Blockbuster looks ahead after Viacom spinoff

DSN Retailing Today, July 19, 2004 by Doug Desjardins

DALLAS -- After years of rumor and speculation, Viacom and Blockbuster made their split official last month. Now the chain is out to prove it can thrive as an independent operator without the deep pockets of its parent company.

The separation will come through with the payment of a $5 dividend on each share of Blockbuster and Viacom stock in a deal that will cost the chain $738 million. The cash will come from a new $1.5 billion line of credit that Blockbuster has lined up for its solo flight.

Once the deal is closed in late summer or early fall (an official date hasn't been announced), nothing will really change in Blockbuster's day-to-day operations. Though chairman and ceo John Antioco said the split will allow the chain to "pursue its unique retail strategy," Blockbuster has already been doing that for more than two years.

The chain has more than a half-dozen projects in the works that are taking it into new areas, such as online rentals and used DVD and video game buying, in addition to the ongoing expansion of a chain that already has nearly 9,000 stores worldwide.

"I think you'll see more of the experimentation they showed in the early 1990s when they were an independent company," said industry analyst Tom Adams. "Their role since the mid-1990s has been as a cash cow for Viacom. But now that they're out of that mode, I think they'll be doing some really interesting things."

Blockbuster has been working to reinvent itself as video rentals have declined due to increased competition from online retailers like NetFlix and the growth of DVD sales. The chain posted a profit of $112 million in the first quarter of this year, but reported a 3.7% decline in rentals that came on the heels of a 6% drop during the fourth quarter of 2003.

So it's no surprise that most of Blockbuster's new initiatives are designed to reduce its dependence on the rental business. In 2002, it began selling video game consoles and software in stores, and last year made a big push into DVD sales. In the first quarter, merchandise sales in stores increased 11% to $331 million, accounting for 22% of the chain's total revenue (just a few years ago, those sales figures were in the single digits).

The chain's newest campaign focuses on movie trading. Blockbuster tested the concept in several markets during the 2003 holiday season with its "Big DVD Trade-In" promotion that allowed customers to trade used DVDs for new titles.

"We estimate there are 2 billion DVDs in home video libraries in the United States, and we think people will be interested in trading some of them," said Karen Raskopf, vp of corporate communications for Blockbuster. The chain plans to have movie trading available in 2,000 U.S. stores by the end of the year.

Blockbuster has also taken steps to offset competition from online retailers such as NetFlix. In May, the chain launched Movie Pass, a subscription service allowing customers to rent two movies at a time and keep them as long as they want for $25 per month.

Later this year, Blockbuster will expand on the concept with its own online rental program that will allow customers to rent DVDs online and receive and return them through the mail. "In 2005, we're going to merge the two programs so customers will be able to pick up and return movies in stores or do it through the mail and online," said Raskopf.

The chain is also raising its profile in the video game sector with its Game Rush outlets. The store-within-a-store departments buy and sell new and used game product; they are currently being rolled out to hundreds of new outlets.

Looking forward, Blockbuster is planning to open 400 stores in 2004 and will invest between $70 million and $90 million in expanding its new initiatives. That investment is expected to result in a 10% drop in earnings of $1.48 per share the chain posted last year.

But analysts believe investing in new ventures makes sense, particularly since video rentals are expected to decline 4% to 5% a year for the next five years. "They need to make some drastic changes in their business model," said retail analyst George Whalin.