As the initial celebrations fade into memory, our heroes from Silicon Valley discover that the Old Economy business of selling books is tougher than they suspected. Part 2 in a series.
Anne Banta had heard someone use the phrase "compassion fatigue" on the radio a few months earlier, and it had resonated with her. She'd had her own moments of compassion fatigue during the preceding year, moments that came when she experienced the loneliness of working in a struggling small business; when she felt abandoned by the people who were supposed to be supporting her; when she questioned how much other people cared--really cared--whether this company, Kepler's Books & Magazines, lived or died. At those times, she couldn't help wondering how she had let herself get involved in such a venture and whether the cause was worth the toll it was taking on her and her family.
But the moments passed, and now--as she stood in front of the small group assembled in her living room this past December--she showed no sign of compassion fatigue, just an intense focus on the matter at hand: coming up with a plan to transform Kepler's from a struggling little bookstore teetering on the brink of extinction into a healthy, self-sustaining enterprise. "Here's what we want to accomplish," she said, passing around photocopies of the agenda she'd drawn up. On it were six circles--or "bubbles of focus," as she called them--labeled A through F, each containing a separate imperative for turning around the business. "Next to these, we need action steps," she said. "We need to put down what the idea is, who's responsible for it, what it will cost, what the expected returns are, and what milestones we're going to use to measure how we're doing."
In her lime sweater, her necklace of polished stones, her brown slacks, and her bobbed haircut, Banta could have been mistaken for a not-so-desperate housewife of Atherton, California, the wealthy enclave just west of Palo Alto where she lived with her husband, a serial entrepreneur, and their son. A native midwesterner with a B.A. from the University of Wisconsin-Madison, she had a bubbly personality and a cheerful disposition, even when her emotions got the best of her, as they occasionally did. But most of the time she radiated enthusiasm, the words tumbling out in cascades of sentences that conveyed nothing so much as her passion for whatever she happened to be talking about. Her resumé included stints at Intel (NASDAQ:INTC) in its youth, sitting near Andrew Grove, and at Adaptec (NASDAQ:ADPT), where she was employee No. 16. Thereafter she had spent more than 15 years as a part-time vice president of corporate communications for dozens of high-tech start-ups, going from one to another as her services were needed.
At the moment, however, her services were needed in a decidedly low-tech business, namely Kepler's. That the Menlo Park store still had a pulse was a minor miracle. Fifteen months earlier, Clark Kepler, the owner and CEO, and son of the founder, had officially thrown in the towel, announcing at an early-morning staff meeting that he, like so many other independent booksellers, had run out of money and ideas for keeping the business alive in the face of competition from the likes of Barnes & Noble (NYSE:BKS) and Amazon (NASDAQ:AMZN). News of the closing had sent shock waves through the community, where Kepler's was a cultural icon. As word had spread, the citizenry had risen up in support, writing letters, posting signs, holding a mass rally, and contributing money and expertise. On October 8, 2005, after yet another rally, Clark Kepler had unlocked the doors and invited everybody to come back in and shop. And shop they did, rescuing the shortened, but vital, 2005 Christmas selling season and giving Kepler's a new lease on life.
By then, a rescue team from Silicon Valley had moved in. It was led by Daniel Méndez, an entrepreneur and computer scientist who had played a crucial role in raising the capital and handling the negotiations leading to Kepler's reopening. With him on the board were Bruce Dunlevie, a general partner at Benchmark Capital and a 15-year veteran of the venture capital industry, and Geoff Ralston, who had until recently been the chief product officer at Yahoo (NASDAQ:YHOO). Banta was the team's principal representative in the company, functioning as an executive vice president of business development and marketing. She was also the one who had made the greatest sacrifice, putting her career on hold and devoting herself full-time to Kepler's. She and the board had hoped they could stabilize the business and formulate a plan in a few months. But now, a year later, with another Christmas season in full swing, they were still working on the plan, and the jury was still out on the store's long-term viability. Meanwhile, its struggle to survive had captured the attention of the media, which accounted for the odd assortment of people and equipment in Banta's living room that December morning. Aside from Banta and Kepler, who was still CEO and chairman of the board, the participants included two industry heavyweights--Michael Hoynes, a former chief marketing officer of the American Booksellers Association, and Hut Landon, executive director of the Northern California Independent Booksellers Association--as well as the company's consulting CFO, Mitch Slomiak. While they discussed action steps, a team filming a PBS documentary on Kepler's moved around the room, searching for good camera angles and positioning the boom mike to capture every word. Later that day, a crew from MSNBC would be coming in to do more or less the same thing.
