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Amazon Deal Lets Borders Focus On Core Business

Amazon.com Inc.'s deal to manage Borders.com is yet another indication of its new resolve to be online shopkeeper for retailers that would rather focus their energies on offline selling.

In an announcement yesterday, Amazon agreed to handle e-commerce for Borders Group Inc., the nation's No. 2 bookseller, which has been dogged by a poorly performing online store.

“We want to continue to provide our customers with the online shopping option,” said Anne Roman, corporate affairs counsel at Borders, Ann Arbor, MI. She added that the Amazon deal “allows us to focus on our core business, which is our chain of over 350 retail stores worldwide.”

More than 70 executives working at Borders.com will lose their jobs, though efforts will be made to absorb them into Borders' brick-and-mortar operations.

“I think it's really kind of a focus on their core competency,” said Derek Leckow, senior investment analyst at Barrington Research, Chicago, who follows Borders. “In this case, Borders' core competency is running the bookstore.

“Basically, Borders is getting out of the direct-to-consumer business,” Leckow said.

The deal mirrors one inked by Amazon in September with Toys 'R' Us, Paramus, NJ, for a co-branded online store selling toys, video games and baby products. It is part of a new strategy to strike strategic alliances designed to help Amazon and its partners compensate for their weaknesses.

Debuting in August, the new Borders.com store will offer books, music, videos and DVDs. Borders will supply store location details and a calendar of in-store events. Amazon will supply inventory, customer service, content and fulfillment.

Borders will get a cut of every sale made on Borders.com. It will pay Amazon an upfront fee for managing the online store on its behalf.

“We've spent a lot of time and investment with making [Amazon] easy to use for our customers,” said Patty Smith, spokeswoman for Amazon, Seattle. “As this platform has developed, we thought about ways of making its attributes and benefits available to customers of other companies.

“We've done deals with companies like Apple [Computer], where we've licensed our 1-Click technology, and Toysrus.com, which has a strong look and feel of Amazon,” Smith said.

But there are differences between the Borders.com and Toys 'R' Us alliances.

Under the 10-year agreement with Toys 'R' Us, Amazon will provide site development, order fulfillment and customer service for the co-branded site. Toys 'R' Us will identify, buy and manage inventory. Amazon will house the inventory in its distribution centers.

This way, Amazon gets much-needed support from Toys 'R' Us to manage inventory in the seasonal toy business.

By contrast, the Borders.com deal poses little trouble: Since books can be returned to publishers for credit, inventory management is not an issue.

The latest deal gets rid of a major millstone from Borders' neck.

Borders.com reported sales of $27.4 million last year, placing third in online revenue after Amazon's $1.7 billion and Barnes & Noble.com's $320 million. Losses at Borders.com were $18.4 million last year.

Borders Group, its parent, said this February that it would take a one-time charge of more than $20 million to record the depreciating assets of Borders.com.

More importantly, the Borders.com alliance also benefits Amazon, which issued an advisory on April 9 saying that its first-quarter sales and profit margins were better than expected.

The new Borders.com will link to Amazon but not vice versa. Borders.com customers may be tempted to click through to Amazon, Smith said.

“Well, we want them to buy the same products that they might at Borders, but we also want them to come over and discover the other product categories we have beyond books, music, video and DVD,” Smith said.

“A lot of folks may not realize that Amazon now sells kitchen and housewares,” she added, “so we hope that through the newly relaunched Borders.com site, it'll gain Amazon a greater familiarity and they'll want to shop with us as well.”

Amazon has little fear of cannibalizing its own sales with this Borders.com deal.

“In this case, Amazon owns the inventory for both sites, Borders.com and Amazon.com, so it doesn't really matter to us,” Smith said. “We're happy wherever the customer purchased the item.”

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