Monday, September 12, 2011

Borders Store No.1 Closes; We Should Celebrate. Powerful Market Forces Are Working Perfectly

The mighty force of "consumer greed" prevails again:
The original Borders store opened 40 years ago in Ann Arbor, Michigan as an independent bookseller, and after today its flagship two-story, 37,000-square-foot store there will close forever.  The remaining Borders in Michigan will be closed by the end of the week, according to this Detroit New article

The economic lessons here include:

1. Creative destruction.  When Borders started aggressively pursuing a Big-Box, Walmart-style discount retail pricing model, it was successful and profitable and its stores spread nationally, and then globally.  Like Walmart, Borders was frequently criticized for putting small, local, independent "mom and pop" booksellers out of business. But by providing a more efficient business model and supply chain, Borders was creating significant value for society through the process of "Schumpeterian creative destruction" that destroyed many small bookstores but created significantly greater value for consumers through lower prices, better selection and longer hours.  In the end, Borders itself fell victim to Amazon's online dominance, the emergence of Kindles and other e-readers, and an evolving marketplace that left Borders behind in a digital wake of "creative destruction."

2. Consumer sovereignty.  It's not completely accurate to blame Borders or Walmart when local merchants or independent booksellers go out of business. After all, neither Borders nor Walmart can force consumers to shop at their stores; all they can do is offer low-priced alternatives to the higher-priced independent booksellers and downtown merchants.  If the small local merchants don't survive, it's consumers and their "greed" for low prices that should get the blame, not Borders or Walmart. 

In a market economy, it is consumers, not businesses, who ultimately make all of the decisions, and that's the ultimate consumer power known as "consumer sovereignty." When we vote in the marketplace with our dollars, we consumers decide which products, businesses, and industries survive—and which ones fail.

It is therefore consumers who indirectly but ultimately determine business success, not corporations like Borders.  In the beginning, it was the power of consumers and consumer sovereignty that created Borders' success and dominance over independent booksellers, and in the end the same "will of the consumers" that brought about Borders bankruptcy and liquidation.  

3. Profit and Loss System.  A market economy's profit-and-loss system is an extremely effective monitoring mechanism that continually evaluates the economic performance of every business enterprise and its ability to serve consumers. When Borders was more successful at serving consumers than independent booksellers, it was rewarded with huge profits and it expanded nationwide and then globally with more than a thousand stores worldwide.  When Borders no longer served consumers as well as Amazon and other competitors, it was penalized with losses, and eventually forced into bankruptcy. Under a profit-and-loss system, unsuccessful firms like Borders cannot escape the strong discipline of the marketplace in the long run, which is beneficial because it ensures a constant reoptimization of resources and moves the economy toward greater levels of efficiency. 
  
As was noted on a recent CD post, the "failure of Borders is a glorious event," and today's closing of Borders Store No. 1 gives us reason to celebrate - it demonstrates that the market forces of: a) creative destruction, b) consumer sovereignty, and c) the profit-and-loss system, are all working perfectly.  To quote Anthony Gregory, "If voluntary competition should one day bring Amazon.com down, in the midst of a competing commercial success today unimaginable but even more friendly to consumers than that wonderful online store, we will again have reason to celebrate."

32 Comments:

At 9/12/2011 4:46 PM, Blogger Michael Hoff said...

And the government didn't step in to bail them out. They must not have been unionized.

 
At 9/12/2011 5:02 PM, Blogger Scott K. said...

Yes, it's just glorious that all those people lost their jobs. It's glorious all those empty buildings will never be used again, causing urban blight. It's never glorious when something closes. Yes, it happens, but it's still not glorious. Yes, it's the way the economy works, but it's not glorious. You are just plain rude to say it like that. To be happy that people are losing their jobs is plain sad on your part.

 
At 9/12/2011 5:06 PM, Blogger sethstorm said...

2. Consumer sovereignty
More like tyranny of the majority. Any sovereignty exists in the aggregate, not at the individual level. That means a business could market in a way that marginalizes individual preference - to the detriment of the individual consumer.

