Blockbuster Shrinks from 5,000 to 3,200 Stores
NEW YORK, NY — Last week Tuesday Thomas Casey, chief financial officer of Blockbuster Inc. (NYSE: BBI), discussed the chain's strategy of rationalizing its brick-and-mortar stores to meet fast changing technological advances in movie distribution.
The CFO stressed that consumer demand for videos has been stable, supporting a $10 billion industry. But "the industry is undergoing change," says Casey.
Casey says that the chain is focusing on growing its digital initiatives, while shrinking its store base in what he calls the franchise chain's "store rationalization program."
In its annual report ending January 4, 2009, the chain reported 7,400 video and game rental stores in the United States and twenty other countries. More specifically in the United States, monthly trade journal Franchise Times reported that Blockbuster had 4,855 stores and 850 franchises in April 2008. And then ten months later, the company reported that in the U.S. it had 4,200 stores, including 550 franchised units. "We have about 3,600 stores today," Casey announced in Tuesday's conference. He then lowered the number. "As the 3,600 stores have come down today to about 3,200, at the same time we have expanded the total points of presence that customers access movies," he declared about the company's store rationalization program.
Casey reassured that a core group of stores will eventually remain, "In-store will be the biggest piece of the pie." He stated that 35% of the stores generate about 80% of pre-tax earnings for Blockbuster Inc. But when it comes to future high flyers, "the biggest piece of expansion is vending," he said.
Competitor Red Box, a $1 movie rental kiosk owned by McDonald's, Coinstar and other investors, has quickly swept through the country. Casey observes of how these kiosks impacted Blockbuster Inc. in 2009, "It was difficult in that environment to sustain positive comps. Revenues were down 15% but EBITDA was down only 5%," he said.
Blockbuster contracted with NCR to answer the Red Box challenge. Casey stated that this contracting made the firm's exposure minimal. "The kiosk business is just a royalty where we collect on revenue from NCR, 65/35 or 60/40 [split]." It has continued to develop a mail subscription service for its DVDs and games that compete with Netflix. And the company now offers a digital delivery of movies called Blockbuster on Demand.
Blockbuster's describes how the "windows" of when movies are released on DVD kiosks is changing. Movie houses such as Universal Studios Home Entertainment and Warner Home Video are releasing movies for kiosk distribution four weeks after DVDs are released at retail stores. Competitor Red Box has sued over the move, while Blockbuster supports it in order to protect its store revenues. Casey thinks that well publicized lawsuits will shape the future of these rental "windows".
On January 14 Blockbuster Inc. announced that its store base had shrunken down to a level in which it no longer was liable for $24 million in certain letters of credit. The letters of credit were maintained by Blockbuster to cover potential liability for Viacom under store leases made in connection with Blockbuster's split off from Viacom in 2004. The obligation to maintain a letter of credit expired when Viacom's overall exposure hit below $25 million.
"Eliminating this final $24 million of credit exposure frees up cash and helps our liquidity," said Casey. "Not only were we able to eliminate the previous $51 million of letter of credit exposure with Viacom in 2009, we also raised $675 million on our bond offering to extend our debt maturities into 2014. While 2009 was a challenging year in the overall macroeconomic environment, what we were able to accomplish in such a credit strapped market last year was truly remarkable."
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Related Reading:
- Redbox sues Warner over DVD release window (Video Business, Aug 19, 2009)
- Be kind, don't rewind (April 2008, Franchise Times)
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Activist investor Carl Icahn has given up his board seat on Blockbuster, saying that Institutional Shareholder Services guidelines restrict how many board directorships he can sit on. That's polite corporate talk for saying, "On my list of things I wanna do in life, you ain't important anymores, fuhgetaboutyouse."
The New York Times hints at why the New York-born board member may want to leave.
Corporate leaders were all publicly lovey-dovey at Icahn's decision to move on. The chairman said, "I love you, man. You're so great." To which Icahn replied, "I loved working with you so much, Bro. You're the best. Well, I guess I'll see you when I see you. Taxi! Where's a taxi when I need it?"
Blockbuster made it onto The Street's Five Dumbest Things on Wall Street this week. Here's what they say about Carl Icahn's move:
The Street also pokes fun at the public love-fest between the chairman and the CEO, just like the Blue MauMau guest did a week ago.
was this comment;
The chart at Think For A Moment does tell the story;
Australian Franchise Opportunities, a common sense approach to franchising
This comment on Quiznos is off the topic of Blockbuster. It has been moved here. - Mr. Blue MauMau, Moderator
In a 2008 article, Franchise Times spoke about some of the disruptive technologies and threats that this chain has had to deal with. They are numerous and sizable. If a prospective franchisee read that article, it ended with this upbeat word of encouragement.
