Hard Times Force Blockbuster To Scramble, Go Back To Basics

Amid concerns that someday pay-per-view movies from cable TV and satellite broadcasters would take a big bite out of his company’s video rental sales, Bill Fields had a plan.

The former Wal-Mart executive, who was now running Viacom Inc.’s Blockbuster Entertainment Group, decided to cut back on the amount of store space devoted to videos and make room for compact discs, video games, magazines, T-shirts and candy.

The new merchandise mix was supposed to transform Blockbusters into neighborhood entertainment centers and provide consumers with one-stop shopping convenience.

It wasn’t a bad idea. But it might have been one ahead of its time. For whatever reason, the strategy flopped and the world’s largest video chain is today struggling.

Fields’s decision to load up on candy and CDs was - believes Dan Potter, chairman of Minnesota-based Video Update Inc. - an attempt to “Wal-Martize Blockbuster.”

But it was “a disaster,” says Curt Alexander, a partner with Media Group Research in Providence, R.I. And it apparently cost him his job. Fields abruptly resigned from Blockbuster in April. He later blamed Blockbuster’s problems on a video industry that has seen better days. In an interview with USA Today, he challenged claims that he is responsible for the chain’s recent struggle and said the video rental business simply may have peaked.

Nevertheless, Wall Street analysts maintain that the changes Fields instituted were a distraction as some other video chains did a better job of bringing consumers the movies they wanted.

When “Independence Day” was first released for video rental, for example, Blockbuster bought about 100 copies for each store, says Pacific Crest Securities analyst Laura Richardson. That’s far more than the 25 copies the average mom-and-pop stocked, but fewer than the 222 copies available at most locations of the Hollywood Entertainment chain, an Oregon-based company with 600 stores.

Putting less emphasis on video rentals is one reason why some Wall Street analysts say Blockbuster has lost its focus - and perhaps half its value since Viacom Inc., headed by Sumner Redstone, bought it in 1994 from Wayne Huizenga for $8.4 billion.

For Blockbuster, switching from videos, with their high profit margins, to low-margin items such as CDs was a “strategic error,” says Brent Rystrom, a Piper Jaffray analyst who follows some of Blockbuster’s competitors.

When it was acquired three years ago, Blockbuster was seen as a vital cog in New York-based Viacom, which in some ways is a continuation of what Redstone started when he joined his father’s Dedham, Mass., drive-in theater business 40 years ago.

But three months after it hinted it might spin off Blockbuster, Viacom said recently that the chain’s cash flow for its second quarter could be $40 million to $50 million, down from $166 million for the same period last year.

In announcing its intention to take second-quarter charges of about $300 million, Viacom indicated that disruptions from Fields’s decision to move Blockbuster’s headquarters from Florida to Texas, excess inventory, and an expensive ad campaign were among the reasons for the chain’s disappointing performance.

Analysts also noted problems stemming from a switch to a new distribution system and high management turnover.

To be sure, Blockbuster isn’t the only video renter that’s struggling. Nearly the whole industry slumped earlier this year.

Like Hollywood studios, the industry relies on hit movies to boost revenues. Movies arrive in video stores six months after their release in theaters, and the movies that reached video stores in early 1997 were mostly box office dogs.

Bad box office at theaters six months ago translates into disappointing rentals at video stores today.

“There’s a softness at video retail” now because of this lackluster crop of new movies, says Viacom spokesman Carl Folta.

“Blockbuster isn’t the only company having problems,” says Robert Liuag, the research director for the Video Software Dealers Association.

According to this trade group, rentals at the nation’s 27,000 video stores generated revenues of $3.4 billion for the first half of 1997, down 8.4 percent from the same period in 1996.

Besides lousy movies, other reasons cited for the decline include video piracy, more competition from cable and satellite broadcasters, and consumers’ buying videos rather than renting them - an estimated $6 billion to $7 billion worth last year.

With an estimated U.S. market share of 20 to 25 percent, Blockbuster looms large over the video landscape. In terms of number of stores, it’s 10 times larger than its nearest rival.

In the United States alone, Blockbuster operates more than 3,800 video stores, about 650 of them owned by franchisees. In 1996, Blockbuster had revenues of $3.5 billion.

With a potentially strong crop of summer movies just out in the theaters, the video rental industry is confident that the second half of 1997 will be better than the first half.

And even some rivals believe that a back-to-basics approach by Blockbuster’s new chief executive John Antioco will help it bounce back.

“We expect their issues will be temporary,” says Doug Gordon, a vice president at Hollywood Entertainment. “We expect the new Blockbuster will be a lot like the old Wayne Huizenga Blockbuster.”