 
At 9/12/2011 5:51 PM, Blogger P.K. said...

"And the government didn't step in to bail them out. They must not have been unionized."

And you must be brainwashed. Which unions were involved with Citibank, Goldman Sachs, AIG, etc.? I'm not sure what economic system these firms fall under, but it sure as heck isn't free market capitalism.

 
At 9/12/2011 6:09 PM, Blogger Jim said...

There is no doubt that the Internet played a role in altering Border's business model, wich has turned out badly for them.

But implying that the Internet is the cause of Border's bankruptcy is not unlike saying Amazon is putting Sears out of business; it is not true.

Bricks and mortar companies have advantages that Internet companies do not have. That Border's did not leverage those advantages speaks more to poor management then the success of the Internet.

Many retailers ignore their physical and geographical advantages, which unnecessarily exposes them to fads, technology, and generally poor returns.

At some point I will publish in my local paper how I would have turned around Border's business model, if I can think of way to dumb it down enough to be interesting:)

 
At 9/12/2011 6:16 PM, Blogger Benjamin said...

As with newspapers, I am not sure I am thrilled that bookstores are getting shuttered.

I am not calling for any government actions--just saying, there is something being lost.

 
At 9/12/2011 6:56 PM, Blogger Methinks said...

but the joooooooooooobs!

 
At 9/12/2011 6:58 PM, Blogger Methinks said...

More like tyranny of the majority. Any sovereignty exists in the aggregate, not at the individual level. That means a business could market in a way that marginalizes individual preference - to the detriment of the individual consumer.

YES, Sethstorm! Brilliant. Imagine how much money you could make serving consumers.

When will you stop contributing to unemployment by starting a business and hiring union labour? How long will you hold the economy hostage by not doing so?

How long before we can expect you to correct the wrongs?

 
At 9/12/2011 8:17 PM, Blogger Hydra said...

Yay. I'm really happy to see borders fail.

 
At 9/12/2011 8:21 PM, Blogger Michael Hoff said...

P.K.

Yeah, that made sense. Bye now.

 
At 9/12/2011 9:54 PM, Blogger aorod said...

Books are too expensive. And maybe their debt had something to do with it.

 
At 9/12/2011 10:12 PM, Blogger Michael E. Marotta said...

Here is a link to the Fortune 500 that you can see change year by year:
http://money.cnn.com/magazines/fortune/fortune500_archive/full/1955/

It is unfortunate that Borders failed. Hindsight is always 20/20. You can find all ranges and domains into which to fit isolated facts about this. Myself, I think of the freeloaders who never even bought coffee but who sat in the cafe section reading newspapers and magazines for free. You can blame (or praise) Amazon, but I see both more and less in this. In aviation, we speak of an "accident chain." No one thing brings you down; but if you had attended to any one element in the failure mode the accident would not have happened. So, too, here.

Ultimately, we have to face the fact that all "living" things are born, flourish, mature, decay, and die. It would be interesting to create a "steam punk" science fiction story set in 2000 with the British East India and Hudson's Bay and Dutch East India Companies, with Union Pacific airliners and IBM cellphones and Edison-TV geosynch satellites. But, admittedly, that would be a work of imagination, not reality.

 
At 9/12/2011 10:14 PM, Blogger Michael E. Marotta said...

BTW, I just moved from Ann Arbor to Austin. The demise of Borders was the final fact: another 1000 clericals in the street, looking for work...

 
At 9/13/2011 12:18 AM, OpenID Sprewell said...

Scott, perhaps the word "glorious" feels a bit much, but considering how many other places this wouldn't be allowed to happen, it is glorious that it does happen here in the USA. In Japan, many businesses simply were not allowed to fail or fire employees in their '90s bust, which is one of the reasons they've never really recovered in the ensuing decades, decades! Empty buildings are a fact of life, as the internet is about to kill off many more bricks-and-mortar businesses. As for those losing their jobs, it's an opportunity to go do something else that people actually want, so yes, it's an opportunity even for them.

