Rewriting the Kepler's Ending

From Inc.com:

Rewriting the Ending
By: Bo Burlingham

The unfortunate demise and surprising rebirth of a very special business.

Part 1 in a series.

Death came swiftly to Kepler's Books & Magazines in Menlo Park, California--so swiftly that word of its closing sent the entire community into shock. Clark Kepler, son of the store's late founder, delivered the news to his employees at an early morning meeting on Wednesday, August 31, 2005. He said that he'd run out of money and ideas, leaving him no choice but to shut down the store less than four months after celebrating its 50th anniversary. The tears flowed as he talked about his sorrow over the decision and invited other people to talk about theirs. He handed out the last paychecks, saying that he would delay filing for bankruptcy to give people time to cash the checks before things got messy. When customers showed up that morning, they found a brief note from Kepler taped to the glass: "The decision to close our doors has been one of the most difficult in my life. As much as we love what we do and would like to continue another 50 years, we simply cannot. The economic downturn since 2001 has proven to be more than we can rebound from."

Within hours, the news had spread throughout the Bay Area. People started coming in groups of two and three to pay homage to a store that had been the embodiment of the area's history and culture. It was at Kepler's, after all, that Ken Kesey had hung out when he was writing One Flew Over the Cuckoo's Nest, and it was there that Neal Cassady--the Dean Moriarty of Jack Kerouac's On the Road--was lolling about when Kesey recruited him to be the bus driver on the cross-country journey that Tom Wolfe immortalized in The Electric Kool-Aid Acid Test. Jerry Garcia had met the future members of the Grateful Dead at Kepler's. Joan Baez had also been a regular, and for a while Roy Kepler--Clark's father--had been her business manager.

In the following decades, Kepler's had changed along with the rest of the Valley, moving three times before landing in its present spot in 1989. Located in a shopping plaza on El Camino Real, in the heart of Menlo Park, the new store was big, 10,000 square feet, and carried 100,000 titles. Although it lacked the counterculture ambience of the original, it fit comfortably into the affluent, well-educated community that had sprung up in the area during the previous decade. Next door was a bistro, Café Borrone, that served as a meeting place for venture capitalists and entrepreneurs, as well as a hangout for book lovers. Kepler's was still a community center, but it now offered book readings, author events, and children's activities instead of sex, drugs, and rock 'n' roll.

The store was such an integral part of Menlo Park that people assumed it would be there forever. Granted, some customers may have noticed that the inventory had started to seem a little thin, and at least a few employees were aware that budgets had been shrinking. The store's buyers knew that several publishers had put Kepler's on "hold," meaning it had exhausted its credit with them and wouldn't be able to get the books it wanted until it worked out terms for paying off its debt. But many bookstores find themselves in that situation during the summer. In any case, the signs of stress were invisible to most people in the community--until August 31.
All that day and the days that followed, people came to view the scene for themselves. Some left flowers. Others just stood there, stunned and bewildered, or outraged. Still others taped notes to the windows, or took photographs, or exchanged memories with one another. Someone put up huge pieces of paper on which visitors wrote messages expressing their sense of loss. Many were written by children. One person even left his phone number, saying that he'd stolen a book from Kepler's in 1975 and now wanted to pay for it.

For a lot of people, the experience was profoundly disorienting. "Have you ever seen somebody after they've been in an automobile accident?" says Daniel Méndez, a Silicon Valley entrepreneur who happened to be having breakfast with his wife at Café Borrone that morning. "Everybody was just walking around in a daze, or in tears. I've seen many businesses fail, but I've never seen any that touched the community like Kepler's did." A book lover and collector, Méndez biked to Kepler's almost every weekend, usually in the company of his daughters. They would have breakfast at Café Borrone, then go next door to browse, read, and shop. It was a ritual. "We're not religious people," Méndez says. "I tell my wife, 'This is our church.'"

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.

Unfortunately, while that was happening, the store's lease ran out. The timing could hardly have been worse. In 1999, the price of real estate in Menlo Park was going through the roof. The new lease Kepler signed pushed his occupancy costs from 9 percent of sales to 14 percent, much higher than the norm. And then the bubble burst. Sales went south, and Kepler couldn't cut costs fast enough to keep up with them. From the summer of 2001 to the summer of 2005, annual revenue declined by 25 percent. The business was barreling toward insolvency, and Kepler didn't know how to stop it. "It was like a death sentence," he says. "Nothing I did was working."

