Blockbuster vs. the World : Entertainment: When it comes to videos, Blockbuster is aptly named. Now this industry leader is storming Southern California.

When Blockbuster Video held a franchisees convention in Los Angeles last year, Hollywood rolled out a star-quality welcome. There was a catered barbecue and presentation on the old Burbank Studios lot and a VIP tour of Universal Studios. Conventioneers with spouses and children in tow were even treated to a private screening of the sentimental movie “Dad.”

Such are the perks for a company that dominates video retailing the way “Batman” dominated the box office. Blockbuster Entertainment Corp. boasted higher revenues than its next dozen largest competitors combined last year. Its ubiquitous “Here We Grow Again!” signs are the primal markings of a company so expansion-minded that it is often compared to McDonald’s.

Now Blockbuster is storming the saturated Southern California video market with plans to place its blue-and-yellow superstores in virtually every neighborhood from San Diego to Santa Barbara. It has opened more than 100 outlets in the past two years and intends to open at least that many more. Competition from such chains as Wherehouse Entertainment and Music Plus is apparently of small concern to a corporation that adheres to the bigger-is-better theory by jamming as many as 12,000 videos into its stores.

“Our challenge is enhancing the ‘wow’ factor,” said Senior Vice President J. Ronald Castell with typical Blockbuster bravado. “We plan to dominate the area by the end of 1991.”

Competitors take Blockbuster at its word. In a phenomenal growth spurt that has reshaped the $10-billion-a-year video business, the company has gone from 19 stores nationally to nearly 1,300 in three years under current management. Even a Wall Street analyst’s critical evaluation of corporate accounting practices last year failed to slow the momentum.

The Blockbuster chain’s $600 million in revenue--including franchised stores--in 1989 dwarfed the $180 million of its nearest rival, West Coast Video Ltd. Securities analyst Fran Bernstein of Merrill Lynch & Co. said Blockbuster stands alone in the video retail market in both size and ambition.

“Blockbuster certainly expected more competition,” she said. “That’s why they have expanded as fast as they have. They wonder where is the Burger King to their McDonald’s.”

Comparisons to the hamburger giant are common, though Blockbuster remains a small fry to McDonald’s Big Mac. Blockbuster markets itself as “America’s Family Video Store.” It eschews adult videos--though one worn-looking copy of “Outrageous Strip Review” could be found in a Santa Monica store--and staffs its outlets with fresh-scrubbed workers who appear to have stepped out of a preppie clothing catalogue.

Blockbuster managers are trained at facilities such as Dallas’ “Blockbuster University.” Chairman H. Wayne Huizenga even hired two former McDonald’s executives to aid in developing the chain of supermarket-sized stores that dispense movies like fast food.

A state-of-the-art computer system tracks the renting habits of Blockbuster’s 12 million members, whose ranks are growing at a rate of 300,000 a month. By continually sampling their tastes, the company knows whether to order 1,200 or 12,000 copies of a release, though regular customers say Blockbuster still tends to run out of the most popular titles on weekends.

Unlike other video companies, Blockbuster also has a long-term rental policy. Customers pay $3 for the right to hang onto their selections for a minimum of two nights and three days. Those who haven’t yet encountered a Blockbuster store have probably at least heard of the chain. Blockbuster will spend $60 million on advertising and promotion this year.

Huizenga, the former president of another aggressive growth company called Waste Management Inc., said customers clearly like the convenience and selection they find at a Blockbuster store.

“That has enabled us to gain market share as fast as we have,” Huizenga said. “Everybody laughed when we said we were going to be No. 1. But . . . we put the needed machinery together to make it work. No one can come in with a better product than what we have.”

While no competitor likes to see a Blockbuster sign go up, analysts say its major victims are the “mom and pop” operators. Sitting in a mini-mall across the street from Blockbuster’s Santa Monica store is the tiny New Wave Video, which dropped its nightly rental prices on some movies to $1 after Blockbuster opened. To further distinguish itself, New Wave has resorted to trumpeting its wide selection of adult videos.

The store’s owner, who asked that her name not be used, is worried about her survival. “It’s not fair,” she said. “There should be certain laws that someone can’t come in your face and and try to get rid of you. We’re just holding on.”

Huizenga credits the original Blockbuster management with the superstore concept. But it was he who pioneered the practice of building a chain by absorbing smaller operators.

In the 1970s, Huizenga turned a small collection of garbage hauling companies into Waste Management, the nation’s largest waste disposal company. Success did not come without controversy, however. The Securities and Exchange Commission alleged in 1976 that Huizenga and another executive disguised certain “unlawful” payments to outsiders as landfill permit costs. Although there was no admission of wrongdoing, Huizenga signed a consent decree barring him and the company from using corporate money for “unlawful political contributions” and from filing “materially false and misleading” financial statements.

Huizenga, often characterized as a workaholic, and two partners bought into Blockbuster for $18.6 million two years after he retired from Waste Management. Wasting none of his management skills, he was soon building the company at a furious pace through the purchase of smaller chains, construction of new outlets and franchise pacts.

Huizenga now owns 14.4% of the company, which is based in Ft. Lauderdale, Fla. It operates eight regional offices around the United States, each with the mission of opening at least 20 stores a year, not counting franchises. To keep the outlets stocked, the company purchases more than 54 million videocassettes a year.

Blockbuster ultimately hopes to have more than 3,000 stores nationwide. The company also has its sights on foreign video customers. It has opened 23 stores in Britain and plans to open thousands more worldwide.

“All of Europe together has more people than the U.S., so we’re excited,” Huizenga said.

Blockbuster’s growth has been accomplished with the enthusiastic support of the investment community. In June, 1989, the company received a five-year, unsecured $125-million line of credit from Security Pacific Merchant Bank. Three months later, it raised an additional $90 million through a debt offering managed by Merrill Lynch Capital Markets.

