Rewriting the Ending

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And so the closing of Kepler's was a blow he took personally. How could this be? he wondered. Wasn't there anything that could be done? Just then he noticed a group of Kepler's employees sitting in the restaurant. He approached one and asked what had happened. She said that the combination of high rent and a bad economy had proved more than the store, and Clark Kepler, could bear. "Well, is there any way that I can reach Mr. Kepler or the people in charge of the store?" Méndez asked.

"Why?" she asked. "Do you know any investors?"

"Well, yes," he said. "As a matter of fact, I do."

"It was like a death sentence"

Clark Kepler recalls feeling a kind of relief when he finally decided to close the store. For more than a decade, he'd been fighting a losing battle to keep it alive. It hadn't been so bad in his early years of running the business, after his father was diagnosed with Parkinson's disease in 1980 (Roy Kepler died in 1994). Although the rise of the discounters had begun to squeeze the company's margins, sales had skyrocketed in the early 1990s, thanks mainly to Kepler's decision to move to a larger, more accessible location.

Then, suddenly, he'd been hit with a double whammy. First, he had discovered massive embezzlement by a bookkeeper who had worked for Kepler's longer than he had. His accountants were ultimately able to document--and recover--more than $300,000 in stolen funds. At about the same time, Barnes & Noble and Borders had come to town, and Jeff Bezos had begun beta-testing his new website, Amazon.com.

By early 1996, Kepler knew that his business was in trouble. Sales had declined. Profit had disappeared. Cash flow was tight and getting tighter. Meanwhile, the bookselling business was being utterly transformed. Kepler found himself facing an entirely different industry from the one his father had competed in 20 years earlier. In those days, bookselling had been more of a calling than a business, dominated by people who, as Kepler says, "loved books and didn't want to have a real job." Net pretax profit ran about 2 percent of sales, which bookstores considered acceptable. Then the discounters and chains came along. They focused on books with an established market, notably bestsellers, and bought them in much larger quantities than a small, independent bookseller could. As a result, they could insist on a lower price from the publisher, pass some of the savings along to customers, and still earn a decent profit. The independents, which couldn't play that game, saw their already thin margins vanish.

For a store like Kepler's, the new order created other problems as well. Both Roy and Clark Kepler had prided themselves on the breadth and depth of their inventory. They carried books that were hard to find anywhere else. That, along with the knowledge of the staff and the in-store experience, was what differentiated Kepler's from its competitors. But it could afford to keep so many books on hand only if the publishers gave them generous payment terms. In the past, Kepler's had had 90 days or more to pay for books. When the giant chains started buying huge quantities of books and returning a large percentage of them, the publishers put the screws on other bookstores to pay more quickly. The 90-plus days shrank to 60 days and even, in some cases, to 45 days. It became a luxury to keep a book on the shelf for three months--one Kepler's could no longer afford.

Kepler decided he had to make changes. He proceeded to do a management makeover, introducing all kinds of new rules and regulations. In this, he was guided by his outside financial adviser. "We realized the need to improve our systems," he says. "We were able to cut areas of cost that allowed us to get through the lean years--like closing the bargain annex next door."

But other people, including many former employees, contend that the makeover actually weakened the business by encumbering it with bureaucratic systems worthy of General Motors at its worst. "I've worked in several large companies (e.g., SRI, McGraw-Hill, the United States Postal Service) and never seen anything like it," wrote former assistant manager Mark Schneider in an Internet posting. "You couldn't get anything done without filling out a form. There was even a form that you had to fill out when there wasn't any regular form available."

There was also the problem of overstaffing, which resulted in employee costs well above the industry average of about 20 percent. And it didn't help that, as part of the makeover, Kepler had moved the corporate offices to Belmont, a 15-minute drive from the store, thereby putting distance between him and his employees. But a booming economy can mask many problems, and Kepler clearly did some things right--like setting up new community outreach programs. He and his managers would arrange with a school, for example, to have students, parents, and supporters buy books from Kepler's. The store would then donate a portion of the proceeds back to the school. By 2000, such efforts had helped Kepler's boost sales back up to 90 percent of what they'd been in 1995.

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Bo Burlingham

Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants: Companies That Choose to Be Great Instead of Big. The book was a finalist for the Financial Times/Goldman Sachs Business Book of the Year Award in 2006. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business and A Stake in the Outcome.

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