By mid-August, he knew he had to make a decision. Without money to pay down his debt to vendors, he wouldn't be able to get the books he'd need for the fall and the holidays. Even if the vendors did cut him some slack, he'd still be saddled with the expensive lease. Finally, he accepted reality: He'd reached the end of the line. That was when he felt the relief. "Even though it devastated me, my family, my vendors," he says, "at least I knew what I had to do, and what I could ignore. While I'd been struggling with all these big issues, little issues would keep popping up, and I'd had to deal with them. After I made up my mind to close Kepler's, I could let the little decisions go. They didn't matter because the company wasn't going to be around much longer."
For the next two weeks, he put everything aside and worked feverishly with his attorneys to prepare the business for liquidation. Against the attorneys' advice, he told his key managers what was going on and asked that they keep the news to themselves until he'd informed the staff. In the midst of all this, his nephew came to see him before shipping out to Iraq. "It was all very emotional," Kepler says, "but I didn't have time to feel the feeling. I figured I'd have a breakdown afterward." On Tuesday, August 30, he sent out an e-mail to employees asking them to come to a meeting the next morning.

He found the meeting extremely difficult. Looking around the room, he was keenly aware of the impact the closing would have on the employees and their families. Although he couldn't have warned them without creating enormous problems for the business, he felt bad that he was springing the news on them. He felt particularly sorry about two employees he'd hired in July, while he was still resisting the inevitable. With tears in his eyes, he apologized for what had happened.

After the meeting broke up, Kepler stayed at the store for another hour or so before heading to his office in Belmont. It was there, shortly past noon the following day, that he received an e-mail from a customer who was interested in reviving the store--Daniel Méndez. It read, in part: "I have talked to a number of my friends and neighbors in Atherton and Menlo Park and I can in short order put together a syndicate to purchase all or a portion of the operation from you…."
And, at that point, Clark Kepler's world took another turn.

"No more Amazon"

Rick Opaterny had arranged to meet a friend from Los Angeles in the fiction section of Kepler's on the evening of August 31. It was a tradition of theirs. They'd meet at a particular author's books, then go next door to Café Borrone for beer or coffee. That day, they happened to arrive at the same time, about 8 p.m., ran into each other in the underground garage, and then took the elevator together up to the plaza.

As they got out, they saw a group of people standing outside the bookstore, talking excitedly and shaking their heads. Opaterny looked at the sign on the door and the darkened store and realized that Kepler's had gone out of business. Though only 24, he had been a customer for eight years, ever since being introduced to it by a high school English teacher. He credited the store with turning him into a serious reader. The thought that he would never set foot in it again was deeply depressing to him.

The closing was still on his mind the next morning when he showed up for his job in the AdWords department at Google. He felt he had to do something--but what? Hoping to find other people who were sad about Kepler's demise, he decided to start a website. The following day, he went by the store and put up a sign announcing the site. Two days later, The New York Times ran an article about the closing and noted the stirrings of a movement to revive Kepler's, "complete with a website (www.savekeplers.com)." In the first week, the site received more than 20,000 hits. Opaterny began getting as many as 150 e-mails a day, and not only from around the Bay Area. He heard from people in Los Angeles, New York, Paris, even India--people who knew the history of the store, or who had gone to school in the area, or who had worked in Silicon Valley at some point. They all wanted to help save Kepler's.

Meanwhile, a Menlo Park city council member, Kelly Fergusson, had called a rally for Tuesday, September 6. Opaterny put the announcement on the website, and hundreds of people turned out, packing the plaza in front of Kepler's. Clark Kepler, smiling broadly, thanked people for their support. Opaterny read some of the e-mails he'd received. The mayor said a few words. Eventually, Fergusson got up to outline a strategy for resurrecting Kepler's. Mainly she emphasized the role that the community could play. "I wanted to empower them," she says. "We had volunteers in the crowd getting everybody's e-mail address." She mentioned an idea that had come up to have people purchase memberships, as supporters of public broadcasting do. She admonished the crowd to buy local--"No more Amazon." And she urged them to attend an emergency city council meeting that was to take place after the rally.

More than 100 people took her up on the suggestion, filling the council chambers. As people took turns speaking, however, it became apparent that grassroots democracy was not going to save Kepler's. Some of the speakers thought the store needed to carry more of this or that type of book or magazine. A few were critical of Fergusson for getting involved in matters best left to the private sector. One person denounced the whole idea of enlisting investors who would no doubt demand that the store be profitable, and thus forfeit its character. And on and on.
It was too much for some in the audience--Anne Banta, for one. After serving as head of corporate communications for the microprocessor group at Intel and then becoming employee No. 16 at Adaptec, she'd gone into business for herself, doing marketing for venture-backed businesses. She wanted to help Kepler's, but--as she sat there listening to the parade of speakers--she thought, I don't know if I can handle this. Finally, she got up and walked outside, where she ran into a small group of investors and entrepreneurs who had just done the same thing. One of them was Daniel Méndez.

