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Update: McDonald's Gives Details of Expanded DVD Test

27 May, 2004 By: Holly J. Wagner

Fast-food giant McDonald's plans to put hit-stocked DVD vending machines in all 105 of its Denver stores this summer and expand the program nationally if the summer test yields the expected results.

The machines, which hold 102 or 350 DVDs, will grace the lobbies and exteriors of McDonald's restaurants with $1-a-night rentals.

“At some locations they may decide to have 100 at one door and 100 another instead of 350 all in one place,” said Dee Cravens, EVP and chief marketing officer at DVDPlay, which provides the machines. They are already in 34 stores in the Denver area, and the entire market should be installed by the end of June, said McDonald's spokeswoman Kelly Hoyman.

The machines are cashless; consumers use credit or debit cards to rent. Because the machines are Internet-connected, McDonald's staff can monitor them and restock as necessary — a key element in a plan that lets renters rent in one place and return the disc in another.

“They are charged $1 per night. They have until 10 p.m. the following day to return the DVD. They get charged $1 per day, and after 21 nights we would charge $25 for the DVD and they can keep it,” Hoyman said. “We are carrying ‘R'-rated titles, because you need a credit card or debit card to rent, and you need to be 18 to receive a credit card,” Hoyman said. “We will not offer anything with above ‘R' ratings or unrated cuts.”

The kiosks will offer 30 top hits at a time.

“[Copy depth is] not going to be the same for each title, because it will depend on how each title is moving,” Hoyman said. “Redbox DVD folks can monitor what is going out and being returned. Every Tuesday, they restock with new titles as well as adjust the existing titles in the machine. If we run out of a title, the DVD team can come in and replenish as needed.”

“I think what they are looking at is to establish customer loyalty and selling other goods there,” Cravens said, noting the kiosks offer several possible revenue streams. “The machines are advertising-enabled, so I imagine that will kick off a program in time. They are also email-enabled.”

The machines will get marketing support in the Denver area.

“We just finished the shoot for the DVD commercial Tuesday morning,” Hoyman said. “We are going to be launching TV and radio support as well as a public relations campaign in July.”

The breadth of the potential distribution network should give video specialty chains pause: With 30,000 restaurants in 119 countries, the burger chain's outlets exceed the international store count of the top three video specialty chains: Blockbuster, Hollywood Video and Movie Gallery. In the United States alone, McDonald's addresses number more than 13,500, compared to the 4,579 stores with which Blockbuster ended the first quarter, 1,935 Hollywood Video and 2,200 Movie Gallery locations.

On the other hand, Michael Pachter, an analyst at Wedbush Morgan Securities, thinks McDonald's may be able to make the system work in smaller markets, but won't be able to manage the logistics of offering DVD rental nationally.

“This is a big management process. Nobody knows what the demand is going to be,” he said. “The only thing they can compete on is price. They think they will make money because they think consumers will hold it for four or five days and they will make money on that.”

“We're not concerned with the announcement,” a Blockbuster spokesman said. “Our focus will remain on our customers, and we will continue with a growth plan around three key initiatives: the growth of our rental category, led by a store-based movie subscription program and followed by an online rental subscription service by the fourth quarter; the development of a movie-trading business at Blockbuster stores; and the development of our game store-in-store concept, Game Rush.”

The McDonald's test also goes head-to-head with Buena Vista Home Entertainment's EZ-D test, which was expanded to Denver late last year. The disposable discs are available in supermarkets and convenience stores in the Denver area, but SRP is about $6 each, and the discs have no bonus materials. The discs have reportedly done well as an add-on for Papa John's pizza restaurants, which recently started a nationwide offer of one of three catalog titles free on DVD with the purchase of each large specialty pizza. That chain plans to change the selection of discs periodically.

Like Wal-Mart, McDonald's can afford to use DVD as a loss leader. The chain's goal is to get customers into restaurants, where the smell of the food becomes a powerful incentive to buy.

McDonald's earlier tested TikTok DVD Shops, a smaller vending machine with rental DVDs, in the Adams-Morgan neighborhood of Washington, D.C. The dozen TikTok machines were to remain in place even though machines with a broader range of products were removed late last year, spokeswoman Lisa Howard said at the time. McDonald's has about 20 Redbox DVD machines in that market and in Las Vegas, Hoyman said.

McDonald's hired former Netflix VP of strategic alliances and development Mitch Lowe to manage the DVD program. The company also offers wireless hotspots at many of its restaurants and has announced plans to offer music downloads.

“Working with McDonald's, it is amazing to watch that unit inside McDonald's grow, and how seriously they are taking this business.” Cravens said. “Part of their strategy going forward they know that entertainment is something consumers gravitate to. They are leveraging that opportunity going forward. They are looking at this mobile society we are in and saying ‘we are in the catbird seat.’

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