How ‘Amazon factor’ killed retailers like Borders, Circuit City

When Amazon.com sold its first book 20 years ago this week, Borders Books & Music had a thriving retail empire generating about $1.6 billion a year in sales.

Today, Borders is nothing but a memory, ushered to the grave by an e-commerce revolution led by Amazon. And Borders is not alone — in the same figurative corporate graveyard are tombstones for the likes of Tower Records, Good Guys and Circuit City.

It’s not that Amazon became a one-company juggernaut that laid waste to the world’s retail landscape. Over the years, the Seattle company has struggled to generate profit. But Amazon changed the way that people shop. Now, instead of just considering in-store sales or discount coupons, shoppers routinely ask themselves, “I wonder if I can get this cheaper online?”

That’s the “Amazon factor,” said Larry Chiagouris, professor of marketing at Pace University’s Lubin School of Business in New York.

“No business goes out of business due to one competitor. It’s usually due to a combination of factors,” Chiagouris said. “But the Amazon factor became a major factor in those businesses gradually going out of business, from bookstores to record stores to electronics stores. They are a category killer.”

According to Amazon, it all started with the July 16, 1995, launch of its e-commerce website and the sale of that first book, “Fluid Concepts & Creative Analogies: Computer Models of the Fundamental Mechanisms of Thought.” The book is still available on Amazon, for as low as $2.72.

Hello, Cadabra

Even though Jeff Bezos founded the company one year earlier under the name Cadabra, Amazon is using the anniversary to heavily promote Amazon Prime Day on Wednesday, July 15, a full day of online discounts that the Seattle company bills as better than Black Friday. Amazon wants to boost membership in its $99-per-year Amazon Prime frequent buyers club.

Today, Amazon is a household name. But in 1995, most shoppers considered buying products online unfamiliar and scary. At that time, the book industry was more concerned that chains like Borders and Barnes & Noble would subsume independent bookstores.

“When they took on Barnes & Noble and Borders, everyone thought they wouldn’t go far,” Chiagouris said of Amazon. “Much to everyone’s surprise, they not only put Borders out of business, but they put Barnes & Noble on their heels.”

Amazon didn’t immediately threaten Borders, which even struck up an alliance with Amazon in 2001 to handle online sales. As late as 2005, Borders Group still operated the second-largest bookstore chain behind Barnes & Noble, with more than 1,200 domestic and international stores, about 15,000 employees and $4 billion a year in sales.

But Borders, which ended its relationship with Amazon in 2007, couldn’t find a way to stop the shift to buying books online. And, as in all of its retail efforts, Amazon could carry more inventory than a brick-and-mortar store.

Moreover, book publishing itself was going digital, and Borders’ Kobo electronic reading device was not popular enough to outsell Amazon’s Kindle e-reader or the Nook from Barnes & Noble. By 2011, as Amazon began selling more electronic books than print books, Borders had closed its stores and declared bankruptcy.

Books were only Amazon’s first beachhead. Bezos wanted to create a site that sold everything, unlike failed early e-commerce sites like long-forgotten Pets.com, which focused on pet supplies, said analyst Tim Bajarin.

“It was their broad product offerings that forced (online shopping) across retail,” said Bajarin, president of Creative Strategies of San Jose.

Digital entertainment was Amazon’s next big move. In 1998, the company bought the popular Internet Movie Database, or IMDb.com, and began selling music and DVDs that year.

That posed another problem for Borders, which also sold music and DVDs, and spelled trouble for a slew of regional and national retailers like Tower Records, Wherehouse Music, Sam Goody and Musicland (all now defunct).

CDNow, which began selling CDs online in 1994, was then considered more of an established Internet music company than Amazon, Chiagouris said.

So the skeptics underestimated Amazon’s ability to compete with a better-known brand.

“By the time they moved from books to music, people said this is where (Amazon) is going to get stretched thin,” Chiagouris said.

CDNow deal

But Amazon proved that it had more than enough bandwidth to do battle, and bought the CDNow website in 2001 while continuing to march into more retail categories like consumer electronics, toys and video games.

To be sure, Amazon didn’t trounce the retail chains alone. There were other market forces at work, such as music fans shifting from buying CDs to downloading digital songs.

But then came Amazon’s “biggest impact,” when the rise of Internet-connected mobile phones handed shoppers a tool to check online prices from the aisles of a retail store, Bajarin said.

“When Amazon launched its broader store, people still had to use PCs to check prices,” he said. “But by the mid-2000s, they could now compare prices on mobile phones, and ... make a more price-sensitive decision.”

To survive, retailers like Best Buy and Toys R Us tried to lower their prices or offer to match Amazon’s prices, “something that has been great for the consumer,” he said.

On the price front, Amazon was also able to take full advantage of laws allowing it to eliminate sales taxes in states where the company didn’t maintain a physical presence, at least until those states changed their laws years later.

That was too late to help consumer electronics retailers like Circuit City, which grew in the 1990s with sales of PCs and appliances, but then went from $10 billion in annual sales in 1999 to bankruptcy and closure just 10 years later.

Circuit City was also doomed by questionable business decisions by management and stiff competition from Best Buy.

Still, Chiagouris argues, Circuit City’s demise had more to do with Amazon than Best Buy. In fact, even RadioShack — which filed for bankruptcy and inked a partnership with Sprint this year — was partially killed by Amazon.

Over the years, Bajarin said, the retail casualties mounted.

“Circuit City, Borders and many others were forced out of the market because of online shopping and Amazon’s influence,” he said. “But thanks to Amazon and other online stores, consumers get more bang for the buck.”

Benny Evangelista is a San Francisco Chronicle staff writer. E-mail: bevangelista@sfchronicle.com Twitter: @ChronicleBenny