Jim, I think you greatly overestimate the advantages of bricks-and-mortar businesses, which is why they're about to be devastated by online shopping. Even Barnes & Noble is teetering, the book itself is about to go away. Why not tell us how you'd have saved Borders? You wouldn't even have to dumb it down. ;)

 
At 9/13/2011 2:15 AM, Blogger juandos said...

"Yes, it's just glorious that all those people lost their jobs. It's glorious all those empty buildings will never be used again, causing urban blight"...

Well Scott K here's YOUR chance to prevent all that by stepping up with YOUR wallet and either buying the building or leasing it and then go out and hire all the Borders' employees that are now unemployed and start paying them to stand around in YOUR building...

 
At 9/13/2011 2:19 AM, Blogger juandos said...

"2. Consumer sovereignty
More like tyranny of the majority. Any sovereignty exists in the aggregate, not at the individual level
"...

Well sethstorm why don't you hook up with scott k and you can make it a joint venture of buying or leasing the building with YOUR money also and then start paying those now unemployed ex-Borders' employees a paycheck...

Now what would be a good name for a business like that, hmmm?

 
At 9/13/2011 2:25 AM, Blogger juandos said...

"I'm not sure what economic system these firms fall under, but it sure as heck isn't free market capitalism"...

Well p.k. personally I think you bring up a valid point, a very good point in fact...

Maybe that sort of capitalism is called, "crony capitalism"...

 
At 9/13/2011 5:19 AM, Blogger Methinks said...

And you must be brainwashed. Which unions were involved with Citibank, Goldman Sachs, AIG, etc.?

They belong to the same inner circle of cronies as the UAW.

 
At 9/13/2011 5:23 AM, Blogger geoih said...

In the interest of accuracy, the "Borders #1 Store" in your pictures was not the original Borders store. The original Borders store was around the corner in a much less attractive building.

The store in your pictures was the old failed Jacobson's department store before Borders took it over. Creative destruction indeed.

 
At 9/13/2011 5:32 AM, Blogger geoih said...

Quote from sethstorm: "More like tyranny of the majority. Any sovereignty exists in the aggregate, not at the individual level."

People don't shop in aggregate any more than they eat in aggregate.

 
At 9/13/2011 7:33 AM, Blogger sethstorm said...


People don't shop in aggregate any more than they eat in aggregate.


However, the effects from "consumer sovereignty" are expressed in the aggregate - as groups of consumers unaware of each other. It does not preclude businesses from marginalizing consumers through a limited set of choices.

 
At 9/13/2011 7:57 AM, Blogger Methinks said...

It does not preclude businesses from marginalizing consumers through a limited set of choices.

In other words, you admit you're marginalizing consumers by not offering them more choices.

When will you start a business to both reduce the unemployment problem and expand consumer choices? Why are you holding the economy hostage, Sethstorm?

Put up or shut up.

 
At 9/13/2011 8:13 AM, Blogger morganovich said...

"However, the effects from "consumer sovereignty" are expressed in the aggregate - as groups of consumers unaware of each other. It does not preclude businesses from marginalizing consumers through a limited set of choices."

that's absurd.

if there are all these big unmet needs from marginalized consumers, then i echo methink's sentiment: serve them and get rich.

you seem to have a strong sense of unmet needs. so meet them. that's what entrepreneurial capitalism is all about.

i think you'd be pretty hard pressed to find any kind of product at all in which there is less variety than there used to be 20 years ago (except as the direct effect of government regulation).

