Strategic management

CASES AND VIDEO TRANSCRIPTS

Case 1: Mismanagement Closes a Bookstore

Ruminator began in 1970 as Hungry Mind, a 1,200-square-foot store with a single aisle choked with stacks of books. The initial investment was $12,000. Two years later, the store captured a huge, steady piece of business, becoming the exclusive textbook vendor for nearby Macalester College. In the following two decades, Hungry Mind grew steadily, finally renting 7,800 square feet in a building also owned by the college.

The good years were very good. Until Hungry Mind opened, Minnesota had been a "flyover" state for authors on publicity tours. In 1990, a popular restaurant moved in next door, and before and after dinner, customers browsed the store. Hungry Mind encouraged them to linger. "It was one of the first bookstores I'd ever encountered that had a couch," says David Houghtby, a longtime neighborhood resident.

Superstores Arrive

All around the Twin Cities, meanwhile, competitors were popping up. "In the early 1990s, the number of book superstores in our area went from zero to 22," says Mr. Unowsky. Yet those were also Hungry Mind's golden years, with sales rising 20% annually. The store employed 26 people, most of them salaried, and offered paid vacations, health insurance, maternity and paternity leaves and a retirement plan. A new computer system gave the store better inventory control, quickly showing which books were selling and which weren't.

Hungry Mind's reputation, which extended far beyond the neighborhood, attracted customers who drove miles to take advantage of the store's large and eclectic inventory. "Book buyers would come in expecting us to have everything," says Tom Bielenberg, who worked at Hungry Mind for 28 years. "They would expect our inventory to match up head to head with the chains." That was impossible: Barnes & Noble [a big book store in US] stores range in size from 25,000 to 67,500 square feet.

The restaurant closed. Yet even as sales flattened in the late '90s, Mr. Unowsky decided to expand again. He moved the textbook business to another location in St. Paul, and in 2000, he opened a satellite store in a new building in Minneapolis.

The Minneapolis store, situated in a remote section of the city with little foot traffic, was "a money pit," says Mr. Unowsky. "It was beyond my level of competence. I wasn't wired to run two bookstores." Furthermore, a costly new computer system that was supposed to network the two stores never worked properly. "We could go all day and not sell two books," adds Mr. Unowsky, whose losses mounted to $500,000 before closing the store in the spring of 2003. "It was a harsh time," he says. "It was hard for me to accept the failure."

More Debt, No Cash

Worse, because Mr. Unowsky had never banked any cash during his peak years, he had financed his new operations with loans. With a heavy debt load, and flat or declining sales, the store very nearly closed in 2000. Then Mr. Unowsky got a reprieve from an unexpected source: An online learning company wanted to buy the name "Hungry Mind." Although he won't disclose the price, Mr. Unowsky describes it as "a fairly large amount of money." He also concedes that the rule of thumb for companies changing their name is a loss of as much as 20% of business.

The sale of the name gave Mr. Unowsky some breathing room, but by 2003 he owed his landlord, Macalester, some $600,000. He also owed money to so many vendors that some stopped shipping to him. "I remember when they used to have all sorts of fiction, literary criticism, books on religion, all sorts of poetry books," says Brigid McDonough, a St. Paul lawyer. "But I went in there before they closed and there was nothing. There was just no inventory."

Eventually, in the spring of 2003, Macalester told Mr. Unowsky that unless he was able to recapitalize and pay his debts, the college would take possession of the store and its inventory. With Mr. Houghtby's help, Mr. Unowsky came close to raising enough money, but negotiations with the college broke down, and the lease was terminated this past July. Mr. Unowsky, who also declared personal bankruptcy because he had charged $100,000 on his personal credit cards to keep the store running.

Using what you learn in the planning section to explain:

1. 
   Why did Hungry Mind succeed in its early years of operation?
   
2. 
   Why did it fail later?
   
3. 
   What do you learn from the case?