Blockbuster's Keyes brings big returns


When James Keyes was appointed CEO of 7-Eleven in 2000, investors could pick up a share of stock for less than $9. Five years later, a Japanese firm bought the convenience store chain for $37.50 a share.

Investors hope Keyes will have similar success turning around video rental store giant Blockbuster, which last week lured him out of retirement and named him chairman and CEO.

At 7-Eleven, Keyes ended a decadelong trend of falling same-store sales by harnessing the power of technology to figure out which items were selling best at which stores -- and when there was peak demand for those products.

Business colleagues and observers expect him to bring this laser-like focus on consumer needs and new product that allows the rental chain to cross-sell related merchandise to Blockbuster.

At 7-Eleven, said Roger Enrico, the DreamWorks Animation chairman who is a friend of Keyes, "he got the business focused on the customer. It wasn't rocket science, but it was a heck of a lot of work."

To explain his business philosophy, Keyes in a telephone interview trudged back to the beginning of the long history of 7-Eleven, recalling how, in 1927, a company in Dallas selling blocks of ice suddenly found itself competing with the widespread adoption of refrigerators.

An employee known as Uncle Johnny Green, according to Keyes, "stood on the dock after Frigidaire came out with its newfangled device and asked his customers what he should do. They said, 'We bought a refrigerator, why don't you sell us milk?' Literally, that change in their business allowed the birth of the convenience store."

The company's stores soon were selling just about anything a customer would want to put in their fridge, and more, and their business hours were extended from 7 a.m.-11 p.m., hence the name change to 7-Eleven.

By 1980, the company operated 6,000 stores. Its purchase of Citgo Petroleum three years later put it in the gas-selling business, and Keyes entered the mix when he joined Citgo in 1985.

Then, a leveraged buyout of 7-Eleven saddled the company with massive debt right around the time gas stations nationwide were turning themselves into competing convenience stores.

The firm was in trouble in the U.S., but licensees were thriving in Japan. Keyes went there to learn their secrets, including the high-tech way Japanese store managers were controlling their inventory.

Bringing the Japanese model to the states got Keyes noticed, but not all his ideas were immediately embraced. In the 1990s, for example, he argued that 7-Eleven should be one of the first retailers to let its customers use new credit card readers to pay for their gas at the pumps. It was a controversial plan because it negated the need for consumers to enter the stores, where they might make an "impulse purchase." Keyes said a convenience store should strive, above all, to be "convenient," and he won over the skeptics.

Blockbuster skeptics, though, seem to be everywhere these days. Last year, the humorists at the Onion skewered the company by suggesting Blockbuster couldn't drum up business even if it paid consumers to shop there.

Under Blockbuster's new plan, according to the Onion's parody news story, customers could take 50 movies for free, plus "be driven home by Blockbuster chauffeurs, who will also install a brand-new 32-inch flat-screen TV upon the first rental."

Not enough. "Something about that place just rubs me the wrong way," a "customer" told the Onion.

Keyes said it's too early to say what changes might be afoot at Blockbuster now that he's in charge, except that he intends on figuring out what customers want and giving it to them.

At 7-Eleven, he would use computers to find which beer brands sold best at which locations and at various times of day and how weather patterns affected those sales. He promises he will do similarly at Blockbuster.

And he likely will introduce new and exclusive products, like when he convinced Anheuser-Busch to stock 7-Eleven stores with beer in aluminum bottles that hadn't before been seen in the U.S. and, in doing so, turned flat sales into 5%-8% increases.

"The ability to stay in stock with the right products at the right store literally at the right time of day is critical," Keyes said.

It might be too early for Keyes to be specific about changes at Blockbuster, but there's no shortage of pundits with opinions.

Rick Munarriz, a senior analyst with investment information and services firm Motley Fool, suggests a revamp of all stores to include:

  Children's play areas, with movie-themed toys, tables and games.

