Blockbuster scales back on transformation

Recession puts halt on wide switch to all-in-one retailer

Blockbuster Inc. said Wednesday that it is scaling back wider rollout of its "Rock the Block" store concept -- a strategy envisioned to transform the company from DVD rental pure play to all-in-one entertainment retailer.
Dallas-based Blockbuster had transitioned all of its stores in Reno, Nev., as part of pilot program.
Speaking to an investor group, chairman and CEO Jim Keyes said keeping up with change is fundamental to retail, but completely reinventing the brand during a recession requires capital investment unavailable in the current credit climate.
"It wasn't prudent to continue with the foot on the accelerator as we had in 2008," Keyes said.
The CEO said Blockbuster increased working capital to $100 million in 2008 in order to maintain 60% in-store availability on all new releases. He said it costs Blockbuster $1 to put a video game on the shelf, and from $40 to $50 to acquire the title, which he said requires increased working capital.
Keyes said he wants to work with video game publishers and movie studios to share in the incremental costs associated with inventory. He said Blockbuster represents a $1 billion annual revenue stream to the studios -- a figure he said cannot be ignored in the current economy.
"We've pulled back on capital expenditures to maintenance levels to weather this economic environment," Keyes said.
The executive said Blockbuster will soon unveil updated pricing plans, a move pre-empted by rival Netflix, which this week announced monthly price hikes for Blu-ray titles.
Keyes lamented Blockbuster's $2.3 billion in sales, general and administrative costs, a figure he described as inefficient.
"Everything, from the way we distribute products, to our stores, the labor model, has been historically inefficient and represents a great opportunity for us to improve our liquidity and cash flow by driving cost savings," he said.
Ongoing restructuring includes reduced store and head counts, outsourcing nonstrategic tasks, refining the store business model and lease cost reductions.
Edward Woo, retail analyst with Wedbush Morgan Securities in Los Angeles, which covers Blockbuster, said it was wise for Blockbuster to cut back until it has better working capital flexibility. He said the company would be able to cut additional SG&A particularly if it closes more stores.
"Rent expense ($400 million annually) is another area to streamline," Woo said.
Keyes said the movie rental business remains an "incredibly fragmented landscape" of many players doing little pieces of the puzzle. He said Netflix gets a lot of attention despite operating a very segmented operation.
"They are in the subscription business only," he said. "It is a very good channel that Blockbuster also participates in, but it is one small segment of this industry."
Keyes said the "shiny new toy" in distribution remains the electronic download. He said Blockbuster is well-positioned in that market, with an excellent library of digital content.
"But the reality is that it is a very small piece of the market," Keyes said. "It is the fastest-growing segment. The brand lends itself to digital offering domestically and abroad, but it is still a sliver of the industry."
In the interim, Blockbuster continues to divest itself from a physical presence in foreign markets, opting instead to sell and license the brand and return at a later date with a digital offering.
"Through 2012, the bulk of the $22 billion rental market remains with physical distribution in stores," Keyes said.
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