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Indies See Window of Opportunity in Movie Gallery’s Exit

2 Jul, 2010 By: Erik Gruenwedel

Liquidation of Movie Gallery and subsidiary Hollywood Video locations may appear to be another nail in the coffin for the traditional video store as Netflix, Redbox and Blockbuster Express increasingly gobble up greater shares of the packaged-media rental market.

But don’t tell that to independent video store operators who are tripping over themselves to snatch up shuttered Gallery/Hollywood Video (and even Blockbuster) store locations to fill a consumer demand for DVD and Blu-ray Disc movie rentals they say the ubiquitous kiosk can’t handle.

“It’s an absolute gift,” said Donald Grim, owner of Twin City Video in Centralia, Wash., who is opening up to three new stores in the proximity of former Gallery locations.

Matthew Schneider, owner of Digital Dog Pound, said he took over two Gallery locations that he claimed had been profitable.

“We do not run the overhead Gallery did, and we don’t have any of the debt they had,” Schneider said. “Our niche is the buy-sell-trade element.”

Indeed, Mr. Movies, a 31-store chain with locations in Minnesota, Missouri, South Dakota and Wisconsin, is conducting market research regarding vacant Gallery/Hollywood stores throughout the Midwest, according to Joe Engen with the Video Buyers Group.

The gold rush isn’t surprising considering the departure of Gallery/Hollywood left a $750 million rental market hole and more than 700 profitable store locations up for grabs, according to Michael Arrington, analyst with Adams Media Research. He said numerous opportunities exist for independent and regional video store operators to fill the gap left by vacating national chains.

“How big an opportunity remains a question,” Arrington said, adding he doubts independents will take over the entire market. “But we do think a large portion of it will be taken.”

The analyst said the 28-day window imposed by three major studios significantly helps all brick-and-mortar locations competing against kiosks, as does the reality that the majority of Netflix’s subscribers prefer catalog to new releases.

“We don’t think the entire Gallery store [footprint] is going to go away,” Arrington said. “I see no reason why somebody wouldn’t look at one of those [profitable] stores as a potential going concern.”

Grim said he surveyed local Gallery/Hollywood stores that were operating in the black and found the locations were paying exorbitant rent and still making comfortable margins.

“It told me there is still a good residual business here,” Grim said, incredulous that the previous Gallery location paid $8,000 a month in rent and still was profitable.

“How can you support that?” Grim said. Instead, he opened a store between the former Gallery/Hollywood locations, buying up the fixtures from the shuttered stores.

“If it hits, then I will start looking at the other areas where there were profitable stores and maybe open some more,” he said.

“We found our niche was offering a large library of catalog titles along with new releases,” said Dan Morrow, owner of Movietime Video in McMinnville, Ore., who has seen business increase following the shuttering of local Gallery stores.

Ken Trenary, owner of a Family Video franchise in Williamsport, Md., said he has seen the national chains come and go during the 27 years he has operated his store. St. Louis-based Family Video is (after Gallery’s exit) the second-largest national rental chain, with 625 locations, in addition to a website.

“We have a Blockbuster Express just down the street in front of a convenience store with three feet of snow in front of it and icicles hanging from it during the winter,” Trenary said. “I think you get the point.”

Henry Turner sold 10 Premier Video stores in Arkansas to Gallery in 2002 and has returned to reclaim some, among other shuttered properties.

“I see it as a window of opportunity for the independents,” Turner said, adding he is pursuing profitable Gallery locations that fell victim to the company’s massive debt.

Turner said demand for the video store remains strong despite the surge in rental kiosks. His “gut feeling” for the rental industry, he said, and the 28-day window offer significant advantage to video stores.

“There have been some pretty good improvement for the independents,” he said.

Turner said challenges continue in finding the right people to talk to regarding shuttering stores and ongoing liquidation. He said he’s in discussions with owners of about 22 Gallery locations, adding that prices on fixtures, inventory and related materials remain in constant flux.

“I don’t think anybody knows what was exactly available in individual stores when the hammer fell,” he said.

Steve Schiller, who sold his Fergus Falls, Minn., stores to Gallery in 2004 (leasing the building space in return), said the locations (the only video rental stores in town) were among the last wave of Gallery stores to face liquidation.

“It was a profitable business before, and we feel it still is,” Schiller said about operating a video store. “We feel there are still legs in the video business. It is not something we are just going to walk away from.”

He said Gallery’s departure would leave a town of 15,000 without a video store, but two Redbox kiosks. Schiller expects the local Walgreens will soon get a Redbox too.

Schiller said depth of available titles and catalog fare make the traditional store competitive with a kiosk.

“People still like to come in see what movies are available,” Schiller said. “We can co-exist with kiosks.”

The Gallery/Hollywood void presents a significant business opportunity, better than opening a completely new video store, according to veteran retailer Mark Vrieling, owner of Rain City Video in Seattle. His chain is expanding operations to possibly include three closing Hollywood Video locations. He said the process has been positive, with personnel from the shuttering stores forthcoming with monthly store gross revenue figures, store foot traffic, parking and customer demographics. Vrieling said one of the stores even put literature about Rain City on their counter to inform customers where to go after the location closed.

“Given the current real-estate market and business climate, it is nice to have the luxury of multiple verified good locations and have hungry landlords that know they are not the only game in town,” Vrieling said.

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