Frank Molstad, editor of Video Magazine, said Blockbuster’s financial savvy sets it apart from many competitors. “They offered a different perspective than Wall Street may have had on video retailing,” he said. “They offered it as a well-run corporate business. They spoke in terms Wall Street could understand and offered numbers that everyone could relate to.”

Almost everyone, at least. Last year, the company’s stock briefly tumbled when Bear, Stearns & Co. analyst Lee Seidler issued a critical report on Blockbuster’s accounting practices.

Seidler argued that the company had inflated earnings by stretching out depreciation expenses and including revenues from tape sales to franchisees who had not yet opened their stores. The report held that Blockbuster padded 1988 earnings by 19% by stretching out the period over which a tape would be depreciated. And it said Blockbuster earned 43% of its income by counting its one-time franchise fees and sales as ongoing income, instead of one-time gains.

Huizenga, in an angry rebuttal, said Seidler failed to account for continuing revenues from franchisee fees and royalties. Seidler declined to discuss his analysis for this story.

Huizenga still bristles at the report, calling it a “non-event.” But the company has since altered its accounting methods, cutting its depreciation schedule for hit tapes from three years to one year, while leaving the rest of its inventory on a three-year schedule.

Gary M. Jacobson of Kidder, Peabody & Co. is one of many securities analysts who remain high on Blockbuster. In a recent report, he noted that the company should turn in a record performance this year, with revenue for the entire chain, including franchised stores, up 67% to about $1.1 billion. (The parent company, Blockbuster Entertainment, earned $44 million on revenue of $402 million in 1989, and Jacobson forecasts earnings of $75 million on revenue of $646 million in 1990.)

Jacobson also reported that Blockbuster should be able to totally fund the $85-million cost of building 180 new company-owned stores this year from current cash flow.

Blockbuster stockholders have been well rewarded this year. The stock closed Friday at $23.38 a share, after beginning the year at $17.

Helping to stuff Blockbuster’s coffers are a network of franchisees who pay start-up fees of $548,000 to $770,000 per store, not counting ancillary items like software. In 1989, the company received about $17.3 million in royalties and fees from its new licensees, who customarily acquire vast territories rather than specific store sites.

Included among them is Marvin Bush, son of President Bush, whose company holds the rights to greater Washington. Bush has the option to open as many as 15 stores. “I’m very comfortable with the people involved in the business, and that to me is critical,” Bush said. “I would not want anyone in the country to be in charge other than Wayne Huizenga.”

The biggest franchisee in Southern California, with rights to the east San Fernando Valley and San Gabriel Valley, is Denver-based UI Video, a subsidiary of United Cable, which holds $30 million in Blockbuster stock. The company has the option to build up to 100 stores there and elsewhere.

Despite its profitability, one criticism of Blockbuster centers on its 50-50 ratio of franchised to company-owned stores. Edward Kushell of the Franchising Consulting Group in Century City said industry standards usually call for franchise ownership of at least 80%.

“A 50-50 breakdown can be a red flag,” Kushell said. “Because you’re looking for the commitment and energy of the person who operates a location for you. . . . Historically, the performance of franchise-owned stores is better than that of company-owned stores.”

Huizenga deflected Kushell’s criticism with this blunt explanation: “Our stores are very profitable,” he said. “We’re not content to just collect a 7% royalty” from a franchisee.

Huizenga also dismisses those who say that the video retailing business may start to wane after years of explosive growth with the emergence of pay-per-view and satellite technology. “It’s always a concern, but there’s nothing on the horizon that’s going to put us out of business,” he said. “Yes, we have all of our eggs in one basket, but we are doing extremely well, and as we move along and cash flow continues to improve, we’ll get into other types of business.”

For now, Huizenga would be happy just to conquer Southern California. Analysts say it won’t be easy, given the price of real estate and the fact that competition is already stiff.

Tom Adams of the media research firm Paul Kagan Associates said “no one has had the guts” to go after Southern California retailers such as Wherehouse until now. Blockbuster could be competitive within a year if its current expansion rate continues, Adams estimated.

Wherehouse, the current leader, has 162 stores in Southern California and 265 throughout the West. Blockbuster is second in Southern California, with 107 stores. Music Plus has 70.

Bruce Jesse, Wherehouse vice president of advertising and sales promotion, said it may be misleading to compare Wherehouse with Blockbuster, since Wherehouse deals in both music and videos.

“We feel we’re offering a much broader array of products and choices for the customer,” he said. “And the success we have enjoyed demonstrates the customers like us, too.”

Whether they like Wherehouse enough to resist the coming Blockbuster onslaught remains to be seen. One thing competitors can be certain of is that, if Huizenga has his way, Blockbuster will soon be as much a part of the Southern California landscape as the golden arches.

BLOCKBUSTER’S EXPLOSIVE GROWTH Number of Stores (at year-end): 1,200 1989: 1,079 1985: 79 LARGEST VIDEO STORE CHAINS

1989 revenue Company Headquarters Stores (in millions) 1. Blockbuster Ft. Lauderdale, Fla. 1,000 $600.0 2. West Coast Philadelphia 710 $180.0 3. Erol’s Springfield, Va. 210 $160.0 4. RKO Warner Video New York 40 $42.5 5. Palmer Video Union, N.J. 160 $34.0 6. The Video Store Cincinatti 90 $30.0 7. Applause Video Omaha, Neb. 61 $28.5 8. Video Galaxy Rockville, Conn. 45 $27.0 9. Video Express Birmingham, Ala. 76 $24.0 10. Video Update St. Paul, Minn. 63 $19.0

Source: Video Store Magazine