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Be kind, don’t rewind

Video stores in constant fast-forward mode


Shortly after Donna Wade opened a Blockbuster franchise in Texas in 1985, someone advised her to spend as little as she could on the business. "Don't invest too much," they said. "Look at what happened to the 8-track tape."

It's safe to say that Wade is glad she didn't take the advice. "Here we are, 20-plus years later, and still going strong," Wade said. Twenty-three years, to be exact, more than long enough to see her industry change numerous times. First she rented movies on beta, then VHS, then the failed laserdisc, then VHS again and now DVDs. She's opened game sections in her stores and, somewhere along the way, began selling videos.

So Wade isn't fazed by a few projections of doom for "brick-and-mortar" video rental shops like hers. How unfazed is she? "We just opened our eighth store in the Beaumont, Texas, area," Wade said. "We feel great about the industry."

Numerous Blockbuster franchisees remain confident in the business despite an enormous number of challenges to the very nature of their business. Online subscription services, DVD sales, video downloads and video rental boxes have conspired to eat into the video rental business.

Rental sales have fallen to $8.4 billion in 2006 from their peak in 2001 at $10.3 billion, according to the Entertainment Merchants Association, a trade group of video and game retailers. It has likely fallen further. Blockbuster estimates that the in-store video rental market has fallen to $5.8 billion this year from $7 billion in 2006.

Several hundred video stores have closed in the last year and the nation's second largest video chain is in bankruptcy—and some competitors, like digital downloads, have yet to grasp a firm foothold in the industry.

According to Blockbuster's annual report, 89 franchises have closed since 2006, or nearly one out of 10 units—850 of the chain's 4,855 domestic units is a franchise. Still, franchisees remain confident in their business.

"We've been hit from all kinds of sides and yet we're still here," said Scott Watson, who owns eight locations in Texas and is president of the Association of Blockbuster Franchisees. "I've been hearing this for 20 years. I got involved in 1986 and my partners and I said that the time that if we got four or five good years we'd be happy with our investment."

Video rental stores emerged in the late 1970s after Sony introduced the Betamax videocassette recorder in 1975. The first store opened in Los Angeles in 1977 when George Atkinson began renting videos he bought through a video rental-purchasing club, according to EMA. By 1979 it had 42 units and began franchising.

Still, the industry didn't take off until 1983-84, when Congress defeated a proposal that would have given the movie industry stronger copyright protection and Sony won a U.S. Supreme Court decision affirming consumers' right to tape TV shows.

Videos were sold largely in grocery stores, convenience marts and frequently at independent shops. A one-time oilman opened the first Blockbuster in Dallas in 1985. Three years later, after the chain was taken over by H. Wayne Huizenga, Blockbuster became the nation's largest video rental chain. Today, large chains account for a majority of in-store video rentals.
The industry has faced threats since then, such as the advent of on-demand video on cable in the early 1990s. Yet rentals continued to grow, and have long outpaced the sale of tickets to movies in theaters in terms of revenue.

Still, some key industry changes hampered video stores. One was when movie distributors began selling movies at the same time they rented them, ending a longtime policy of pricing movies at rates that encouraged people to rent them. Video sales really took off with the rapid rise in popularity of DVD players, which were first introduced in 1997. That has turned companies like Amazon, Best Buy, Wal-Mart and Target into major forces in the video retailing industry.

"It used to be that you'd have a window at the box office, a window at the video store and a window for sales," Wade said. "Those windows have closed up."

A substantial threat first appeared in 1999, at the height of the dot-com boom. Netflix began offering a small library of DVDs via mail to subscribers who paid a monthly fee. By 2003 it had 1.6 million subscribers. The next year Blockbuster announced its own service, Blockbuster Total Access.

That move didn't sit well with some franchisees. One of them, Blockbuster of Tennessee, in 2006 filed a lawsuit against its franchisor, claiming the online subscription service takes business away from its stores. "The Nashville and Memphis (Blockbusters) have a license agreement for all the Blockbuster products sold within that geographic territory," said Bob Craddock, the Memphis-based attorney for the franchisee. "The online solicitation by the Blockbuster franchisor violates that."

Other threats are Redbox Automated Retail, owned by McDonald's, Coinstar and private investors, that rents DVDs for $1 a night through big red vending machines. The machines first appeared in McDonald's., and can now be found in other locations, such as Wal-Mart, and the company recently reached a deal to put the machines in Walgreen's locations. The vending machines have been able to lure business away by offering low-cost videos to convenience-oriented consumers.

In addition, more companies offer online video downloads that can be watched on a computer or on a set-top box. Netflix offers some movie downloads and is working on a box. Apple has also gotten into the act, offering video rentals through iTunes. Blockbuster also got into the act last year, purchasing the movie download site MovieLink. Consumers have yet to warm to those services, however.

A clear picture of the impact all this competition can be found in Blockbuster's own annual report. Just over half, 51.7 percent, of the company's total revenues came from movie rentals in the store. That was down from 58.3 percent in 2006.

Movie Gallery, meanwhile, filed for bankruptcy last year—two years after it bought Hollywood Video, at one time the second largest video rental chain in the U.S. The company has since shuttered 920 stores. Blockbuster hasn't been immune from the store closings, either; it closed 526 company locations since last year. The company does expect that Movie Gallery's problems will help its stores in 2008.

Sean Bersell, a spokesman for the Entertainment Merchants Association, said we're not seeing the beginning of the end of the of the video rental store. "Is there consolidation in the market? Absolutely," he said. "As you have a maturing industry, you expect to see that. Clearly you're seeing fewer stores. The consumer has so many outlets."

Watson said many of the Blockbuster closures have come with stores built between existing Blockbuster units at the height of the rental industry. With the increasing competition for video rental, these stores are the first to go. He believes the market will long be there because a certain segment of the population still prefers getting their videos from a store.

Blockbuster apparently agrees. The company appears to be de-emphasizing its online service. Late last year it increased prices and decreased advertising of the service, a decision the company said would make it more profitable—but one that nevertheless resulted in a loss of a half a million subscribers. It now has 3.1 million subscribers, less than half that of Netflix.
The company has started experimenting on its own Red Box-style vending machine. Watson said the company is looking at different store concepts, including a "Blockbuster Café" that gives people more reasons to go into the store. "It's great for us," Watson said. "It's all about the stores. It's energized us as franchisees."

Wade likewise is bullish. Her strategies could offer other business owners a lesson on how to remain relevant despite industry changes. For one thing, Wade owns her buildings. When a store loses traffic, she reduces its size and uses the remaining space for another tenant, which brings in more income.

She's also branching out beyond Blockbuster. Wade recently decided to become a franchisee in Pods, a moving and storage business. "We think it's going to be a very good business," she said.

"All businesses are changing," Wade added. "You would have been blind if you didn't see it in our business. We've been dealing with it at franchise meetings for 10 years. Any industry should look at what its threats are."

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