. At present, it has an arrangement with Amazon to sell books online and plans to have its own website in the UK soon (Smith). The organized retail market is a highly competitive one partly because of the commoditization of the products sold. However, books are different from other retail products and can be differentiated to a large extent. According to Porter’s (1980) theory, the level of competition in an industry is defined by the five forces: 1) the threat of entry of new competitors (new entrants), 2) the threat of substitutes, 3) the bargaining power of buyers, 4) the bargaining power of suppliers and 5) the degree of rivalry between existing competitors. The model can be elaborated in the following diagram. (Source: Porter, 1980) The business environment depends on the level of industry competition and the intensity of rivalry, which in turn depend on the threat of new entrants into the business and that of substitutes as well as how well the company can manage its buyers and suppliers. The intensity of rivalry between players also depends on the number and size of players, cost structure of the industry, level of product differentiation, customer-switching costs, level of aggression exhibited by players and exit barriers. Books are increasingly facing competition from substitutes like television, going movies and renting CDs and DVDs, listening to CDs, tapes and radio, playing computers and video games, surfing the Internet and outdoor games. There is intense competition for leisure time and dollars from adults and teenagers. Some of the leisure activities, like television, do not require spending of money. Hence, booksellers need to consider the cost of books when targeting these segments of consumers. Typically, older people read more number of hours than young people and teenagers (Modi et al., 2000). The book market, typically the brick and mortar one, has high entry barriers since it requires considerable investment to build book stores. Large book store chains like Barnes and Nobles, Border, and supermarkets like Wal-Mart, are located in prime locations hence it is virtually impossible for new entrants to provide competition to these giants soon. Besides, high product awareness and large marketing budgets of the industry majors make it all the more difficult for new entrants into the market. As a result, independent books stores and small chains have been losing market share globally since the 1990s. The online book stores and the mall-based stores are providing tough competition for traditional book store chains, particularly with the large retailers selling at heavy discounts. For example, the sale of J K Rowling’s Harry Potter and the Deathly Hallows at half the listed price of GBP 17.99 is considered to have put the independent stores under severe stress (Smith). The book market is an oligopoly with the major players capturing most of the market. Although there is high rivalry between different types of book stores, there is little product differentiation since there is no major difference in the titles stocked by the competitors except the choice of the genre of books stocked. A customer can buy a particular book from an independent book store, a chain book store, a mall-based book store or from an online book store. Particularly, the absence of sales tax for books sold online poses a stiff competition to books sold by brick and mortar stores. Buyer power is very high in the book retailing market but it ultimately depends on the need and requirement of the buyer. For example, if a customer wants to buy a travel book, he might go to different types of stores depending on his requirement. If he only wants to have a general overview, he might read about a travel destination on the Internet and save money and time he would have to spend to buy a book on the subject. If he wants to have a book at hand while traveling he might either order at an online bookstore or go to a physical store. If he is short on time, he would rather go to a brick and mortar store (Modi et al., 2000). Supplier power in the book market is moderate. Book retailers can purchase from alternate publishers and wholesalers. The supplier power of publishers originates from the distribution of titles through copyright protection, list prices and retailers’ margin. However, publishers tend to push titles through intensive discounts thereby reducing supplier power. Larger retailers have significant powers over the publishers because of the large purchasing volumes. Marketing Strategy Border Books is an integrated seller of books, music and video. The parent company pursues its expansion strategy by integrating the online and brick and mortar stores. Each superstore that also includes cafes offers a diverse variety of books and environment. Border Books has developed the intangible capabilities which, according to the VIRO (Valuable, Rarity, Immitability, Organization) model, developed by Barney (2005), are required for it to maintain strategic competitive advantage. Johnson, the new owner of the group, claims that Border Books has a distinct space in the book market in the United Kingdom supermarkets sell only a short list of bestsellers while Border Books has a far deeper range of titles (Smith). After the takeover, Johnson plans to improve the retailing infrastructure by streamlining inventory, better use of shopfloor, improve stocktaking and publicity, introduce new range of titles and new product range including computer games, and expand the stationary section (Smith). Border believes that the traditional forms of music and video through CDs and DVDs will not peter out with the onslaught of digital