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Blockbuster to Accelerate Store Closings, Reduce Store Size

11 Jan, 2006 By: Erik Gruenwedel

Blockbuster Inc. chairman and CEO John Antioco said he is open to revisiting the chain's troubled No Late Fees policy, evaluating pricing, restocking fees and even working together with online rival Netflix.

“We will collaborate with the Devil if it will help our business,” Antioco told a group of investors Tuesday afternoon in Phoenix.

But he doesn't think it will come to that in 2006. Antioco, who reiterated 2005 was a “challenging year,” said the company would outperform the rental industry's current “high single digit rate of decline.”

“We think we can do better than that,” he said.

Antioco said Blockbuster would achieve this in part by accelerating the number of store closings from 150 annually, which he said could have a positive impact on same-store sales. He said 25 percent of business from shuttered stores could be transferred to other retail locations. The chain would aim to create average size stores of 4,000 to 5,000 square feet compared to 8,000 square feet previously. Blockbuster is poised to cut $75 million in general and administrative costs this year as well.

“We are shrinking our retail footprint,” Antioco said. “The rate of store capacity shrinkage will increase [more than] the rate of [capacity] decline in the industry. That would be a positive for us. We are scrutinizing more closely lease renewals.”

Antioco, who said he wouldn't second-guess the decision to eliminate late fees, admitted the policy has had an impact on the availability of new releases. He said Blockbuster was looking at ways of improving turns, including crediting customers who return titles early.

“It would help some,” he said.

Antioco said the company is also ready to jumpstart Blockbuster Online at a faster rate than Netflix, but admitted the service's 1 million-subscriber base had stagnated since the second quarter.

The CEO said Blockbuster Online's (undisclosed) subscriber acquisition costs are lower than Netflix; the service's original year-end target of 2 million subscribers and profitability in 2007 remain on track. He claimed 80 percent of subscribers get titles in 24 hours due to increased automation at 30 regional distribution centers.

Blockbuster Online, which also distributes product from 1,000 retail stores, is set to open five distribution centers and incorporate 10 additional retail stores this year, according to Antioco.

“We don't believe we are five years behind Netflix even though we got into [online rentals] five years later,” said Antioco.

He said Blockbuster would continue to integrate upwards of 33 million retail customers to online, where the average industry spend is about $15 per month, compared to $7.50 at retail.

“We will continue to convert as many retail customers to online as we can,” said Antioco. “The real heavy lifting in online is behind us. Now it is more a maintenance issue.”

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