The media types--including Inc.--were all intrigued by the same question: We wanted to see whether a group of people who had helped build the New Economy could save a failing relic of the Old Economy, a relic that was failing in part because of innovations and technologies that they and their colleagues in Silicon Valley had helped unleash.
On a sunny day last June, Banta and Kepler sat at the Café Borrone, next door to the store, and tried to be upbeat. "We've taken a lot of little steps," Kepler said, "and we've seen some good results. But January, February, and March were a disappointment. We'd projected a 15 percent increase over 2005. In fact, our sales declined. April was a little better but still below the previous year. May was also a little below. June appears to be slightly above."
"Those first three months were awful," Banta said. "We thought that sales would bounce back without our doing anything."
"Before Christmas, it was, 'Let's all get together and raise the barn," said Kepler. "After Christmas, it was a reality check."
There had, in fact, been reason for optimism. Kepler's closing had been a wake-up call for the community, and the outpouring of support suggested that people had gotten the message. By the end of 2005, 1,800 of them had put their money where their hearts were, signing up for paid memberships in Kepler's new Literary Circle and, in the space of eight weeks, contributing more than $200,000 to the store's bottom line--far more than anyone had expected. Meanwhile, Banta had turned up numerous untapped business opportunities. In early January, she had outlined to the board four major initiatives that she was confident would put the business on the road to recovery. One of them involved beefing up the membership program by having member-appreciation nights, members-only receptions with local authors, special member dinners, and on and on. She set a goal of getting 80 percent of the current members to renew in the fall, signing up 1,500 new ones, and recruiting corporate sponsors for several events. Those efforts alone, she figured, could bring in $300,000 to $350,000 during the year and put the store in the black. She would also work to build stronger ties to the community by holding monthly Family Fun Days, sponsoring a Kepler's Day in the Park, setting up community partnerships with local businesses and organizations, and making the store available to schools, churches, and nonprofits for evening events, perhaps with a reading by an author. In the process, she thought she could add another $300,000 to $350,000 to Kepler's revenue, which had been hovering around $6 million, by increasing outside sales to schools and other community organizations and by setting up bookselling services in local companies.
In the months that followed, however, few things turned out as Banta had expected. To begin with, she had underestimated how much work was required just to get Kepler's back on its feet. A third of the staff had left after the closing, making it necessary to hire and train a lot of new people. The initial closing had also forced the cancellation of all the scheduled author events, which meant putting together a whole new schedule. Banta had intended to hire someone to handle the events, but she didn't find the right person until April and wound up having to do it herself. In addition, the store had had operational problems, particularly in the way books were received, inventoried, put on shelves, and--if unsold--returned to publishers. A consultant had to be brought in to streamline the systems. And then there was the rain, day after day of steady downpours, more rain than anyone could remember, which inevitably dampened retail sales throughout the region. It soon became clear to the board members that Kepler had a much tougher fight on his hands than they'd realized. "I have to tell you," Banta said on that sunny day in June, sitting next to Kepler at the Café Borrone, "I have a hundred times more respect for Clark now than when I started. What he's doing is so hard. He can't afford the team he needs, and he's competing with Amazon. He's competing with Barnes & Noble. People in high tech complain about Microsoft (NASDAQ:MSFT). Look at what Clark is up against!"
Kepler sat there silently, a whisper of bemusement on his face.
"In high tech, you have people who've gone to school together," Banta continued. "They make friends and stay in touch. There's camaraderie. If they need help, they can pick up the phone and call 20 different people. Here you don't have the collective brainpower. And the culture is so different. In high tech, you have salaries that allow people to work on long-term projects. Here people make $12 an hour. They do it because they like the lifestyle, or they love books, or it's a stopping point for them. But turnover is high, so they don't have the experience and it's hard to create a culture. In high tech, people work around the clock. Here people on the nighttime staff have never even met people on the daytime staff. In high tech, everyone is sharing financials. Everyone knows the margins. Here there's no understanding of how the business works."
Kepler looked around the café and said nothing.
"And it's so lonely," Banta said. "I've worked in 25 start-ups. In any one of them, I could talk to five founders and board members whenever I needed to. We'd hold a meeting and have 17 advisers come in, all looking at the problems and figuring out how to solve them. I'm going to meet next month with the president and his staff at one company I'm advising. I can do more in four days there than I can do in four months here. Why? Because I know the business so well, and I have so much help. I can bring the staff together, and we can come up with 64 scenarios of which 36 will work. We can test them. We can figure out which one is best and go with it. Whereas here I can't say what will work. I don't have experience in this business. I can be a good facilitator, but that's about it. I think, What would I do if I were in Clark's shoes? Would I call up other bookstores?"