"The eyes of the community are upon you"

Ever since that brief conversation with a Kepler's employee on August 31, Méndez had been trying to come up with a plan to save the store. The challenge he faced was more complex than it first appeared. He was dealing, after all, with a low-margin business that had apparently succumbed to forces beyond its control. Méndez believed he could find investors willing to put up the money to get Kepler's up and running again, but only if it was capable of generating the cash flow it would need to survive on its own. No one would be interested in resurrecting a business that would always be on life support.

And it wasn't just the investors he had to persuade. The Tan Group, which owned the property, was unlikely to renegotiate the lease unless it was sure Kepler's would be around for the next 10 years. The vendors would not extend additional credit unless they were confident they would be repaid. Even Clark Kepler had to be convinced. He had just been through a nightmare. He wasn't going to start all over again if he wasn't reasonably sure the story would have a happier ending this time.

Time was also a factor. If Kepler's wasn't going to reopen, it would have to file for bankruptcy--soon. Word of its closing had been trumpeted around the world, and creditors were lining up. If Kepler didn't move first, they could force him into Chapter 11, which would complicate any attempt to revive the business or undermine his efforts to make a graceful exit. Then again, if Kepler's was going to reopen, it had to do it fast. The holiday season was approaching, and the store had no staff and little inventory. Even with an injection of capital, the business could not afford to lose the holiday sales, which typically account for a third of its revenue for the year and the lion's share of profits.

"I was extraordinarily explicit," says Daniel Méndez.

With that in mind, Méndez set out to raise the money Kepler's would need to reopen. He went about it much as he would have approached the financing of a technology start-up--with one crucial difference. He stressed that the investors should not expect to see their money again and that they certainly wouldn't earn a good return on it. "I was extraordinarily explicit," he says. "I said, 'As an investment, this is a lousy one. It has to be a labor of love.'"

Nevertheless, he attracted a group of investors that would be the envy of any Silicon Valley entrepreneur: college friend David Cowan, a general partner at Bessemer Venture Partners; Bruce Dunlevie, another top VC and a general partner at Benchmark Capital; Geoff Ralston, the chief product officer of Yahoo; John Doerr, the legendary VC with Kleiner Perkins Caufield & Byers, who, ironically enough, had sponsored the firm's early investment in Amazon and still served on its board.

In fact, Méndez had more investors than he needed. For all his warnings, he wound up raising far more than the $500,000 he had originally said he was seeking. He kept only what he thought the business required and returned the rest. "I figured that the long-term success of Kepler's wouldn't be achieved by a one-time infusion of money, regardless of how big it was," he says. "If we cannot do it with the amount of money we have, we will not do it with 20 percent more."
In addition to money, Méndez needed experienced professionals who could pull the deal together quickly. There again, he had no problem. The law firm of Orrick, Herrington & Sutcliffe volunteered to represent the investment group pro bono. David Cowan lent his expertise in crafting the term sheet. Anne Banta agreed to work on initiatives that Kepler's could develop to open up new sources of revenue. And the task of writing the business plan fell to another volunteer, Mitch Slomiak, who had been the chief financial officer of two businesses--including a three-time Inc. 500 company--before becoming what he calls a virtual CFO, working with small, growing companies. "This was the fastest business plan of that quality I have ever done," he says. "I mean a professional business plan meant for sophisticated investors, with a detailed financial model that they could drill down into. We also needed something to show the landlord, which was tricky because we had to forecast rent. That could either tip our hand in the negotiations or get them upset. And we had to do it fast. I think it took about two weeks from my first meeting until we finished hammering out the fine points with the attorney who reviewed it before presenting it to the investors."

Then came the term sheet, which stipulated the conditions that had to be met before the investment group would do the deal. One called for renegotiating payment terms with creditors, especially the book vendors. That turned out to be relatively easy. But it soon became clear that Kepler's might have trouble satisfying the second major condition--that it renegotiate its lease and get a reduction in its rent. At first, the Tan Group showed little inclination to renegotiate anything. Phone calls were not returned. Letters got no response.

Méndez was concerned, and so was Kelly Fergusson. She, too, says she wrote letters and left phone messages. She also decided to pay a visit to the Tan Group's offices in Palo Alto. She rang the buzzer and tried the front door, but it was locked. She walked around to the back, where she found another door, this one unlocked. Letting herself in, she made her way to the reception area, which was empty. "Hello, hello," she called. A staff member appeared. Fergusson introduced herself and asked if they could sit down and talk. She wasn't offered a chair. She said she had come to let the Tan Group know how important it was to the people of Menlo Park and the surrounding area that Kepler's reopen, which would happen only if it could negotiate a new lease with more favorable terms. "I just want you to know that the eyes of the community are upon you," she said, "and the community will be very grateful for anything you can do." Then she left.

