Independent vs. Chain Video Rental Stores

1. Independent vs. ChainVideo Rental Stores Group Members: David Sarotte Scot Runke Tinoush Shifteh Katie Valentine Lorie Vogel Tiffany Lamontagne

2. Introduction • Purpose compare independent vs. chain video rental stores • Picked two chain stores • Hollywood Video • Blockbuster Video • Picked two independent stores • Thomas Video – Royal Oak • Video Jack – Farmington Hills • Research Methods • Interviews • Year End Company Financials • Trade Journals

3. Introduction • Topics covered during store interviews included: • Site selection • Trade area analysis • Customer relationship marketing (CRM) • Merchandising • Inventory strategies • Competition • Strategy • E-Commerce/Website

4. Introduction • Topics focused on in presentation include: • History of chain stores • Including small business perspective • Overview of domestic video market • Analysis of Video Stores

5. History Of Chains • Chains have mainly influenced the following store types • Variety Stores • Grocery Stores • Restaurants • Department Stores • Drug Stores • In 1982, these 5 types of stores accounted for 40% of retail sales in the United States • First chain stores can be traced back to the American colonies • Before 1930, Department Stores were the prominent chains • Food retail stores were also big chains prior to 1930 • Piggly Wiggly and A&P - Grocery Chains • Harvey House - 1st restaurant opened in 1854 • Woolworth’s was the oldest variety store and had 2100 stores and annual sales over $273 million in 1929

6. History Of Chains • Expansion of chains slowed in the 1930’s and 1940’s • Growth resumed after World War II • Lebhar (1963) said three trends affected chains • The growth of suburban planned shopping centers • The growth of discount store retailing • The growth of government opposition to chains • Small businesses began to object to the growth of chains • Legislation enacted • Anti-chain taxes • Resale price controls • Antitrust regulations • Robinson-Patman Act (curbs chains buying advantages)

7. Chains v. Small Businesses • Size • Chains can buy products in bulk and receive bulk discount • Chains can afford to manufacture, distribute, or wholesale if they choose • Small businesses do not have the capital to invest in these “backward integrated” activities • Human Resources • Chains can better afford expert managers and training programs • Chains risk more turnover among employees than small businesses. • Learning Curve • Faster learning curve for chains because same decisions are made over and over - leads to easier expansion process • Chains are more standardized • Price/service Tradeoff • Offering reduced prices may sacrifice customer service • Small businesses have more personalized customer service.

8. Small Business Perspective • Small businesses must be able to differentiate themselves from their competitors • Conant, Smart, and Solano-Mendez did a study of small retailers in 1993 that found • Merchants and specialty retailers with clearly defined strategy patterns both possess source-of-advantage-skill superiority along a variety of marketing competencies • Perform better than the retailing types that have marketing strategies that are unclear and lack emphasis. • Ozment and Martin in 1990 showed • The presence of a discount retail chain in a rural area does affect the number, size, and sales of small retail establishments • A discount retail chain will effect the growth (or decline) in the number, size, or sales of retailing over time.

9. Next Steps • Take a look at how chains and small businesses fare in the video store industry. • Blockbuster • Hollywood Video • Video Jack • Thomas Video

10. Video Rental Industry Overview • Consumer Spending: ($billions) 1990 2000 2010 $10.1 $20.6 $31.1 • 90% of U.S Households with TVs Own VCRs

11. Video Rental Industry Overview • Video Rental Competitive Advantages: • Entertain one or more people for a reasonable price • Ability to browse many movies • Control viewing experience • Consumer able to view new releases prior to showing on cable TV

12. Video Rental Industry Overview • Video Rental Competitive Advantages: • Revenue-sharing agreements with major movie studios • Per video cassette fee for “sell-through” movies • Percentage of video store revenue for major releases

13. Video Rental Industry Overview • Major Industry Threats: • Change in relationship with major movie studios • Developing technologies: • Satellite TV • Digital cable systems - “Video on demand”

14. Blockbuster - Did You Know? • Blockbuster operates more than 7,700 video stores in 26 countries • Blockbuster had 52 million U.S. member accounts active during 2001 • Blockbuster had over $5 billion in sales revenue for 2001

15. Blockbuster - Did You Know? • The largest Blockbuster store is 20,433 square feet, located in Dayton, Ohio • The smallest Blockbuster store, just 772 square feet, is located inside a Kroger supermarket in Euless, Texas • Blockbuster’s brand recognition is nearly 100% with active movie renters

16. Blockbuster - Franchising Opportunities • The dream can be yours: • Minimum net worth of $400,000 • Minimum liquidity of $100,000 • Required: • One-time development fee • One-time franchise fee • Continuing royalty, service fees • Usage fees for Blockbuster software

17. Blockbuster - Site Selection • Blockbuster new store development team • Utilizes a real estate and customer transaction database to profile: • Density of local population • Local demographics • Visibility & accessibility

