Independent Video Stores Struggling

Since opening Video Universe in Minnesota 11 years ago, Scott Prost has weathered more than his share of adversity.

In the late 1980s, Blockbuster Video began rolling out its national chain of video rental superstores, putting hundreds of independents out of business. Video Universe survived.

The weak economy of 1992 sparked another general shakeout in the home video industry and claimed several thousand more small stores. Again Video Universe survived.

Even when half a dozen Blockbuster wannabes used public stock offerings to finance huge national expansions in 1995 and 1996, Video Universe hung in there.

But now things are shakier than they’ve ever been at Prost’s single-store operation.

Since the beginning of the year, the nearby Blockbuster Video and Hollywood Video stores have been in fierce battle with each other, guaranteeing the availability of newly released videos and extending the rental period to as long as five days in an aggressive quest for market share.

And Video Universe has been caught in the cross-fire.

“My store is down probably 5% to 6% for the year, and it’s getting worse as the year progresses,” Prost said. “They’re taking away my bottom line, and once they get 20%, that’s it--we’re done.”

Like other independent video retailers around the country, Prost places the blame squarely on the shoulders of the aggressive competitive tactics employed by the nation’s No. 1 and No. 2 video rental chains: Viacom Inc.’s Blockbuster Entertainment Group, which operates more than 6,000 video rental stores in the United States, and Hollywood Entertainment Corp., the fast-growing contender from Wilsonville, Ore., that has more than 1,100 stores.

To drive traffic into their stores, both chains earlier this year began stocking up on the hits, bringing in mass quantities of new releases under revenue-sharing deals cut directly with the studios. Instead of paying $70 for each video as Prost and other retailers do, they pay less than $10 up front and split the revenue with the studios.

The strategy is working. Blockbuster and Hollywood have reported sharp increases in store traffic and quarterly same-store video rental revenue gains in the double digits.

Independent video store operators like Prost say there’s no way they can compete. They don’t have the clout of the big chains. They can’t negotiate their deals directly with studios, so the terms they get aren’t nearly as favorable.

Viacom chief Sumner Redstone has publicly stated that under some of its deals, Blockbuster keeps as much as 70% of rental revenue, whereas independent stores with revenue-sharing arrangements can at best hope for a 50-50 split.

Add to that the rate at which Blockbuster and Hollywood are opening new stores--around 700 so far this year between them--and a clear picture begins to emerge.

“The chains have outspent and ‘outstored’ the little guy,” said veteran industry analyst Tom Adams. “Their goal is market share, and that’s causing the demise of more and more independents.”

Bill Bingham, who owns two independent video stores in rural Louisiana, is feeling the crunch. One of his stores, across the street from Blockbuster, is losing $4,000 to $6,000 a month. The only reason he’s still in business, Bingham said, is that he owns the building, so he has no rent payments.

“They’re deep on everything,” Bingham said. “I’ll have seven copies of a movie and they’ll have 50 or 60. And that just kills my business, because once a customer comes to my place for a movie, can’t find it, and then sees plenty of copies at Blockbuster, he’s gone.”

At a recent industry gathering in Los Angeles, Ron Berger, chief executive of video distributor Rentrak Corp., said he estimates that between 300 and 400 video stores are going out of business each month.

He attributed the closures to “inherently anti-competitive practices” on the part of studios “content to share with Blockbuster and a handful of other chains and no one else.” (Until this year, Rentrak had a virtual monopoly on revenue-sharing, acting as a middleman for various studios under exclusive contract.)

Blockbuster has long denied allegations that it is receiving favorable treatment from studios in the form of special deals that enable the chain to buy videos for significantly less than other retailers.

At last July’s Video Software Dealers Assn. convention in Las Vegas, Blockbuster Entertainment Group chief John Antioco told an audience of retailers, “We have no--zero, nada, nil--exclusive deals and no favored-nation clauses [with studios]. We have done nothing contractually or otherwise to prevent the studios from signing deals--even better deals--with other retailers, large or small.”

Bob Webb, president of the Independent Video Retailers Group, a management and marketing association representing 300 storefronts nationwide, disputes that. For some months, Webb has been talking about filing an antitrust lawsuit against Blockbuster and the major studios, charging them with discriminatory pricing.

“Our contention is that some of the big chains are getting favorable treatment, and that’s hurting the independents. There’s no question that ‘indies’ are being hit hard this year,” Webb said.

“Surveys conducted by the IVRG indicate that the average independent retailer competing against a Blockbuster is down 10% for the year to date,” he said. “Meanwhile, you’ve got Blockbuster reporting that same-store sales were up 19% in the third quarter.”

Webb himself is not immune. As owner of six-store Video Revue in Decatur, Ill., he’s seen business at the five stores that compete directly with Blockbuster plummet 15% for the year. At the one store that doesn’t have a Blockbuster within a two-mile radius, business is up 5%.

Talk of his lawsuit has already brought several studios into discussions, Webb said.

“Even with all of the concern today about the long-term viability of the independents, it is important to remember that they still represent the backbone of the home video industry,” said Jeffrey Eves, VSDA president. “They continue to account for approximately 55% of all consumer spending on video rental, and they operate two-thirds of all video shops in North America.”

Still, Eves maintains it is unrealistic to believe that independent video store closures can be completely averted. Some degree of consolidation is to be expected in any maturing industry.

“Overall, we have an industry that is performing well,” he said. “Our numbers show that the rental industry as a whole is up 9% this year, but we must remember that a rising tide only lifts seaworthy boats.”