Those bullish sentiments by franchisees and trade associations were said at 4,855 stores. That was some 1,600 stores ago. In not quite two years, those video stores have now, well -- gone with the wind. Its CFO said last week that the "store rationalization program" will have more outlets disappear.
Granted, there is certainly another side of the story. The article above is simply coverage of what Blockbuster's chief financial officer said in a meeting to investment analysts at last week's Cowen & Company Consumer Conference in New York City. Nothing more. There are things we don't know. It's possible that the company will say it is only closing down company-owned stores while franchises have grown, so franchises now benefit from less competition.
If I were selling Blockbuster franchises, that is how I would want to spin events.
But what surprises me is the difficulty of finding articles that record this chain's shrinkage or that anticipate it. The reporter and interviewees seem to have some unwritten rule to sound bullish, no matter what. Maybe they were trying to convince themselves that things will turn out alright for their business. I don't know. There is probably another interesting news story in seeing what these individuals say now, should FT decide to revisit the story.
Here is evidence that reading news that touches on the realities of the street can be very tough to find for franchise buyers. Franchisees would want to know that store outlets are shrinking in a major way. But there is a bias to sell and inflate. As a reporter, I wonder how much bullish events are lifted up higher than reality dictates and how much bearish news is simply brushed aside, even when one interviews multiple and divergent sources. I think that is a healthy thing for a reporter to think.
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An exception:
Trade publication Home Media Magazine published information on the closure of stores the day of the conference, Jan 12. Kudos.
Blockbuster's CFO says that 35% of the 3,600 stores provide 80% of the company's revenues. He obviously is talking about company-owned stores.
Does that mean that BBI is targeting a reduction to 1,260 stores and that the franchises will be 193 since they seem to be in tow?
Look at what the WSJ reported in September of last year.
That comes out to 2,200 stores. I bet the number of stores finds support at just under two thousand in 2011.
What do the franchise gurus here think? With fewer company stores, will the current 550 franchises find relief?
It has been rather widely believed for about ten years that going to a store to rent a movie was a dying business. But FranWads never bother to do that kind of life cycle investigation.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Who would you recommend stay in the Blockbuster system for another five years and make money, and who would you recommend bail out? What's your cutoff point?
Any strategies on how to milk this cow? Or does the Franwhack farm only have blocked roads because the farmer's instinct says so?
And it won’t take that long. Technology and alternative access points will become increasingly more popular as the market quickly embraces that ease of access. Product distribution has changed and will continue to change. This is going to snowball downhill before our eyes.
But that industry also has to deal with the changing habits of consumers where the vast majority of product being produced is crap and consumers lose interest to where ‘ho hum’ consumers consider such access as cable were they become particularly bored.
The bigger market of children’s videos and games has stiff competition from supermarkets and the internet where parents are tending to buy rather than rent for viewers who watch the same videos over and over again and for just over twice the price and sometimes less.
It will be interesting to look at this industry in another 12 months. It is in death throes and anyone buying ANY of the many franchise video rental franchises should consider all of the competition that will challenge attempts to survive.
In Australia when EzyDVD was heading to the wall it was taken up by Franchise Entertainment Group who also own Video Ezy and Blockbuster. Obviously those idiots were thinking cheap ‘expansion’.
Whatever happens in this industry won’t leave it as a franchise concept worth considering and as they crash those franchisors will be desperate to attract any investor capital as they sink. Their problem will be that even foolish investors will have the reality of a dying industry in their face. But that is just my opinion ..
Australian Franchise Opportunities, a common sense approach to franchising
Blockbuster Inc. is looking for franchise owners. As of this posting, its website writes:
There's a few miniature side stories with this article.
When I took this photo this morning, the business owner next door poked his head out. "Are you leasing the space?" he excitedly asked. "Who is it?"
"I'm not the new tenant. I'm just a reporter taking a photo for a story on Blockbuster," I replied.
His smile disappeared but he was interested in the Blockbuster story.
The empty Blockbuster store, owned by a franchisee, has been sitting empty for months. The franchise was one of two retail outlets in the western wing of a strip mall. The next door neighbor apparently did not think that the empty space was good for his business.
That's a sentiment that most retail store owners can relate to.
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