18. Blockbuster - Site Selection • Most desirable: • High-visibility stand-alone structures or • Prominent locations • Blockbuster leases all corporate-run store facilities

19. Blockbuster - Marketing & Advertising • Focused on corporate branding primarily through TV and radio • Adjusts advertising regionally based on: • Market share • Brand awareness relative to competition • New industry trends • Local demographics

20. Blockbuster - Marketing & Advertising • Blockbuster.com • Blockbuster Rewards Program • Blockbuster Giftcards • Blockbuster Ticket & DirectTV • Alliance with Coca-Cola • 2001 advertising budget $215 million

21. Hollywood Video-Introduction • Founded in 1984 • World’s second largest video chain • 1800 Hollywood Video retail superstores in 47 states throughout the U.S. • Mission: “To establish Hollywood as the premiere provider of entertainment products worldwide, by providing a friendly place for customers to go and get the entertainment they want, when they want it.”

22. Hollywood Video-Retail Strategy • Between 1987 and 2000, rapid growth and expansion through new store openings were top priority • By 2001, strategy changed to one of revenue growth from existing stores. • Key elements of current business strategy include: • Broad selection and superior availability • Creating an exciting, enjoyable, and convenient shopping experience • Providing excellent entertainment value • Expansion of product opportunities

23. Hollywood Video-Site Selection • Focused on organic growth (95% of stores were opened as new stores) • Value importance of site selection to success of the Company • Principal criteria for site selection: • Local residential population density • Traffic count on adjacent roads • Visibility and accessibility of store • Availability of sufficient parking • Overall, most desirable locations are in high-visibility, stand-alone structures or in prominent locations in multi-tenant shopping centers.

24. Hollywood Video-Merchandise • Each store carries 8,000 titles and 15,000 videocassettes, DVDs, and video games for rent • Revenue sharing with studios – resulted in 100 to 300 copies of hit movies titles per store • Also offer VCRs, DVD players, and game players for rent • Offer blank videos, video cleaning equipment, and confectionary items for sale • Maintain detailed inventory systems to track rental activity • Allows management of buying, distribution, and disposition of movies

25. Hollywood Video-Pricing • Offer 5-day rentals on all products • New releases $3.79 • Catalogue titles $1.99 • Hollywood Video guarantees availability of new releases or free

26. Hollywood Video-Atmospherics • Stores are designed to capture excitement of movie industry • Interior is clean, brightly lit; surrounded with colorful murals; video screens playing movies • Exterior has large HOLLYWOOD VIDEO signs in bright colors • Movies organized in 28 categories, arranged in alphabetical order • New releases displayed around outer walls for easier browsing • Overall atmosphere is of fun and excitement

27. Hollywood Video-ECommerce • Acquired Reel.com in 1998 – was the leading online destination for film related content and commerce • Offered extensive selection, movie descriptions, critics reviews, ratings, recommendations, and allowed preview of movies prior to purchase • Reached $80 million in revenue by 2000, but generated significant losses • E-Commerce site was closed and is now content only • Hollywood Video’s website provides information on top hits, a new release schedule, Company newsletter, store locator, customer service, and access to account information

28. VIDEO JACKOVERVIEW • Video Jack is a small independently owned video store located near Grand River and Drake in Farmington Hills. • While they do not have the atmospherics of Blockbuster or Hollywood Video, they do have an extremely convenient location, which is definitely their most salient attribute. • They recognize the importance of relationship marketing and their customers tend to be quite loyal because of this.

29. VIDEO JACKSITE SELECTION • When Video Jack choose their current location, their main objective was taking ownership of an already existing video store. • They are conveniently located in a strip mall near several large neighborhoods, multiple apartment complexes, as well as downtown Farmington. • Above mentioned area, encompasses a fairly large population base. • Premiere location because nearest competitor is over three miles away, allowing Video Jack to focus on a broad customer base.

30. VIDEO JACKDEMOGRAPHICS • Video Jack does not have one specific demographic in which they target and consider their clientele base to be very diverse in nature. • They cater to different ethnicities; as well as to gender, martial status and family status. • Video Jack believes that it is their location that determines the consumers who come into their store.

31. VIDEO JACKCUSTOMER LOYALTY PROGRAMS • To build long lasting relationships, Video Jack understands the importance of having customer loyalty programs to reward their members. • They currently have two in place: 1,) The “Early Bird” – available only on new releases and is an incentive program which offers $1 coupon for turning in your rental before noon the next day. 2.) “Rent One/Get One Free” – available only on older releases entails just what it says. Both programs are well received by their customers. • Video Jack understand importance of customer relationship marketing and did an awards program for their top 25 members.

32. VIDEO JACKMERCHANDISING • In addition to video’s and DVD’s Video Jack also carries a variety of ancillary items: • “Pre-viewed” videos • Video games • Popcorn (fresh popped or pre-bagged) • Boxed candy • Cotton candy • They also own a tobacco store “Capitol Cigar” which is located next door and is directly interconnected with Video Jack so management can run both operations simultaneously.