forms like the itune and ipod. In the Ansoff (1965) matrix presented below. Risks are lowest when market penetration is attempted by present or existing players. Market development by a new player and product development by the existing player lies at the next levels of risks while diversification has the highest risks involved. Border Books is a relatively strong existing player in the book market in the UK and hence has only moderate risks in the short to medium term. It is now attempting product development in the entire range of books and entertainment. (Source: Ansoff, 1965) In the traditional scheme of book retailing, publishers sell books to wholesalers, who in turn sell to large retailers that again sell to small retailers. Customers then need to be physically present in the book stores and the location of the stores become crucial. At the next stage of evolution of the book retailing business, mail-ordering became a viable alternative to physical buying of books from stores through which customers can place orders on the basis of catalogues. Mail-order services also provide value added services like reviews and recommendations to readers. This system not only provides more convenience to the readers, it also reduces overhead costs of the retailers, thereby allowing them to sell at lower listed prices to the customers. Over the last twenty five years, chain stores have been the major change in book retailing. Although this system does not have the advantage of off-location selling, this system has the advantage of storing large database of titles and the ability to mail any title possible. The mall-based book stores have combined book retailing with other value added services like coffee bars, comfortable seating arrangements, computer terminals accessing store databases and large magazine racks (Shrikhande and Gurbaxani, 1999). Online retailing, pioneered by Amazon.com, during the 1990s changed the rules of the game for book retailing. New marketing techniques, new technology and new channel strategy have together changed the book retailing scenario. Most retailers, even the physical ones, are now combining offline and online marketing strategies (Fahey, 2003). Book retailing has become the most successful online selling sector. Yet, conventional book sellers have been able to sell more titles, at 30.8 million during the Christmas sales of 1999. Typically during the festive seasons, traditional book retailers fare better than online sellers hence Border Books should plan its seasonal sales accordingly (Reynolds, 2000). Segmentation Book buying is strongest in the A and B social grades, which is strength as well as a weakness of the market. Booksellers and publishers can easily target the customer base that is easily identifiable. However, the customer base is not wide enough. The market classifies ‘heavy book buyers’ as those who buy ten or more books a year. A very important aspect of book retailing is communication with buyers and readers. Besides catalogues, the online store enables Border Books to engage in e-mail communication with a larger database of readers. In the recent industry of book retailing, there is increasing tendency of diversification of retailing of CDs, DVDs, stationary, etc. However, as Johnson notes, the market for CDs and DVDs are on the decline as more customers are switching to digital entertainment media. Hence, Border Books has decided to focus on its customer orientation towards niche and specialized books. A 2006 study found, quoted by Robinson (n.d) that 68 percent of book buyers visit physical book stores for purchases while 43 percent bought books from department and discount stores and 23 percent bought online in the UK. As much as 71 percent of people in the age group of 18-34 years and 73 percent in the age group of 35-44 years buy books from physical stores. Another survey found that 10 percent of trade books were bought from small book chains while 24 percent were bought from large chains. Other book outlets include mass merchandisers, discount stores, food and drug stores, price clubs, used book stores, book clubs, mail order and the internet. Since the Border focuses on specialized books, it could segment its customer base according to special interests like travel, cookbooks, etc. as well as other categories like academic, religious, antiquarian or used books (Robinson, n.d). Targeting Border Books has over the years targeted the serious reader that extends beyond the reader of bestsellers from shopping malls, the main competitors now. The inventory management of Border Books is a key strength of the retailer. Its just-in-time book replacement system enabled by efficient operations and networking with publishers and wholesalers are its main assets. Enhancing the operations will enable Border Books to offer discounts at par with mall-based book stores and online stores like Amazon or online-physical formats like Barnes and Noble. The retailer uses extensive promotions through television, targeted radio, press and outdoor advertising but not usually through catalogues. Book retailing in the United Kingdom is facing intense competition from supermarket sales and online retailers, both categories being able to offer huge discounts to customers. For example, the seventh Harry Potter book released earlier this year was sold at huge discounts by all supermarkets: Asda, a subsidiary of Wal-Mart sold it at GBP 5 and Tesco sold at GBP 8.99 while the listed price was GBP 17.99 (Rosenheim, 2007). As a result, all the book retailers in the UK, Waterstone’s, Border and W H Smith had to sell the book at GBP 8.99. lower than the wholesale price of GBP 