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Gallery's Mityas: ‘Moving Forward'

3 Jul, 2008 By: Erik Gruenwedel

Much has happened in the DVD rental market as Movie Gallery Inc. sat sequestered in Chapter 11 bankruptcy protection, attempting to surface from under a mountain of debt via a $1.1 billion acquisition of Hollywood Entertainment Corp. in 2005.

Rival Blockbuster Inc. aggressively re-branded itself an entertainment retail buffet, and online DVD rental pioneer Netflix Inc. continued to expand by-mail dominance and just co-branded (with Roku Inc.) a mini-set-top box that streams movies directly from the Internet to the TV.

Dothan, Ala.-based Gallery — at one time a profitable company with $30-plus share price catering to a largely rural demographic — has a new lease on life (thanks to private equity capital) underscored by a mandate to return to profitability as quickly as possible.

To achieve that end, Sopris Capital Advisors LLC brought in new CEO C.J. Gabriel Jr., who, in turn, hired Sherif Mityas as COO and president of retail operations.Departed are former retail president Jeffrey Stubbs, EVP and chief merchandising officer Bo Loyd, and founder, chairman and CEO Joe Malugen, who retained his board position.

Drawing customers and revenue to Gallery's 3,300 retail stores, including Hollywood Video and Game Crazy, falls on the shoulders of Mityas, a former aeronautical engineer, who brings 20 years of retail consulting experience, most recently with A.T. Kearney Inc.

Mityas, in a phone interview with Home Media Magazine, explained how he envisions Gallery's future.

  • HM: Blockbuster has made it a priority to expand beyond traditional rental to include sellthrough of movies, games (new and used), food, hardware and other related consumer electronics products. Is Gallery following a similar path?

  • Mityas: We need to focus on what our customers want. What our customers need is a full breadth of movie and game product. And they need that movie theater experience. So we are going to provide products and services that meet both their in-home rental as well as library needs both from a new release and previously viewed perspective.

    It's an opportunity for us as a retail organization to become the destination for movie and game fans in whatever way they want to shop and buy or rent their products. We will be focused on all areas of movie and game products, including game hardware.

  • HM: Do you see Gallery pursuing consumer electronics retailers similarly to what Blockbuster did with Circuit City?

  • Mityas: No, not all. We believe there is an opportunity to really focus on a singular shopping experience. Folks coming in on the weekend may not want that big screen TV, but we know they want movies.

  • HM: Can the traditional rental store survive without pursuing sellthrough of related products?

  • Mityas: We think sellthrough of DVD movies is very important. As you see more consumers building their own home libraries … in light of the price of going out, with fuel and with everything else … we think it is going to be a very important part of our business going forward.

  • HM: How important is high-definition Blu-ray Disc to Gallery?

  • Mityas: As the migration to Blu-ray occurs, we believe that will even further increase the sellthrough portion of the business.

  • HM: Are you working with any of the studios or consumer electronics companies to offer point-of-purchase or educational kiosks for Blu-ray in the stores?

  • Mityas: Yes, we are, but I would rather not elaborate at this time. I can assure you that we will be heavily vested and have a broad presentation of our Blu-ray bundles and retail packages going forward. And that involves opportunities with both studios and consumer electronics companies.

    We think Blu-ray is very important for the whole industry. If you look at the conversion that occurred from VHS to DVD and you look at a similar conversion as the penetration of Blu-ray players continues to increase, in the upcoming holiday season, we believe it will be a hot gift. As consumers experience the difference [from standard DVD], we believe it will drive in-store rental and sellthrough of Blu-ray that is not possible today from an online perspective.

  • HM: Is the rental option for Blu-ray a good catalyst for wider adoption?

  • Mityas: Absolutely. We are going to be very aggressive in getting our customers to try Blu-ray. In certain markets we are going to be the low-cost Blu-ray provider from a rental perspective to generate penetration coming into the important holiday season.

  • HM: Will there be any education for consumers about what Blu-ray brings to the home entertainment experience?

  • Mityas: Yes. What we want to give our customers in-store is a direct comparison between standard DVD and Blu-ray.