Kepler noted that he was already in touch with other independent bookstores through various organizations.
"I don't mean to be negative," Banta said. "We have made some progress here. I feel hopeful about how it's going. But the idea of people from high tech coming in to save the day--it was so naive to think that we could. We have to find other people who know the industry--an advisory board or something. If we can tap into some industry experts, it would make a big difference."
Enter Michael Hoynes.
By the time Hoynes's flight landed at San Francisco International Airport on the Tuesday after Labor Day, he already had a pretty good handle on the problems at Kepler's. He had been studying the store's financials and the results of a customer survey it had conducted earlier that year. Now he was on his way to Menlo Park to share his findings with Kepler, Banta, and whomever else they wanted him to talk to. It was a mission of mercy: He asked only that they cover his expenses. His most important presentation, he knew, would be on Thursday, when he was scheduled to speak to the staff at an early-morning meeting.
The staff meeting was critical because--as Hoynes knew from experience--any turnaround involves, first and foremost, a change in culture, which is often anathema to employees. Still, he was generally optimistic about Kepler's, which was reassuring to his hosts, if only because of his credentials. From 1998 to 2003, as the American Booksellers Association's head of marketing, he had led the effort to establish a national brand that would link the country's independent bookstores, allowing them to offer an online service, BookSense.com, to compete with Amazon.com, and a national gift card program to compete with Barnes & Noble and Borders (NYSE:BGP). Now semi-retired, he continued to do some consulting. As the son of an Irish immigrant who'd had his own grocery store in New York City, he had a soft spot for small, independent businesses, although they sometimes exasperated him. "After I was at the ABA for a year, a couple of my friends asked me, 'What's it like, dealing with all these independent bookstores?' I said, 'Well, I don't know how good they are at selling books, but they're damn good at being independent."
Hoynes preached that bookstore owners needed to think like retailers first and booksellers second--a message they did not all want to hear. He told them they had to respect the power of the consumer. Instead of assuming they knew what was best for their customers, they should start by finding out exactly who their customers were, what they wanted, and how they behaved. The survey Kepler's had done offered a golden opportunity to put that philosophy into action. The 1,949 respondents--including 504 members of Kepler's Literary Circle--were, by definition, among the store's best customers, loyal enough to take the time to fill out the survey. When Hoynes studied the results alongside the financials, several things jumped out at him, as he explained in a series of meetings during his three-day visit last September.
First, he noted, these customers bought an unusually large number of books, 44 per year, but only 11 from Kepler's. In other words, the store's best customers were buying 75 percent of their books somewhere else. According to Hoynes, independent bookstore customers on average buy 20 books per year, of which eight, or 40 percent, are purchased from the store in question. Perhaps Kepler's could get its customers to buy 40 percent of their books from the store. Second, the customers were buying five or six books a year from used bookstores, which amounted to more than 12 percent of their total book purchases. Nationally, used books accounted for only 5 percent of book sales, indicating that Kepler's customers were more interested in used books than most book buyers. But Kepler's did not carry used books. Hoynes thought it might be a good idea to add them, especially since used books have much higher gross margins than new ones. Third, 69 percent of Kepler's customers--most of whom were middle-aged women--were living in households that did not have children. Hoynes thought that odd. The Menlo Park area was a magnet for families, and families were known for buying lots of books--but they weren't buying them at Kepler's. They might begin to, Hoynes suggested, if the store made a serious effort to reach them. Fourth, by a large majority, customers were either unaware that Kepler's sold things other than books or did not particularly like its selection. Because of the low margin on books, Hoynes believed that as much as 25 percent of a successful independent bookstore's sales had to come from selling sideline items such as calendars and games. If Kepler's could approach that figure, the impact on its bottom line would be dramatic.
Taken together, Hoynes's points seemed to provide a rough road map for Kepler's return to profitability, and the company's leaders reacted favorably, although some expressed doubts about a couple of his observations and recommendations. Kepler, for one, wasn't keen on getting into used books, which he considered a completely different business. And Méndez was skeptical that a large percentage of the customers were middle-aged women without children. "It's inconsistent with what I see," he said. "Do you believe the survey?"
"I believe the patterns," Hoynes replied. "Whether the real number is 69 percent or 60 percent doesn't really matter. The point is that you're missing out on what should be a good market for you--people with children. But that's a good problem to have because you know they're out there."