10.74. In order to review its own targeting strategy, Border needs to study competitor strategies. For example, Waterstone’s has initiated a centralized consolidation center for distribution of children’s books, which are less susceptible to online sales. Waterstone’s has also targeted 10 percent rise in online sales through its own web site rather than routing through Amazon (Rosenheim, 2007). Positioning Border Books has positioned itself as a niche seller of serious books although it also competes in the light reading and other entertainment products like music and video. The e-commerce site, Border.com operates from the United States parent company. The UK venture also partners with Amazon.co.uk and plans to have a UK-based e-commerce soon. The stores have been positioned as comfortable space complete with cafes, known for convenient shop floor use and easy retrieval systems. The company must strengthen its customer-based positioning strategy in order to increase market share in the intensely competitive scenario. In order to be successful, a retail chain has to streamline the inter-relationships of the various aspects of functioning. At the customer level, inventory levels have an immediate effect on sales as the stocking scenario is the most visible aspect. However, the inventory is ultimately dependent on merchandise planning, cash flow management, buying planning, which are not visible at the customer level. In the current environment of web-enabled book retailing, Border Books has to strengthen its internet selling mechanism. Since Border Books operates both offline and online, it has an advantage over the web-only retailers like Amazon. According to Internet Retailer, retail chains control nearly 40 percent of online retail sales while web only retailers have a 24 percent share (Love, n.d). In order to position itself online, Border Books needs to communicate effectively on store stocks and churn the merchandise effectively. Border is diversifying into e-tailing after being taken over by Johnson. However, the owner must keep it in mind that competition is also intense among e-tailers as it is evident by the narrowing of margins of Amazon and Barnes and Noble. Hence, the crucial key to success is the expansion of the product range and expansion across markets, including international sales. For example, Border can target markets across Europe, particularly in the English-speaking region as well as in other European language titles in order to capitalize on multiple market opportunities. Recommendations From the analysis above the following recommendations are made for Border Books in the United Kingdom: 1) The company improves its inventory management and shelf stocking so that the flow between customer demand and shelf availability is smooth. 2) The company increases its relationships with wholesalers so that the movement of titles is streamlined. 3) The company increases its focus on e-commerce by making its web site more proactive since the main competition in the present day book market is online. 4) The company maintains its focus on niche books and dissociate slowly from the CD and DVD markets since the latter markets are dissipating in the scenario when ipods, etc. are on the rise. 5) The company increases its focus on mall-based stores from its current independent bookstore chains since book sales have tended to become integrated with other entertainment avenues. 6) The company expands into other European and Asian markets which are growing. References Smith, David, Entrepreneur begins new chapter for borders books Former pizza Express president aims to revive high street chain after surprise £10m purchase. Research and markets.com (2006). Research and Markets: Amazon.co.uk Is the Fastest Growing Bookseller in the GBP 4.11bn Retail Book Market, Business Wire, April 24. Available Online http://findarticles.com/p/articles/mi_m0EIN/is_2006_April_24/ai_n16131924 (accessed on 19 November 2007) Modi, Tarak et al (2000). Strategic Audit: Barnes and Noble, April 20. Retrieved from www.teknirvana.com/internal_documents/BarnesAndNoble.pdf PORTER, M.F. (1980). Competitive Strategy, The Free Press, New York ANSOFF, H I. (1965). Corporate Strategy: An analytic approach to business policy for growth and expansion, McGraw Hill, New York BARNEY, J.B. (2001). Gaining Sustainable Competitive Advantage, 2nd Edition, Prentice Hall; 2 edition. Love, Jack (n.d). The web-enabled chain store. Internet Retailer. Available online http://www.internetretailer.com/internet/marketing-conference/30055-web-enabledchain-store.html (accessed on November 19, 2007) Shrikhande, Aarti and Viijay Gurbaxani (1999). Competing in Book Retailing: The Case of Amazon.com, Center for Research on Information Technology and Organizations. Available Online http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1140&context=crito (accessed on November 19, 2007) Fahey, Liam (2003). Competitor Scenario, Strategy and Leadership Journal, Vol 31, No 1, pp 32-44 Rosenheim, Andrew (2007). The Changing Face of UK Book Retailing, Publishers’ Weekly, August 13 Reynolds, Jonathan (2000). E-Commerce or Bust? Templeton Views, Available online http://www.templeton.ox.ac.uk/news/pdf/ViewsTrinity2000.pdf (accessed on November 19, 2007) Teather, David (2007). Borders retreats from Britain to concentrate on US book chain, The Guardian, March 23. Chakraborty, R and B Scholnik (2001). International expansion of e-retailers: Where the Amazon flows. Thunderbird International Business Review Journal. Vol 44 No 1. Pp 85-104 Robinson, William C (n.d). Retail Book Selling. Retrieved from http://web.utk.edu/~wrobinso/561_lec_retail.html Read More