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Gallery CFO Sees Potential for 300 Game Zones

25 Sep, 2003 By: Holly J. Wagner


Movie Gallery has plans to expand its Game Zone store-within-a-store test from seven to 15 stores by the end of the year and sees potential for it in about 300 of the chain's 2,000 stores, an executive told investors last week.

“We're beefing up the game inventory in the stores, and we have worked on some more savvy marketing and signage. I think the next step for us in the game business is moving out the continuing test,” EVP and CFO J. Steven Roy said.

But only 300 to 400 of the chain's 2,000 stores are in markets large enough to sustain the flashy game store concept, he said.

“We are actually building out a separate unit within the store with glass walls,” he said. “It has very exciting young-age coloring schemes with green and purple — it hurts my eyes to go in and see it, but I think kids like it. It has some kiosks where kids can try games before they buy them. We have game contests in the stores, and there's a flat-panel screen in there to play games.”

Although the Game Zone is a separate area in each store, the chain departs from competing models by letting consumers conduct game and movie transactions together.

While the chain is expanding steadily, the cost to open new stores has dropped by about $10,000 per store in the past year, mainly because product costs have dropped.

Although about 40 percent of Movie Gallery's rental business is still VHS, until studios brought VHS prices into line with DVD, the chain was forced to rely on DVD for copy depth.

“It made for dumb consumer-purchase decisions on our part,” Roy said. “We would be underbuying the VHS market based on current demand merely because the studios had a high price on it. We went through a period of time when we considered buying DVD players for our high-volume video renters so we could make them happy while at the same time reducing our product costs.”

The chain has benefited as sellthrough pricing on DVD has pressured the cost of rental VHS lower.

“We've plowed a lot of that money we saved on the video side back into the game business, where we historically have not been very competitive,” Roy told analysts at the Wells Fargo Securities Consumer Conference.

On the video side, sales of previously viewed titles are about 10 percent of the chain's bottom line, Roy said. As DVD prices have edged up around $1 over the past year, the chain sees less success with new movie sales.

“We do find that when we take the price point internally from $19.99 to 21.99, which is a 10 percent increase, we have much higher than a 10 percent degradation in unit sales because we've crossed what in many consumers minds is a fairly important price threshold,” Roy said. He expects mass merchants to feel the same pressure.

But while the bigger chains — Blockbuster and Hollywood Video — feel pressure from online rentailer Netflix and video-on-demand (VOD) via cable, satellite and the Internet, Roy sees Movie Gallery as more insulated from those competitors.

Movie Gallery looks for sites in towns with a population between 3,000 and 25,000, which makes them less attractive to the other chains. While many of those markets may not be big enough to support Game Zones, they protect the chain in other ways.

“Technology will come slower in some respects and may not ever be able to impact some of these smaller towns,” he said, adding, “Many of these markets just cannot sustain two major video stores.”

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