Ultimately, the company's staff would have to carry out any plan that the board approved. After a couple of unannounced visits to the store, Hoynes could see they lacked basic selling skills. The employees struck him as book lovers rather than salespeople, which raised a number of questions. Would they be open to learning the skills they would need to start selling more books? Would they be willing to take real responsibility for the success of the business and to be held accountable for meeting goals? Did they care enough to change? For that matter, did they care enough to come to the early-morning meeting that had been scheduled for that Thursday, when Hoynes would present his findings and Banta would solicit ideas and suggestions from the staff? The meeting was not mandatory, and the timing was particularly bad for people on the night shift. Kepler confessed that he had no idea how many of his 50 employees would attend and how receptive they would be.
But shortly after daybreak, they began showing up at the store, one by one, some with their hair still wet from recent showers, several on bikes, a Red Sox cap here, a Sorbonne sweatshirt there. They continued to arrive as Kepler made his welcoming remarks. By the time he turned the floor over to Banta, all the seats were filled and additional chairs had to be brought in. People listened attentively as she discussed the agenda and noted the recent anniversary of the store's closing. She recalled how difficult that period had been for Kepler and suggested that he deserved their collective thanks, whereupon the room erupted in applause. For the next half hour or so, Banta presented the results of both the customer survey and a staff survey that had been conducted during the week leading up to the meeting. Then Banta introduced Hoynes.
With his shock of white hair, his rosy Irish face, his button-down shirt and black loafers with tassels, he was clearly an outsider, but that didn't seem to bother his audience. All eyes were on him as he talked about his professional background and the recent history of the industry. At one point, he picked up a marker and began writing on a flip chart. "Let's say we sell $100 of books," he said. "They cost $55, so you subtract that, and you have $45 in gross profit left over. Then you spend $42 on things like salaries, rent, and utilities, which leaves you with $3 of net income. A dollar of that goes to taxes. You wind up with $2 of profit from $100 of sales. Bookstores are a 2 percent business, which is far below the profitability of most retail businesses." There were shocked looks around the room. Hoynes then talked about the higher gross margins on used books (more than 50 percent) and sideline items (as much as 60 or 70 percent) and went on to present his analysis of what he called the Kepler's Challenge.
"Well, that was interesting," Hoynes said shortly afterward, as he sat at a table on the plaza in front of the café next door. "The biggest surprise for me was their overall receptiveness. There's obviously a recognition that things have to change. From the standpoint of changing the culture, I don't think the staff is going to be as big a problem as I feared, but it's going to take good, strong, creative leadership to make it happen. I just hope Clark is up to it."
In fact, a lot of people were hoping Clark was up to it, including Kepler himself. It was the big, unspoken question hanging over the group that reconvened in Anne Banta's living room in December to draft a plan they could present to the board. The board had met infrequently since early summer, and several attempts to schedule a board retreat had run afoul of scheduling conflicts, skiing trips, and holiday plans, all of which left Banta extremely frustrated. But with the fiscal year ending on February 28, there was no time to lose. She and her colleagues--principally Kepler, Hoynes, and Slomiak--had to produce a plan within the next month, or Kepler's would start another year with no clear direction.
Banta considered lack of direction to be Kepler's major problem. For all that she and others had done to launch new initiatives, for all the advice the group had received from people in the industry, for all the thought that had gone into establishing priorities, the company was still bouncing from one short-term problem to the next. It was the classic small-business trap. Without an articulated vision of where the owners wanted to take the company and without a well-thought-out plan of how to get there, people were left to make it up on their own. The person ultimately responsible for that was Kepler. He was, after all, the CEO and chairman, as was only proper: It was his name on the door. In theory, the board could replace him, but its members had no interest in doing so. Aside from it being unseemly, they didn't want that level of responsibility. Frankly, their investment was not big enough to warrant taking it on.
Besides, Kepler was a beloved figure. A gentle, thoughtful person, he was a good listener and a calming presence, and he took his responsibilities to his employees seriously. But he suffered from the normal failings of small-business owners who have grown used to operating with scant resources, uncertain cash flow, and the entire responsibility for success or failure on their shoulders. As a manager, he was a one-man band. Every significant problem came to him. He wasn't even willing to delegate responsibility for checking the suggestion box. On top of that, he had an elaborate set of written rules governing everything an employee might do. Aside from contributing nothing to the business, the rules sent exactly the wrong message to the staff: You are not empowered to think for yourself.