 
At 9/13/2011 8:20 AM, Blogger morganovich said...

scott-

"It's glorious all those empty buildings will never be used again, causing urban blight"

you have to be joking.

restaurants fail all the time. new ones take over the space. the same is true of stores, factories, whatever.

since when do the buildings of a defunct enterprise have to stand vacant forever?

that sure isn't how i've seen it work.

regarding "urban blight" i think you have the causality backwards. a boarders in SF will be filled with something new in short order. the reason you get blight in places like detroit is not businesses leaving but because the economy there sucks and drives businesses out. it's not businesses leaving that causes urban blight, it's urban blight that causes businesses to fail.

then, when it gets cheap enough, you get a renewal (as has happened in parts of oakland.

that's the cycle of life.

also note:

it's not a sign of net job losses, just specific ones.

the reason boarders failed is that prices went down. that harms their employees, but benefits all buyers of books. they then have more money left to spend on food or dvd's or whatever which, tah-dah, creates jobs.

competition is good for the consumer, and what's good for the consumer is good for jobs and quality of life.

 
At 9/13/2011 9:22 AM, Blogger geoih said...

Quote from sethstorm: "However, the effects from "consumer sovereignty" are expressed in the aggregate - as groups of consumers unaware of each other. It does not preclude businesses from marginalizing consumers through a limited set of choices."

And I can measure rain drops, but that won't tell me anything about how it rains.

Your aggregate measures are meaningless because there is no cause and effect relationship between what you're aggregating and what is actually happening.

 
At 9/13/2011 12:14 PM, Blogger MaggotAtBroad&Wall said...

What's glorious is that scarce resources will no longer be used sub-optimally.

The employees voluntarily chose to work at Borders. They saw, or should have seen, the business was becoming increasingly irrelevant and uncompetitive. They had no duty to go down with the sinking ship. They did, however, have a duty to look out for their own best interest. Maybe that means they should have sought employment elsewhere. Or quit Border's to get themselves re-trained with a skill set that would make them more marketable in the job market.

That the first thing someone thinks about is the plight of employees who chose to work for an obviously failing business model just demonstrates how little we value the notion of personal responsibility anymore. It's quite sad.

 
At 9/13/2011 8:46 PM, OpenID Sprewell said...

Seth, do you have any actual examples of marginalizing "individual preference - to the detriment of the individual consumer?" I do think we don't have as much choice as possible today, largely because the online transition hasn't fully taken hold yet. I was just buying my groceries online at safeway.com and was struck by how little choice there is for some fundamental items, like kettle chips or mayo, particularly when compared with the vast selection I'm used to for many other items I buy online. However, I think the internet is about to upend most of these existing models, whether the grocery store or the electronics store to bring much more choice to the consumer, to the point of customized food or other items, so whatever expanded choice you miss is about to arrive soon. :)

 
At 9/14/2011 12:39 AM, Blogger Don Culo said...

Let's all hope Wall Street collapses, the big three U.S. automakers go bankrupt, that will be a grand celebration of Market Forces.

 
At 9/14/2011 1:31 AM, OpenID Sprewell said...

Hear, hear, Don, that's exactly what will happen next. :D

 
At 9/14/2011 7:40 AM, Blogger sethstorm said...


I think you'd be pretty hard pressed to find any kind of product at all in which there is less variety than there used to be 20 years ago (except as the direct effect of government regulation).

Unfortunately, the lack of choice, for cars at least, is a function of overzealous environmental regulation. It doesn't get rid of the large cars, it simply just moves them to the few - while moving the rest to glorified golfcarts. See Europe for an example of enviros gone mad.

 
At 9/14/2011 7:31 PM, Blogger Scott K. said...

juandos: Not what I meant. My post says that I know it happens and it's the way it's supposed to happen, but one should not think that it's GLORIOUS. It's sad they didn't run their business better, manage the trends, grow with current trends, etc. It's never good for the person who loses a job, either. We all know it happens, but it is not a GLORIOUS event. I never said I wanted to step in or have the gov't step in, did I? I don't want the gov't to step in, not at all. It just goes back to that the author is filled with such glee that bad stuff is happening to people.

 
At 11/14/2011 12:43 PM, Blogger jonsteiman said...

In the wake of Borders closing, I wondered how many total square feet of retail space would be vacated due to digital distribution. According to my analysis, it's about the size of the island of Manhattan. See the analysis here:

http://www.jonathansteiman.com/1/post/2011/07/borders-books-is-down-14-square-miles-to-go.html

 

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