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TOP 100: Video Specialty Stores

15 Apr, 2003 By: Joan Villa

The year 2002 was full of experimentation for the top video specialty chains. They tried promotions, subscription plans and retail sales to boost revenue and dissuade customers from renting or buying DVD from nonspecialist competitors.

Despite predictions that a new breed of DVD collector would forever choose purchase over rental, the top rental chains showed strong returns and climbing stock prices through most of 2002. They managed the growth of DVD rentals, used and new sales, and expanded games substantially to stay one step ahead of consumer demand.

The fact that the rental chains boosted performance while the rental industry overall suffered from a shift toward sellthrough indicates that top players are growing in market share, said retail analyst Kavir Dhar of New York-based Jefferies & Co.

“In general, in the industry overall, rentals did decline, but for the three chains [Blockbuster, Hollywood Entertainment and Movie Gallery] the same-store sales numbers were all positive,” he said. “That indicates to me they were basically taking market share from independents -- that's the only way you can grow in a declining market -- and that's encouraging for the large chains. You could argue the year could even have been better overall if the economy had been better and Wal-Mart and the rest hadn't used DVD as a market driver.”

Blockbuster fought back, however, launching its “Rent It, Like It, Buy It” program that converted many renters into purchasers, with previously viewed DVDs at a now-standard $9.99. Then the rentailer embraced retail sales to compete for the gift-giving business of holiday shoppers.

Chairman and CEO John Antioco vowed to triple Blockbuster's $400 million sellthrough business by 2006, increasing the chain's share of overall sales from 3 percent to more than 9 percent, without cannibalizing rental.

“We believe we can accommodate both types of transactions profitably,” he said.

The chain also unveiled monthly subscription plans for DVD and games to compete against another top 10 specialist, online rental leader Netflix. Netflix VP Ted Sarandos said he welcomed the competition, along with a similar service launched by Wal-Mart, because it brings “instant credibility” to the subscription model.

To stay on a growth track, Netflix also improved service by adding distribution centers, helping it reach a watershed 1 million subscribers in February -- an announcement that triggered a 13 percent jump in its stock price.

Hollywood Entertainment turned its energies to game rentals, sales and trading with its Game Crazy concept, while Movie Gallery applied similar techniques to grow its customer base in rural and secondary markets.

The 1,800-store Movie Gallery chain successfully promoted retail sales in the fourth quarter, which contributed to a 6.2 percent increase in same-store revenue from the prior year. In 2002, the chain acquired 265 stores and opened another 145.

After expanding into Canada in 2002 with the purchase of Video Update, CEO Joe Malugen is eyeing locations in Western states that would give the Dothan, Ala.-based chain a national presence. After a $7 million infusion in new DVD product, he expects the format to explode to more than 60 percent of overall rental revenue this year.

The chains also had to focus on cash flow and profits to satisfy Wall Street.

Hollywood showed the strongest same-store sales growth, and it doubled third-quarter profit to a hefty $32 million, from $15.3 million in the same quarter of 2001. At mid-year, CEO Mark Wattles announced his chain's financial troubles were in the past.

“We are no longer in turnaround mode, we are in leveraging mode -- leveraging the existing traffic in our stores and the opportunities that exist within our four walls,” he said.

Seeking growing revenue and profits, Hollywood now manages more than 270 Game Crazy locations in its base of more than 1,800 stores and oversees an inventory mix that shifted from 40 percent DVD in mid-2002 to more than 46 percent by year-end.

Analyst Dhar believes the top video chains show strong fundamentals, indicating a prosperous future, despite past stumbles like the post-Thanksgiving rental slump that led Blockbuster to lower earnings expectations and sent its stock plummeting 30 percent.

“I'm in alignment with Blockbuster, that what you saw was an aberrational event,” Dhar said. “There's nothing, in my mind, that changed in a matter of two weeks that would warrant that type of price reaction, and time has proved us right.”

Overall, the top 10 video chains are well-positioned to reap further revenue from DVD, particularly as the format moves further into the mainstream, he added. As consumers weigh the value and cost of rental versus retail, nonspecialist competition will move on to the next trend.

“The product du jour to drive traffic is today DVD, but after a while it will be a ho-hum thing,” Dhar said. “When it's at 90 percent penetration, then it's no longer the traffic driver of the day, and Wal-Mart will move into some other product.”

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To read about the Top Video Revenue Generators, click here.

To read about the Top DVD Revenue Generators, click here.

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