As Banta had come to realize, Kepler would have to learn an entirely different management style if the company were to be turned around and set up to last for another 50 years--the goal set by Méndez and the board. He would have to put managers in place, give them real responsibilities, and hold them accountable. He would have to commit to a plan with realistic projections, quantified goals, and specific benchmarks. Banta and her colleagues had already identified the key areas to concentrate on. They were the six imperatives that made up her "bubbles of focus." The first bubble was the core: doing the things that defined Kepler's mission of being the local area's community and cultural destination. The second: sell more effectively to current customers. The third: expand and diversify the customer base. The fourth: expand and diversify the store's product line. The fifth: develop an employee culture of empowerment with total customer focus and an understanding of person-to-person marketing. The sixth: reduce costs and improve efficiencies. Banta wanted the participants in the meetings to lay out all the ideas they had for addressing the imperatives. She then wanted them to decide on the three to five most promising ones in each area, estimate the costs and returns, assign responsibility, and settle on the measurements they would use to monitor progress.
It was at the end of the third day--about an hour before Hoynes had to leave to catch his plane back to New York--that suddenly, unexpectedly, everything fell apart. Maybe it was compassion fatigue. Banta had filled up sheets and sheets of paper with notes on possible action steps, but as she looked them over, she felt a certain despair. What did it all add up to? Where was the business going? Where did Kepler want it to go? "The problem is," she said, "we don't know where we're heading."
Hoynes looked at her skeptically. "I don't know about that," he said. "I think we want to see the business get to the point where it can sustain itself."
Then it all came tumbling out. "You know, I began at Kepler's feeling I could make it all happen fast," Banta said. "I found out I was wrong, and I felt terrible. That's why I was crying last spring. I was devastated. I felt I wasn't adding any value. Then I realized I had to talk to customers. I began learning from them, seeing what we could do, and I felt better. But I can't be effective on my own. When you go into start-up--and I consider this a start-up--you need a board that commits to 24-7 and puts in at least one full day a week. We don't have that. We couldn't even schedule a board retreat because it was more important for people to go skiing. We need board members who know this industry and will make a big-time commitment for two years."
"I don't disagree," said Hoynes, "but I don't think Kepler's needs a new mission and vision. You've had one for over 50 years. The hope for the future is to be what you've been."
"If Clark's goal is for Kepler's to be what it's been, I would not know what to do. No one in the store knows what we should be doing."
"There are ways to make Kepler's extremely profitable," Hoynes said.
"But I don't know what we want to be! I think, in the next year, we should put in the minimum number of things to make us profitable but leave time for Clark and me to focus on where we're going. If we're not going to do that, I would recommend that Clark get rid of me and hire a marketing person. There are lots of good people who can do these action items."
Kepler sat there, looking overwhelmed and a little bewildered. "Well," he said, "I think that has potential, but it raises a lot of questions in my mind."
"If Anne is not going to be involved, you'll have to find other people to take over from her," Hoynes said. "Your staff costs are high as it is, and you don't have the managers you need. I don't think anyone there can do what she's been doing. Replacing her will take time, in addition to the disruption. But I don't know how you can do these things and not deal with the staff issues."
"That's a good point," Kepler said.
Banta turned to him. "When I say, 'Empower the staff, you and I work on the vision, get a more involved board,' how does it make you feel?"
He thought for a moment. "How it feels is uncomfortable," he said. "It's out of my comfort zone, and that's good. This business needs to get out of my comfort zone. We need to do things differently without compromising the passion and the sense of purpose we have here. Am I the right person? I don't think it's a job that I am uniquely qualified to do. It's just a job I'm willing to do. Without a financial reward, there's no reason for other people to do it."
"It was uncomfortable for me, too, last spring," Banta said. "It will get uncomfortable again. We won't know if we will be successful. Things can shake out in so many ways. I think we can do it. But critical things have to change."
And that was that. Shortly thereafter, Hoynes left for the airport. Banta, Kepler, and Slomiak had one more meeting before going their separate ways for the holidays. They agreed they all had a lot to think about before they got back together in early January. By then, they would know just how good--or bad--the Christmas selling season had been. But would the time off make a difference? Would they be any more in agreement in January than in December? Would they be able to decide on a plan to take to the board? For that matter, would there even be a board meeting?
As they said goodbye to one another and exchanged best wishes for the holidays, none of them knew the answers.
Editor-at-large Bo Burlingham is the author of Small Giants: Companies That Choose to Be Great Instead of Big.
As Clark Kepler and his supporters continue to search for answers and as the financials come in on the new Kepler's first full year in business, we will continue to follow the story.
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