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Blockbuster Shrinking Retail Footprint, Ad Spend

31 Jul, 2007 By: Erik Gruenwedel

Blockbuster Inc. may be expanding its Internet prowess through Total Access; it also plans to significantly curb retail space at many of its 8,000 leased stores, according to new CEO Jim Keyes.

During an investor call last week, Keyes outlined several areas he envisioned would help transition the Dallas-based company from a pure DVD rental service to entertainment convenience store.

Keyes spent 20 years as CEO of 7-Eleven where he said he helped the venerable convenience chain up its offerings from soda, beer, chips and slurpees to fruit, household wares and auto supplies, among other items.

Specifically, Keyes questioned why Blockbuster would continue to operate its traditional 5,000-to-6,000-square foot locations based on the fact that most consumers frequent Blockbuster in search of new releases.

Blockbuster, which last year aggressively downsized international operations, has reportedly shuttered 519 stores in the first half of the year, compared to 427 locations last year.

It claims to cater to about 1.2 million retail customers on a daily basis.

Keyes said the company was in the process of reviewing and redefining all store locations, including offering new retail items at existing larger store fronts and incorporating new inventory management systems to manage a smaller inventory in a much smaller footprint at about 1,500-square feet per location.

“If successful, [the new inventory system] would allow for more smaller stores that are more convenient for customers,” Keyes said.

He said Blockbuster had suspended all discretionary marketing programs until management developed a better understanding of the cost and benefit of each.

The reduction in retail space was welcome news to analysts, many of whom have long felt the chain wasted overhead on catalog titles.

“They are just too big,” Pali Research analyst Stacey Widlitz told the Associated Press. “If they had the same amount of sales in smaller [stores] that makes more sense.”

Michael Pachter, analyst with Wedbush Morgan Securities in Los Angeles, said Blockbuster's subscriber surge coupled with Netflix's announced drop of 55,000 subs would motivate it to substantially curb marketing costs.

He said Blockbuster spent $154 million in 2006 on marketing, including an additional $10 million in the fourth quarter when launching Total Access.

In the first quarter of this year, Pachter said Blockbuster spent $58 million on marketing and $76 million in the second quarter, ended July 1. With Blockbuster adding and Netflix losing subscribers, he said Blockbuster doesn't need to track customers so heavily.

“They are going to try and cut marketing to find a happy balance,” Pachter said. “All they really care about is defending their in-store customers from Netflix.”

He said the company's sustainable marketing spend rate is about $35 million a quarter, which means Blockbuster could slash as much as $25 million in marketing per quarter.

“They can cut quite a bit,” Pachter said. “Blockbuster would be totally happy if neither they nor Netflix added another single customer. If Netflix isn't gaining customers that means Blockbuster isn't losing any.

“And if Blockbuster isn't gaining Total Access customers, movie rental customers are paying as they go and [Blockbuster is] making more money.”

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