  Less candy, soda and popcorn -- which might appeal to theatergoers but not necessarily movie renters -- and more real food for those interested in dinner and a show in the comfort of their own homes.

  Flashier aisles with themes, like one decked with a red carpet featuring only Oscar-nominated movies.

"When I walk into a Blockbuster, I can't tell if it's a church or a Church's fried chicken," Munarriz joked. "It's a sea of movie covers. There's nothing distinctive. And there's no reason for me to go there except to rent or return a movie. It's not conducive to commerce."

Cross-merchandising is something "we haven't done a good job of," Blockbuster board member Gary Fernandes said. "That's one thing Jim wants to focus on. What else can we sell people while they're in the store?"

And if anyone can bring customers back into Blockbuster stores, it's Keyes, colleagues and friends say.

"He's a visionary," said Ed Moneypenny, who was CFO at 7-Eleven from 2002-06. "He demands everybody be at the same level of excellence that he's at, and he holds people accountable."

Moneypenny said that Keyes not only whipped 7-Eleven into shape but made sure that Wall Street noticed the changes.

"We'd go to investor conferences and he'd interject humor into the seriousness," he recalled. "The stock was doing great, and then the buyout occurred. It wasn't like we were bought because the stock was cheap. We really had the convenience store business model well in hand."

DreamWorks chairman Enrico knows Keyes and his predecessor, John Antioco, from his days as CEO of PepsiCo.

Antioco also was an executive at 7-Eleven and had been CEO of competitor Circle K Stores when Enrico tapped him to head Pepsi's Taco Bell unit. Enrico is a fan of both men.

"John is more flamboyant. We were struggling at Taco Bell, and he quickly fixed it. Honest to God, I never did figure out what he did," Enrico said.

Keyes, on the other hand, "is a terrific bridge between customers at the store and suppliers at the other end. Entertainment executives will find that he's open to new thinking."

Added Erle Nye, the chairman emeritus at energy company TXU Corp. who also knows both men: "Jim's more thoughtful, John is more direct. I'd go to war with either one of them."

Like Ted Turner, Tom Selleck, Gene Autry, Philip Anschutz, Ronald Reagan, Adolph Zukor and others, Keyes is a recipient of the Horatio Alger Award.

Named for the Civil War dime novelist whose rags-to-riches tales featured industrious heroes who succeed against the odds, the award is given each year to community leaders who exemplify "honesty, hard work, self reliance and perseverance."

The association's Web site describes Keyes as the youngest of six children who grew up in a small home built by his father and grandfather. It had no heat or running water.

When he was 5, his parents divorced and he lived that first summer with his older sister before returning to his father. At 10, he was caring for his grandmother and his dad, who was stricken with cancer.

After his father died, he lived with his mother and her boyfriend, which he described as "embarrassing and difficult." He got a job at McDonald's when he was 15 and was promoted to shift manager within a year. He was with Gulf Oil from 1980-85 before joining Citgo when it already was a subsidiary of 7-Eleven.

Keyes, who lives near Blockbuster headquarters in Dallas, is a member of the board of governors of American Red Cross, Dallas Center for Performing Arts, Cooper Institute and SMU/Cox School of Business. He also founded Education is Freedom, a foundation that provides college scholarships to hard-working students.

Nye, also on the board of the Dallas Center for Performing Arts, said Keyes "can slip up on your blind side. He's not the first one to speak up, but when he does, you need to pay attention. He's honorable and forthright."

Enrico said that if Blockbuster is to thrive, it needs to be the leader in every facet of the movie-rental business, including stores, DVD-by-mail and digital delivery. For now, Blockbuster lags Netflix by a wide margin in the DVD-by-mail category, and its digital strategy is a mystery.

Asked whether a successful turnaround would benefit the movie industry, Enrico said: "It's important for Blockbuster, but, honestly, not for the industry. There's no shortage of companies focused on distributing content more conveniently and less expensively. If it's not Blockbuster, it will be somebody else."

Georg Szalai in New York contributed to this report.