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Shrinking Stores

13 Feb, 2006 By: Holly J. Wagner

With suppliers clamoring for every scrap of retail shelf space, it seems a paradox that specialty retailers are cutting back on square footage in ways that range from passive to draconian.

But the environment is increasingly competitive. With mass merchants gobbling up market share, pressured specialty retailers are trying to squeeze as much money as possible out of each square foot. As rental revenue dips and sales revenue flattens, the square footage has to give.

Musicland Group Inc. is perhaps the most extreme example, shuttering its 61 Media Play stores this past December before the rest of the chain filed for bankruptcy protection last month. But those were huge stores, averaging 46,000 square feet. The chain has since announced plans to close another 341 stores.

“We are finding the opposite to be true in Suncoast — our stores need to grow in size,” said Peter Busch, Musicland's SVP of video. Suncoast stores average 2,400 square feet and Sam Goody stores average 4,700 square feet.

Other retailers seem to agree that the sweet spot is between 4,000 and 6,000 square feet. In January analyst calls, retailers pointed to a shrinking industry and the wisdom of smaller stores.

“Our store footprint has clearly shrunk over the years,” Blockbuster CEO John Antioco said. “It used to be 8,000 square feet. Over the last couple of years, we have gone to 4,000 to 5,000 square feet.”

He also said the chain would look into selling its Movie Trading Co. and reduce its store count by about 150 a year in addition to downsizing its video stores.

“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.” Antioco said the company is more closely scrutinizing lease renewals. He said Blockbuster will be looking for smaller stores for future openings.

“The main issue is cost containment in a rental business that is about 20% smaller than five years ago when these stores were being leased,” said industry analyst Tom Adams.

“Shrinking footprints is a good alternative to closing stores. Since most of the actually worthless locations have been shuttered over the last decade, most of today's stores do a reasonable amount of business, but would be more profitable with a lower cost structure.”

With large chains, most downsizing takes place as leases expire. But Antioco and Movie Gallery CEO Joe Malugen both have mentioned exploring some creative opportunities.

Gallery is evaluating subletting some of its stores, which executives said average 6,000 square feet — more space than it takes to support rentals in the present environment. The average Movie Gallery store has three years left on its lease, while the average Hollywood store has six years to go, executives for both companies said at recent analyst briefings.

The chain also has a handful of modular stores averaging 2,200 square feet.

Indie retailers, responding to a recent survey by the Video Software Dealers Association, said their average store size is 2,672 square feet.

Part of the problem with large stores is that the business is largely new release-driven, and most stores line their walls with new releases, shelving older titles in the middle.

“You have 5,000 square feet of real estate that is dedicated to 11% of the business,” said Bill Fischer, VP of corporate development for DVD Station, a San Francisco-based operator of proprietary kiosks. “It just doesn't make sense.”

Movie Gallery is pushing into rental kiosks in supermarkets and convenience stores, but has yet to roll out machines under the Movie Gallery or Hollywood brands.

Trans World Entertainment, much like Musicland, operates a variety of brands and formats. Some of its mall-based FYE stores are the largest, at about 25,000 square feet. But early last year, the chain began testing smaller FYE Movies and FYE Games stores with more specialized stock that averages a mere 3,000 square feet.

The chain straddles the line with its other brands: Planet Music stores are 31,000 square feet; Coconuts Music & Movies range between 5,000 and 14,000 square feet; and smaller brands such as Strawberries and Spec's average 3,000 square feet.

Analysts asked CEO Robert Higgins in January if the chain was feeling the same pinch as Musicland, but he said Trans World's large stores are “not in the same situation” as Media Play.

“We think this business will continue to consolidate and we think some of the mass merchants will consolidate their music presence,” he said. As for an industry shakeout, he said, “when any of those things have happened in the past, if anything they have helped business.”

His cagey response isn't an accident. Trans World is reportedly a leading bidder for Musicland assets.

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