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Hollywood Video Testing New Concepts in Two Communities

7 Dec, 2001 By: Joan Villa

Hollywood Entertainment Corp. has opened two test stores in the Portland, Ore., area to research new concepts and product mixes as part of a license agreement with Boards Inc., a company majority-owned by Hollywood founder, president and c.e.o. Mark Wattles, Video Store Magazine has learned.

The stores, each approximately 4,000 square feet, are in the Portland suburbs of Molalla and Beaverton and are apparently testing varying levels of DVD inventory and a new "cutting edge" approach, sources say.

One contains 50 percent DVD in an atmosphere that tries to "step it up a notch" by playing the latest music videos rather than movies, according to a clerk. "We're trying to make it more exciting to rent videos," the clerk says.

The stores opened in July after receiving approval from Hollywood's board of directors in January, according to the chain's third quarter earnings report filed with the Securities & Exchange Commission last month.

"These stores will be operated by Boards and are not included in the 1,809 stores operated by the company," notes the report, adding that Wattles is majority owner of Boards.

Under the license arrangement, Boards will pay the company $25,000 per store, a royalty of 2 percent of revenue and may purchase product and services from Hollywood. As of Sept. 30, Boards owed Hollywood approximately $506,000 for fees, services, and product including rental inventory to open the stores, the filing states.

Wattles and Hollywood executive v.p. and c.f.o. Jim Marcum did not return several calls seeking comment.

Under the restructured bank agreement that Hollywood completed in June, the chain is not allowed to open any new locations but may close or move underperforming stores. The new locations, as part of a private license agreement, would likely not fall within these restrictions.

It is also likely that the privately held licensed stores are not subject to the public chain's studio revenue-sharing deals, which would allow Wattles to experiment further with purchasing and pricing. So far, however, the stores don't appear to be testing rental price, charging $3.79 for a five-day DVD or VHS rental, and $1.99 for catalog VHS.

Hollywood could learn, however, what kind of tweaking consumers are looking for in the retail environment, without drawing undue attention or including those sales results in the public chain's earnings, notes one industry analyst who asked not to be identified.

Blockbuster tested CD-ROM rentals in a store or two, another analyst notes. "Just to get a sense of the operational hassles of a product or service, two stores are enough."

It is "unusual" for a public company to test new services or products in licensed stores held outside the core corporation, adds entertainment and retail analyst Jeffrey Logsdon, who covers Blockbuster at Gerard Klauer Mattison & Co. However, since Hollywood lacks Blockbuster's financial resources and is bound by its lending covenants, he says the chain could be using the license deal to test new concepts out of the public eye and find a way to update its image.

In the past, Wattles has embraced innovation with Hollywood, opening Game Crazy stores and experimenting with DVD-only concepts. Most recently he boasted an 80 percent increase in DVD rentals per store during the first half of the year, after Hollywood upped its DVD purchasing and restructured regional management.

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