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Blockbuster Shrinks from 5,000 to 3,200 Stores

A shuttered Blockbuster franchise in Central Kentucky
A shuttered Blockbuster franchise in Central Kentucky. photo/bmm

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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