Fergusson proceeded to write personal letters to the principals of the Tan Group, which she then hand-delivered to their homes. She also contacted other public officials, who wrote letters as well. Whether because of their efforts or for other reasons, the Tan Group--a spokesperson for the company denies it was slow to respond--soon opened talks with Kepler and his lawyer. Both sides bargained hard. At one point, the Tan Group agreed to reduce the rent, but only if Kepler's reduced its footprint and made room for another tenant at what had been the front entrance. That was unacceptable to both Kepler and the investors, who were the ultimate decision makers.

The negotiations dragged on through September. "We made sure they understood the negative effects Kepler's closing was having," says Méndez. "All the businesses around the store had suffered fairly dramatic drops in their own revenue. So the Tan Group could have been looking at a cascading effect that could lead to other problems. Of course, that's standard negotiating."
Meanwhile, time was slipping by. Each week that the store remained closed was a week of potential profit down the drain. Having lost September, Kepler couldn't afford to lose much of October. He set Saturday, October 8, as the target date for reopening. That meant he would have to send out a press release on Monday, October 3, if he was going to get the media coverage and the turnout he hoped for. But on Sunday, October 2, the deal was still not signed. Once again, Kelly Fergusson took matters into her own hands. She called the home of Faber Tan, the 70-year-old president and CEO of the business and a philanthropist who had been honored in the past for his contributions to the community. He called her back the same day. "I made a personal appeal that they treat this as a priority," Fergusson says. "He sounded generous. He wanted it to happen."

On Monday morning, the new lease was signed. On Friday, the investment deal closed.
"I couldn't go to the restroom"

Clark Kepler still can't quite believe what he's been through as he sits in the Café Borrone in mid-January and reflects on the past five months. "At the end of August, I was going 100 miles per hour to close the store," he says. "In September, I was going 100 miles per hour to open it. Some days I was doing both at the same time. It was schizophrenic."

During the week leading up to the reopening, more than 100 volunteers helped get the store ready. On Saturday morning, between 500 and 800 people showed up for another rally on the plaza. Anne Banta talked about a new program through which people could buy memberships in Kepler's Literary Circle, with contributions ranging from $20 for students to $2,500 or more for the Platinum Circle. About 640 people signed up the first day. "There were women buying memberships, regular customers in their seventies, pledging $500, $1,000," says Cynthia St. John, one of Kepler's buyers. "And these are people on fixed incomes."

St. John was working one of the store's two registers. "We had lines out the door," she says. "I couldn't go to the restroom. I don't know the exact numbers, but that day was better than any Christmas season day ever. It was incredible. I mean, I didn't get out of here until midnight. And then I worked 14 or 18 days in a row, seven days a week, just off the energy."

Frank Sanchez, the head buyer, remembers putting in 60 hours a week or more, reinstating all the orders he had canceled at the end of August and trying desperately to catch up on what he'd missed while the store had been closed. That meant ordering tens of thousands of books, all of which had to be labeled and put on shelves. It was more than the staff could handle. More than 100 volunteers stepped forward again to do the grunt work.

Mainly, however, the community supported Kepler's by buying lots and lots of books--which called not only for loyalty but for patience. At one point, Kepler was working a register that had a long line in front of it. A customer put an armload of books on the counter. "Thank you for waiting," Kepler said.

"I've been waiting 30 days," the customer said.

Because the store had lost 40 percent of its staff by the time it reopened, many employees were new. Inevitably, mistakes were made, but few people complained. "What I heard, time and again, was customers saying, 'I want to thank you for reopening,'" says Sanchez. "There was a lot of goodwill going on."

When the dust settled and Kepler rang up the numbers, he found that book sales from the reopening through December 31 had increased over the same period the year before, even though the store had been open significantly fewer hours in October and November, when it had closed every day at 6 p.m. But the biggest surprise had to do with the membership program. Anne Banta and Daniel Méndez had met with considerable skepticism when they first proposed it. The company's new board of directors had set a goal of signing up 500 members and raising $70,000. Kepler's had blown away that target within the first two weeks. By January, 1,800 people had enrolled in the Literary Circle, contributing $200,000 toward keeping the store alive.

As impressive as that was, it also suggested the challenge that lay ahead. The shock of Kepler's closing had galvanized the community. In the heat of the moment, hundreds of people had committed time, money, expertise, and labor toward preserving a business and an institution that they obviously valued greatly. But how do you maintain that enthusiasm? Would those 1,800 people sign up again next year or the year after? Above all, was it really possible for an independent bookstore to overcome the powerful forces that had led to its downfall?

Daniel Méndez, for one, has no illusions. "It's a grand experiment," he says. "Kepler's is only going to survive if the community buys there. And I'm going to make sure that everybody knows how it's going. Whatever happens won't come out of the blue this time. People will have plenty of notice. And if they choose to let it die, you know what? We all tried. If it dies again, it will be very dead."

Bo Burlingham is an Inc. editor-at-large and the author of Small Giants: Companies That Choose to Be Great Instead of Big.

Photo from SFist