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The End of No Late Fee as We Know It

15 Jan, 2006 By: Kurt Indvik

A year ago, when John Antioco announced Blockbuster's No Late Fees program, I think I shared the mixed feelings of many industry observers. It was a bold move, no doubt, one of the boldest in the chain's history, to counter what Antioco called “The No. 1 dissatisfier in the industry.” I certainly was not alone in admiring Blockbuster's chutzpah and marketing zeal to elevate its goodwill with customers.

At the same time, I wondered just how the chain could possibly make up for $250 million to $300 million in annual revenues which simply evaporated with that one strategic move. The fact that its competitors did not follow Blockbuster's lead seemed to indicate they couldn't see the equation working, either. Blockbuster had tested the program in select markets and seemed comfortable with the assumption that this groundbreaking move would generate enough increased traffic (Antioco said last week they were expecting about an 8 percent increase in transactional traffic, which has not occurred)—hopefully bringing back some of the market share lost to Netflix—to make up all but about $50 million of that lost revenue in the first year, after factoring in marketing and inventory expenses to execute the program. Meanwhile, the chain also looked at shaving operating costs and boosting its own online rental business.

A year later, it seems initial concerns may have been proven right, as Blockbuster, indeed, can't seem to come quite so close to making up for the lost revenue in late fees. Antioco said last week during an analyst call he figures the policy will actually cost the retailer $125 million in 2005.

The Blockbuster chief said he would not rule out a variety of responses if, in six months, analysis shows the program is not working any better. If the rental business is expected to be flat to slightly down in 2006, and if the program's initial metrics hold as they seem to be (that is, the same percentage of people keeping films out late for the average one to two days) then I have to wonder what will change to reduce that loss to the business? Indeed, about 160 of Blockbuster's franchise stores have seen enough and have dropped their participation in the program due to its impact. I would bet that number increases each month in 2006.

Antioco says the company might consider any number of responses in 206, from reinstituting late fees, to increasing rental fees to increasing the “restocking” fee for people who hold the video past their allotted seven days. My bet…goodbye No Late Fees. Raising rental fees is tricky, since you are bound to lose some customers because of it. Will that fee increase be enough to ameliorate both the loss of revenue from no late fees and the expected loss of some customer base? A boost of the “restocking fee” impacts, I am guessing, too small a percentage of the customer base to make much of a difference.

No, I think the prognosis for No Late Fees is not good and getting worse by the day. I think Mr. Antioco, as he continues to downsize stores counts and square footage, as he continues to try and migrate customer to online subscription models, will have to bite the bullet and find a way to re-introduce late fees once again.

What do you think? Let me know.

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