  • HM: Is Gallery pursuing a rental kiosk strategy both in-store and/or through third parties such as Redbox?

  • Mityas: Our strategy right now is really focused in-store. We may pursue kiosk opportunities that extend the hours of our stores. But we have 3,300 stores we need to focus on first.

  • HM: Is Gallery pursuing an online by-mail rental strategy?

  • Mityas: We are always looking at ways to improve our e-commerce capability. You will see more to come on that.

  • HM: It appears, as Gallery exits bankruptcy protection, it wants to put one foot forward at a time.

  • Mityas: At the core, we are a retailer. And folks still want to come to a retail store, have a shopping experience and peruse the titles.

  • HM: What are your core assets?

  • Mityas: Our rural locations in smaller communities catering to relatively underserved consumers. We are also focused on moving forward a very coordinated event and merchandising plan for our stores that will create more of a movie theater-like experience. This will include the sights, smells [of popcorn] and sounds of going to the movies. We will create more of that experiential shop for our customers that they can't get by sitting at their computer or going to a kiosk at the grocery store.

  • HM: Will there be a redesign of stores?

  • Mityas: Absolutely. We are going to reformat a number of our stores to be much more of a movie experience.

  • HM: Do games play an important part in the Gallery renaissance?

  • Mityas: We have a great brand in Game Crazy, one that we will continue to leverage not only alongside our movie business but as a standalone concept.

  • HM: You had MovieBeam, then shuttered it and sold it for scrap. Will Gallery re-pursue a streaming or download strategy?

  • Mityas: We are going to be cautious how we get into that. MovieBeam was not the right avenue at the right time for us. We clearly see the advantages of being in that area, but we are focused on a different path to get there.

  • HM: Was it a mistake to acquire MovieBeam?

  • Mityas: I believe it was premature. But again, [digital] is something we understand the value of. But we have a different plan in mind how to get there.

  • HM: What do you say to the studios that want to circumvent traditional rental with same-day cable VOD? Essentially, they want to put you out of business while at the same time provide you with content.

  • Mityas: We have a lot of respect for our studio partners. I know they understand the economics of the movie business very well and understand the value of the rental and retail business to them. We can be joint partners in helping them achieve [profitability]. At the end of the day, studios understand the value of the different distribution channels and they understand the value and profitability of the release schedules.

    In the foreseeable future, given the Blu-ray conversion many of them are focused on, we will continue to be solid partners with them.

  • HM: Sounds like you think the studios need Gallery, Blockbuster and others to get the word out about Blu-ray?

  • Mityas: I think there are clearly some synergistic opportunities for the studios and rental/retail organizations in Blu-ray and the broader catalog business as well.

  • HM: Blockbuster CEO Jim Keyes believes rental can offer the studios greater margins of a larger pie compared to larger margins of a smaller pie via video-on-demand. Do you agree?

  • Mityas: Jim is correct. The issue all comes down to margin mix that different [distribution] channels provide to the studios (rental, retail, catalog or Blu-ray) … If you can improve the portfolio of the margin mix rather than focus on any one area, such as VOD, there are opportunities to continue to be solid partners.

  • HM: What is Movie Gallery's biggest asset to studios?

  • Mityas: Our No. 1 strength is remaining connected to millions of customers in rural and urban locations … in markets that are underserved especially from a VOD perspective.

  • HM: Was acquiring Hollywood Video a mistake?

  • Mityas: At the time there was a great deal of synergy that was viewed by all parties. In hindsight, to go back and review what is good and what is bad is pointless. It is what it is. Now, we have 3,300 great stores. We are going to focus on moving forward.

  • HM: What changes do you want to implement in the first few months?

  • Mityas: We need to instill a greater focus on our customers. One of the key messages I have been sending out to our 30,000-plus employees is that we are going to start caring more. … Second, we will be much more focused on our events and merchandising in our stores. And finally, we are going to be focused on creating more synergies between the brands (Gallery, Hollywood Video and Game Crazy) to leverage the power we have across our customer base across all three areas.

    …Unless you create an experience and delight customers every time they are in your store, you are going to lose them.

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