2011Jul25 Borders Is No More

Borders Books is no more.  When filing for bankruptcy reorganization, it closed 228 stores. Having received no bids to buy the company, it will auction (or dump) the remaining 300+ stores nationwide by the end of September. Its closing means another 11,000 people will join the unemployed.

In malls where Borders was an anchor drawing foot traffic, an additional 25,000 square feet of space will become vacant. That will nearly double the vacancy rate in its typical mall location. It means a loss of ad revenue for news papers and a loss of sales for the mall’s other tenants. In the mid-90s, Borders was at the top of the heap in establishing the box store concept.

Should we weep? It has followed other dominant players down the road of an inflexible business model such as Linen N Things, Circuit City and Block Buster. Avid fans of Borders will weep just until they realize that they, too, have been buying books from Amazon or other on-line sources. On-line is the new business model that Borders was too late in adopting to maintain its market share. Further, e-books don’t sell for enough to cover the costs of cushy retail sites.

Consumers adapting to technology, to increasing demands on their time, changes in lifestyle associated with aging demographics and spending less over all contributed to Borders’ demise. It has become one more “buggy whip” in an economy that adapts to retail reality. We call it a free market. Satisfied consumers determine successful business by their collective decisions to spend money.

As for our economic recovery, it is no wonder why so many are perplexed today. A jobless recovery is an oxymoron. A jobless recovery is a depression in slow motion. Borders’ 11,000 employees will be joined by 6,500 from Cisco. Lockheed Martin will add another 6,500 while Goldman Sachs drops 1,000. The financial industry consolidation has left it with too many duplicate positions which must go. Further down the food chain we find Cracker Barrel’s staff reductions due to reduced consumer spending. These lay offs have a domino affect with reduced spending placing down-sizing pressure on community businesses.

How does this happen in an economic recovery? In part, the “good news” we get from the media is due to the presentation of favorable statistics. Plus, leaders in business and government apparently do not understand predictable changes in spending patterns due to an aging population.

For instance, the national factory utilization rate tracked by the St. Louis Fed is an economic indicator with a positive trend. Since the recession’s end, Capacity Utilization Rate, or CUR, has risen sharply though not to previous highs. It has typically meant that business was doing well and new employment should be on the horizon.

The chart illustrates a sharp recovery from the end of the recession which is typical. What the chart does not show is the details. When Borders closed its first 228 stores, it almost doubled its utilization rate because the remaining stores were more productive. With less money spent on rent, inventory and staff, what remained should have created a better use of capital.

The same applies to Cisco’s selling a whole division in addition to its staff reductions. It is now a smaller company with fewer employees and related costs. It is smaller but its utilization rate improves. Re-opening a plant has big costs. These closings would not occur if management viewed future business as expansionary.

These changes take time as management realizes, often slowly, that their previous, prosperous assumptions have become unrealistic. The problems at GM have been known to management and observers for years. GM has lost approximately 1/3 of its market share in the past decade. That is not evidence of a healthy business model.

The government bail out allowed GM to leave bankruptcy but not without serious damage to its image and its operations. Bankruptcy allowed it to do what it had been unable to negotiate with its unions. In June of 2009 it announce the closing of 14 plants plus 34 more in 2010 and 33 more by the end of 2012. The closings result in less capacity. The remaining capacity is better utilized; therefore, we see improving economic statistics while unemployment increases. Remember the domino affect. Closing 81 plants will stress other businesses in those communities.

If you can’t sell what you are making, you make less of it. You can’t pay people to not make your product or to keep your factory open for employees with nothing to do. Employees do not have the power to keep factories open when consumers aren’t buying their output. That is a Socialist mentality. In a free economy, people make their own decisions on what to buy and when. Business adapts or dies.

The unemployed compete with 110,000 monthly new entrants to the job market from high school and college who will often work for wages well below the expectations of the newly, but experienced, unemployed. The result is wage depression and mental anguish adjusting a lifestyle and family needs to a permanent loss of income.

The result is less spending. That results in lower sales. That results in store closures and fewer employees. That results in lower household incomes and lower tax revenue for government.

The result is less spending…. Do you see the cycle? Can it be reversed? Yes. It can and will because we have a population that has decided to have babies. Babies create new spending needs with each year of life. The teen-age years are the most expensive and have been the impetus for much of our economic expansion over the past 40 years.

As the Millennial’s children reach adolescence, our economy will have a new and strong engine of growth. We are the only Western economy that can make that claim. Celebrate families with children. They truly are our future economically, as family, and as a nation.

In the meantime, we will have periods of economic sputtering like a car low on fuel only to have some Good Samaritan stop with a gallon of gas to restart us. The markets will behave in like manner – surging and falling back.

We need only to look at Japan to see what happens. Repeated government intervention has failed to reverse a shrinking population which, with age, is increasingly not inclined to spend. The chart above looks much like the Japanese stock market – up and down with a declining trend. Expect the same for this decade. Buy and hold is dead.