Wednesday, August 1, 2007

New Blockbuster CEO Faces Long Line Of Challenges
By John Gaffney, Contributing Editor

Retailing is an active verb. It requires that companies that consider themselves retailers actively generate demand for their products or services. When I look at some of the retailing business models that are under siege these days, I wonder if the ones in danger understand the economics of demand.

Entertainment retailing is one of those retail business models that has taken some knockout blows from new delivery platforms. It’s still staggering. Record stores? All but done. Book stores? Having a tough time. Video stores? Blockbuster, the category leader, has posted losses in 9 of the last 10 years. In the first quarter alone, Blockbuster reported a net loss of $46.6 million, compared with $1.9 million of red ink in the same period last year.

Well, its time to meet the latest combatant stepping up to take on the tag team of Netflix, On Demand, iTunes, Amazon, Tivo and a line of other services. He’s new Blockbuster CEO James Keyes. He is credited with helping turning around 7-Eleven and putting the convenience chain back on a growth track. Wall St. is optimistically hoping he can achieve a similar turnaround with Blockbuster.

During his tenure at 7-Eleven, was credited with using business intelligence to tailor merchandise assortments down to the store level, and ultimately reducing the average footprint to run more efficiently and provide a more convenient shopping experience for their customers.

At first blush that sounds like a solid blueprint for reversing the fortunes at Blockbuster. Any number-cruncher could walk through a Blockbuster store today and point to empty aisles and crowded shelves of inventory that isn’t turning. The problem is, the foundation of the video rental business is built on a “watch what you want, when you want,” philosophy. The appeal of Blockbuster for most consumers over the years has been that you can find one of your old favorites while you are picking up that week’s new release.

If you focus on Netflix as Blockbuster’s biggest nemesis over the past six years, then there is some cause for hope that Keyes can the company around. Blockbuster’s Total Access program has clearly been turning the tides on its online competitor this year. In July, membership at Netflix actually fell for the first time in seven years, after growing at a compound rate of almost 80% per year. Blockbuster’s Total Access membership, on the other hand, has been growing at close to 50%

Putting the two movie rental giants side by side, Netflix had 6.7 million subscribers, compared to close to 3 million for Blockbuster’s multichannel Total Access program. Analysts project that the total online rental market will have more than 20 million members over the next four to six years. Assuming that growth rate is in the ballpark, the big question will be how much share Blockbuster can secure.

Ironically, in a category that has been over-run by digital formats, Blockbuster’s base of almost 5,000 brick and mortar stores has proven to be a competitive advantage. Consumers are clearly voting for the convenient choice of ordering titles online or driving over to the store for immediate gratification. The challenge for Keyes will be to deliver that convenience in a profitable way.

Blockbuster has announced plans to close another 5% of its locations this year and Keyes may be pressured to shutter even more to improve the bottom line. Of course, fewer or even smaller stores could also slow the growth of its Total Access program.

In a recent interview with The New York Times, Keyes was already looking ahead to other delivery formats, such as digital distribution, or “next wave of demand.” However, his real ticket for success will likely be punched by the strategy he builds for the traditional brick and mortar business.

A reasonable strategy, to me, would be to generate all the demand for my core product that I could. If I was running Blockbuster, I would make sure I owned key customer groups and then I’d generate demand from them accordingly. At brick and mortar locations, I would cater to moms, kids, and gamers. In fact, I’d want to own those groups. Leave the art house groupies to Netflix. Blockbuster needs to get back in front of moms and kids with the concept of movies that the family can watch over and over and over.

To an extent that seems to be what’s Keyes is doing. But he may be leaving out the demand gen part. Shrinking the footprint of brick and mortar stores, shrinking the physical inventory could be a big mistake.

No comments: