VHQ Aims to be the Netflix of the Canadian Market22 Apr, 2004 By: Holly J. Wagner
Canadian specialty chain VHQ has wasted no time launching its online DVD rental destination at www.cinemaflow.com and www.vhqonline.ca, having just completed its acquisition of CinemaFlow and its back-end software.
Subscribers will pay $24.95 (Canadian) per month for a three-out plan. The site also offers a $19.95 two-out plan and four- and five-out plans with prices tiered at $5 increments. The site is offering a free, two-week trial for new subscribers.
The announcement comes just as Netflix has announced it will push into the already bustling online rental market in the U.K. this year and plans to enter the Canadian market in 2005. That gives VHQ nearly a full year to get an online toehold before Netflix moves in.
A network of distribution centers has been a cornerstone of Netflix's success in the United States. VHQ will have a new enlarged distribution center operating in the Vancouver area by early next month and is reviewing potential sites for a distribution center in the Toronto area, with an early summer opening targeted.
Jody Mehring, the developer of the Web site, has been appointed VP of VHQ Online and has been granted an option to acquire up to 37,500 common shares of VHQ at an exercise price of 60 cents per common share on or before April 15, 2009.
VHQ bought CinemaFlow, a Vancouver, B.C.-based private company that developed scalable software to manage the operations of its own online DVD rental service, in a swap of 600,000 VHQ shares valued at $480,000 (60 cents per share) and $120,000 in cash. VHQ will also pay CinemaFlow an earn-out of $365,000, with payment based on 20 percent of revenues from online DVD rental until the earn-out is satisfied.A critical consideration at the outset was the necessity to secure reliable, scalable software technology that would “drive” the online ordering system as well as automatically manage inventory, subscriber notification and a host of other applications, said VHQ president and CEO Trevor Hillman.VHQ plans to continue building its store count through acquisition and new corporate locations, Hillman said. But with just 59 stores now, the online brand is sure to give the chain added visibility.
That plan drew a favorable review from analyst Brian Tang of Fundamental Research Corp., who initiated coverage April 21 with a buy rating and and fair value of $1.20 Canadian.
“As sales and rentals of VHS movies decline, we believe that DVD will not only replace VHS, but lead to growth in an otherwise saturated market. The driver of this growth is the fact that DVD player owners tend to rent more and purchase more movies than VHS owners. Threats from competing products such as VOD, we believe, are relatively minor,” Tang wrote.
Forecasts assume that VHQ will be able to implement its online strategy and its stated goal of opening 10 new stores per year in its target markets. Fundamental's geographic analysis identified 60 to 100 new potential locations for video stores across certain regions of Canada.