What Was Behind the Borders Web Reversal?

Analysis: As Borders executives discussed the various reasons they severed their multi-year partnership with Amazon.com on Thursday, the most critical was the least expected: taxes.

As Borders executives discussed the various reasons they severed their multi-year partnership with Amazon.com on Thursday, the most critical was the least expected: taxes.

As a pure online play, Amazon.com was an ideal long-term partner for Borders as there was no physical store conflict. But as the years passed, that initial advantage quickly turned into the Amazon Albatross, as the online retailer couldnt do anything in-store, for fear of running up huge tax bills in various states.

As has happened with so many retailers who strive to be multi-channel, they instead end up being what Google retail head John McAteer has called "being multi-silo-ed."

For Borders officials, having a good Web site that was distinct and apart from a lot of good brick-and-mortar stores made perfect sense in the late 1990s. But in 2007, it simply no longer worked.

"Being a world-class cross-channel retailer is integral to our future," said Borders Chief Strategy Officer and Executive Vice President Rick Vanzura. "The only way were going to get there is to take control of our Web site."

Vanzura happened to have been president of Borders.com in 2000 when the Amazon deal was signed and he said that it was the right deal to make at the time.

"At the time, I told existing management, Look. This is just going to be way too expensive, way too hard, especially because we tried to do fulfillment ourselves. So the best thing we can do is to try and cut our losses here, work with the marketing elements to create a better marketing presence for the stores and find a partner who can really handle the e-commerce."

Does Vanzura regret that decision? He says no. "The Amazon agreement, I think, made perfect sense at the time and was successful at what it was intended to do, which was to stop the bleeding in late 1999, early 2000, on a very expensive Web site that was very distracting for our core business," he said. "It let us focus on our core business and find a way to actually make a little bit of money on the Web site."

But he stressed that so much has happened since 2000 that everything needed to be rethought. "In Internet terms, we are eons away from the late 1990s. If we had to revisit that decision, I would 100 percent make the same decision we did back when we signed the original agreement. The worlds changed and customer expectations have changed."

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The state tax issue was an immovable obstacle to future expansion, Vanzura said. The Amazon physical-world restrictions "kept us from having a really great cross-channel experience and being able to control our brand in the way we want."

But taxes were only one issue. The only crucial change is that it was a lot more expensive and complicated to create a major Web presence in 1999 than it is today. "Web technologies are a lot more advanced, a lot more mature, a lot more reliable, a lot more stable," Vanzura said. "And its a lot easier to find people who are experienced in running Web operations so the hurdle to being able to put up a credible Web site that you can at least make some amount of money on is a lot different than it was in the late 90s."

Analysts applauded the move, saying that its a trend of companies starting to take cross-channel issues seriously.

"Borders has recognized it’s time to go multi-channel for real," said Paula Rosenblum, a longtime retail analyst who serves as VP/Research and Content for the Retail Systems Alert Group. "You can’t do cross-channel promotion, ordering, and fulfillment right—or profitably—when your e-commerce provider has its own company and its own agenda."

Sucharita Mulpuru, the senior retail analyst at Forrester Research, agreed. "I think it points to something that retailers havent acknowledged for awhile, which is that online is indeed very important and that yes, it does cannibalize your store business a bit, so its important to keep it close," she said.

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