Blockbuster Revamping

DVD has done more than change the way people watch movies at home. It's also changed their rental habits. The format is so superior to VHS tape, and so affordable, that many movie fans are choosing to buy rather than rent.

Video rental giant Blockbuster, Inc. is adapting to this new reality with a massive overhaul of its more than 4000 US stores to emphasize DVD and video game sales as much or more than movie rentals. "Our mission is clear: to be the complete source to our customers for movies and games, in the format of their choice, rental or retail, new or used," said Nick Shepherd, a Blockbuster merchandising executive.

The move pits Blockbuster directly against retail behemoth Wal-Mart, Inc., which sells DVDs in its stores nationwide. (Wal-Mart also recently moved into the digital television market, with widescreen sets and basic home theater set-ups.) Some analysts see the sales push as risky because it is such an abrupt change from Blockbuster's traditional business model. In 2001, Blockbuster's DVD sales revenue represented only about 3% of the total market. Company officials would like that figure to reach 9% by 2006.

Blockbuster has not indicated any interest in selling video hardware, although CEO John Antioco has said he wants to position the company as "a one-stop shop for consumers' home entertainment needs." The company is also accommodating Hispanic customers with an expansion of Spanish-language selections and signage in approximately 1000 of its US stores.

The per-item profit margin in mass-market electronics stores is dismayingly thin, Fulcrum Global Partners analyst Alan Weichselbaum pointed out. Huge volume is what keeps operations like Best Buy and Circuit City alive. Margins on video rentals are much higher than they are on sales, thanks to differing scales set by movie studios, which take 75% of video sales revenue, but only about 26% of the revenue from rentals, according to Adams Media Research. Video rentals are about two to three times more profitable for dealers than sales are; the revamped Blockbuster would need to sell many more DVDs to maintain its present volume of business. Blockbuster's own research shows that regular rental customers spend approximately $5 billion annually buying video titles, Antioco told reporters. Emphasizing sales could keep much of that business in house, he said.