33. VIDEO JACKINVENTORY STRATEGIES • Video Jack carries an approximate total of 1,000 new releases. • Quantities vary from two to twenty-one, all of which is dependent of the price they receive from their supplier. • Some titles are more expensive than others, ranging anywhere from $13 - $70 per release. The studios that release the videos determine the “set” prices. • “Pre-viewed” videos are also available for sale. Video Jack generally holds onto movies until they run their “rental cycle” and then keep three releases for their store and sell the remaining inventory to their customers.

34. VIDEO JACKVIDEO SELECTION GENRE • Video Jack carries a wide selection of both foreign and classic films: • Foreign films – they carry anywhere from three to four more title varieties than Blockbuster, as well as larger quantities too. • Classic films – they are particularly proud of this film genre and carry approximately 500 titles, which is fairly large for a store of their size.

35. VIDEO JACKCOMPETITON • Video Jack subscribes to a variety of industry magazines, which enables them to keep up with what the competition is doing. • Their business strategy is to continue the growth of their DVD selection, as well as to keep a wide assortment of releases in their store at all times. • They feel since Blockbuster is their nearest competitor, they have to be aggressive in this strategy. • Typically they do not feel there is another independent store who poses a threat to their business.

36. VIDEO JACKENTEPRENEUR VS. FRANCHISE • Video Jack determined from the very beginning of their business plan that it would not be in their best interest to run a franchise. • They had owned another video store in Livonia and this location was to be an addition to their “chain”. • However, they recently sold ownership of the Livonia store and so now Farmington Hills is their only location.

37. VIDEO JACKBUSINESS STRATEGY • Video Jack does not feel much has changed in their strategy since the introduction of the larger chains into the marketplace. • Their current location has been in business for fifteen years (approximately 1 ½ years under new ownership) and have always been in direct competition with Blockbuster and Hollywood Videos. • Their constant strategy has been to keep purchasing multiple copies of new releases.

38. VIDEO JACKPRICING STRAGEGY • There are two strategies Video Jack focuses on: 1,) New releases - $3.50 per release (however, if combined with the “Early Bird” $1 coupon the total cost to a customer is $2.50). 2.) Older releases - $2.00 per release (combining with the “Rent One/Get One Free” gives the customer two movies for the price of one). Blockbuster typically charges $4 per release.

39. VIDEO JACKE-COMMERCE • Video Jack does not presently have a website and do not have plans to invest in one at this time.

40. VIDEO JACKCONCLUSION • While Video Jack does not have the atmospherics of Blockbuster or Hollywood Video, they still have been able to maintain a loyal customer base. Their current membership is 6500 to date. • They recognize the importance of customer relationship marketing and have strong programs in place to reward customer loyalty. • Their business strategy is simple, yet effective and have been able to survive the introduction of the “chain” video stores.

41. Thomas Video • Opened in 1974 as Thomas Film Classics; rented out Super 8 movies on reels before videos were introduced • Moved to different location that benefited the store as well as customers • Dennis Thomas had vision that videos would be the wave of the future

42. Thomas Video – Site Selection • Original site had bad visibility • Difficult to see sign • Bad parking situation • Moved to larger, more visible location • Near a intersection • Better signage • Convenient parking

43. Thomas Video – Demographics • Range of demographic segments • Variety of titles/selections brings in many different segments • Don’t market to one particular segment more than another • Movie aficionados

44. Thomas Video – Customer Loyalty • No customer relationship programs • Bring in audience due to variety of titles • Keep focus consistent • Known for unique/rare titles

45. Thomas Video – Merchandising • Movies – VHS, DVD, Beta, LaserDisc • Used videos/DVDs • Comic books – vintage/rare • Other: T-shirts, books, vintage TVs • No food/snack items: • Stay focused on core competency • Not offer too many extra things

46. Thomas Video – Inventory • More breadth, less depth • Carry various titles • Only one copy per title • Focus on diverse, unique titles

47. Thomas Video – Rental Selection • Core Competency • Wide selection of titles • Rent VHS & DVD • Buy VHS, Beta, DVD, LaserDisc • MANY titles, few copies • The reason customers come into the store

48. Thomas Video - Competition • Does not try to compete with the the larger chains • Different demographic audience • Blockbuster and Hollywood cater to the average moviegoer • Not really child-friendly • Focused more on the niche genres and carrying unique titles

49. Thomas Video – Strategy • Evaluate market every five years • Develop new/revised strategy based on current market conditions • Keep up-to-date on movie formats (Beta, VHS, LaserDisc, DVD) • Not a lot of advertising; Yellow Pages, Metro Times, word-of-mouth

50. Thomas Video - Pricing • $3.00 per rental for VHS or DVD (3 nights, due on third night) • $1.00 per extra day • Try to stay competitive to other stores, chains