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UPDATE: Blockbuster to Shrink VHS Inventory in Favor of DVD

14 Sep, 2001 By: Joan Villa

Blockbuster plans to pare some 2,000 units per store of older VHS catalog this fall in order to free up space to “dramatically” merchandise DVD movies and players in time for the holiday season.The move will not immediately impact the display of VHS on the new release wall but will, in short order, lead to far heavier purchasing of new release DVD for rental.

Blockbuster chairman and c.e.o. John Antioco says the initiative signals a “radical” inventory shift, driven by consumer demand, that will tip Blockbuster's product mix from today's 80-20 ratio of VHS-DVD, to an opposite 20-80 VHS-DVD mix in three to five years.

“Our purchase decisions need to be rational,” explains Antioco. “The mix between DVD and VHS should represent the mix between DVD and VHS rentals. I expect next year on a full-year basis 35% to 40% of rentals will be DVD, and I think 35% to 40% of our copies should be DVD.”

With that in mind, Antioco says the company intends to modify studio revenue-sharing deals to include DVD or will simply allow VHS-only agreements to expire.

“All those deals are coming due or will come due and all new deals will reflect what DVD is doing in the marketplace,” he contends. “I'm not going to enter into any deals that lock Blockbuster into guaranteed revenues on VHS during this time of very fast transition in formats.”

The chain will start by eliminating a full 25% of its VHS and older games inventory, which together contribute less than 1% of revenue, in a campaign targeted for Thanksgiving, Antioco says. Individual stores will be told to sell off any VHS product that hasn't rented in the past year.

The move will open up and “declutter” each store's center space to create a “more definitive” DVD presence supported by point-of-sale signage, he explains. A more thorough point-of-sale package around the theme “the best way to DVD is Blockbuster” will be rolled out next year, he adds.

DVD players — perhaps 50 per store, Antioco says — will be displayed in all locations, up from the approximately 2,000 stores where they are currently sold, and bundled with free rentals. Another promotion will be unveiled in the coming months providing free DVD players to customers who purchase prepaid DVD rental cards.

In the process, Blockbuster will take a $400 million charge in the third quarter and another $50 million in the fourth quarter to reflect inventory amortization changes that will account for VHS tapes and games over a shorter nine-month span rather than the previous 36 months. In addition, tapes will be amortized to approximately $2 and games will have a residual value of $5.

Industry analyst Tom Adams of Adams Media Research believes the inventory shift accurately reflects the realities of current DVD demand.

“The business is going from $747 million just in the rental of DVD in 2000 and we project it hitting $2.3 billion this year and that's over 20% of the market,” Adams explains. “So they'd be crazy not to be upping their DVD inventories and shrinking their VHS to make room.”

Although the stock dropped about 5%, or $1, after the Sept. 10 announcement, Adams expects little long-term impact for Blockbuster shares from the $450 million mostly non-cash charge.

“There's bound to be short-term pain if they have to write down VHS inventories,” he notes. “But most investors are paying enough attention to know that DVD is good for Blockbuster and everyone else in the business.”

However, one industry observer believes Blockbuster's public paring of VHS will be threatening to studios for as long as DVD remains at its current sellthrough price, which produces a higher margin for retailers. The rental giant's goal may be to lead studios to adopt higher rental pricing for DVD, a position Blockbuster has supported in the past, he suggests.

“Any move that accelerates the shift to DVD, especially by Blockbuster, seems to be a politically charged move, a power play to two-tier pricing,” he says.

Blockbuster could also be promoting DVD as a cutting-edge format to counter recent announcements of studio video-on-demand alliances that dampened video stocks in recent weeks, proposes another studio source.

Antioco, however, denies either assertion. He says Blockbuster “never” times announcements for the purpose of Wall Street reaction. The timing is “logical,” he insists. “This allows us to make all the logistics of implementation prior to the peak season of the year.”

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