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Texas Four-Step

18 Jul, 2003 By: Joan Villa

Straddling video, music, books and games helps diversify Hastings Entertainment, but the strategy also exposes the Amarillo, Texas-based chain to the ups and downs of four industries.

In 145 superstores averaging more than 20,000 square feet each, Hastings brings this unique mix to small and medium markets in 21 Central and Western states. It's a big job, but CEO John Marmaduke tackles the task by staying active and informed in each industry, and then adjusting product lines both to meet the needs of individual markets and to keep pace with broad national trends.

After expanding Hastings' selection of new, used and rental games to rival and even outpace his competition, Marmaduke is testing a sleek “mini-superstore” store model of about 7,000 square feet to 8,000 square feet tailored to rural towns of less than 20,000 people.

He spoke to senior correspondent Joan Villa about the challenges and opportunities ahead for Hastings and the growing DVD market.

VSM: It's a challenging time for virtually all the product lines you carry: books, music and video. What strategies can Hastings employ to deal with this unique entertainment market?
Marmaduke: Our primary strength is the same as always: multimedia format with value pricing and the best service in town. Since our stores have purposefully no partitions, we continually refine the mix to suit the market.

VSM: What is the mix you're using now?
Marmaduke: It varies from store to store depending on the components of the demographics. It's approximately 25 percent books, 25 percent video, about 30 percent music and the remainder is games and sidelines consumables.

VSM: Hollywood Video has been very vocal about expanding games, and now Blockbuster is doing the same. Are you also finding that games is a winning category at this point in time?
Marmaduke: Yes. Games are growing greater than we expected, as our multimedia format is a favorite of Generation X and Y gamers. We've enlarged almost all our games departments and put them into a lifestyles boutique with our music, software and sidelines. We really have a much larger footprint for games than either Hollywood or Blockbuster.

VSM: DVD has been boosting revenue for music/video combo retailers and acting as a traffic-driver for mass merchants. Do you see any signs that DVD might cool off and consumers will get more selective about what they'll buy?
Marmaduke: DVD's growth curve will naturally start sloping off, but I see four to six years of growth ahead.

VSM: Already, Wal-Mart seems to have backed off the deep discounting we saw in fourth-quarter 2002. Do you think we'll see a repeat of deep discounting by a variety of retailers again this holiday season?
Marmaduke: DVD hit pricing is irrational, and I suspect next Q4 may be more rational in pricing. If Best Buy and Circuit City elect to continue loss-leader prices, Wal-Mart will respond to it.

VSM: You've said in the past you think the market will transition more toward DVD rental and away from sellthrough. Does that mean prices will rise and revenue-sharing will become more important?
Marmaduke: I think rental and DVD trade-ins are a natural consequence of a maturing customer base and growing home libraries of DVD. In economics, that's called “marginal utility,” or the second cup of coffee is never as good as the first. I think as the consumer shelf fills up with DVDs, the pride of ownership diminishes, and we're seeing customers much more willing to rent or to trade. I don't anticipate an increase in DVD prices, as rental retailers would decrease their buys.

VSM: How much more of a market do you see for VHS? What is your current VHS-to-DVD mix?
Marmaduke: VHS is still very viable in rental and will be so for years because many late adopters love the recording feature of VHS. More than half our rental and 75 percent of sellthrough are DVD.

VSM: Do you fear that some of the same problems you've faced with music downloading will soon happen to the video industry?
Marmaduke: The video industry has two advantages over the music industry: First, we have a model of how not to do it from the music industry; secondly, rental acts as an antidote to piracy since the marginal cost to rent a film is lower than the cost to download and burn one. Still, we need better copyright protection as the cost of piracy is declining.

VSM: Going forward, will you continue to focus on your rural and secondary market niche, or try out some new strategies?
Marmaduke: We're continually evolving our store model -- we don't just have one model and then change it every few years. What we're currently testing is a very-small-market store model of about 7,000 square feet to 8,000 square feet that would go into markets smaller than 20,000 people.

VSM: Would your overall look change?
Marmaduke: No, not really. We'd obviously have to edit out some categories because you can't get it all into 7,000 feet, but it's amazing how much we got into 7,000 feet.

VSM: Would this be a fill-in strategy for you then?
Marmaduke: Yes, it could be. If we could get it to be profitable, it would open up hundreds of markets for us.

VSM: When will you see results and make decisions on rollout?
Marmaduke: Next year.

VSM: What do you see as Hastings' greatest challenges and opportunities in the future?
Marmaduke: One, loss-leader pricing. The music industry is in the process of losing most of their specialty retailers due to loss-leader pricing. Once there is no channel to stock and expose their lesser product, what will become of their business model when there's only a channel for hit product? And two, piracy. We need one format of HD-DVD with robust copyright protection.

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