Adapting to a video market where gamers rule the day: Game Rush John Antioco, ceo, Blockbuster

DSN Retailing Today, Sept 6, 2004 by Doug Desjardins

In the 20 years since it was founded in 1984, Blockbuster has become synonymous with movie rentals, but it's never been a major player in the video game industry. But that's changing as the retailer makes a big push into games as part of a larger plan to diversify.

Blockbuster has been expanding its presence in video games with its new Game Rush store-within-in-a-store concept. The stores, which sell and buy both new and used video games and game hardware, are now in about 400 stores and should be in 1,200 outlets by the end of next year.

"We plan to have 600 Game Rush stores open by the end of this year and an additional 600 open by the end of 2005," Blockbuster chairman and ceo John Antioco told analysts during a July 22 conference call. "We plan on going after the game market in a big way."

Video games have always been a part of the retailer's merchandise mix, but its traditional focus was to encourage customers to rent games rather than buy them. But that began to change a few years ago when Antioco started to retool the chain he has headed for more than seven years.

In 2001, Blockbuster and Radio Shack teamed up to open 150 small consumer-electronics departments inside Blockbuster stores with plans to roll out the departments throughout the chain. The idea didn't work out as planned, but it provided Blockbuster with a valuable lesson.

"We've demonstrated an ability to sell additional entertainment products in our stores," Antioco said at the time. "And we're moving ahead with our plan to carry a limited number of entertainment-centric products."

Blockbuster made good on that promise in early 2002 when it began selling video game consoles in stores for the first time and broadened its selection of video games for sale. The move was a departure for the chain and marked a turning point in the type of business model Blockbuster would pursue in the future.

And the move is paying dividends. During the first six months of 2004, the chain generated $172 million in video game sales compared with only $120 million during the first six months of 2003. Game sales accounted for 26% of total merchandise sales in stores during that time, compared to 21% in the first six months of last year.

Blockbuster is also using acquisitions to strengthen its position in the industry. In May, it bought the 40-store Rhino Video Game chain as a foundation for stand-alone operation similar to the Game Station chain it runs in the United Kingdom. Antioco said Blockbuster plans to have 175 Game Station stores open in the United Kingdom by the end of the year and double that number by the end of 2005.

The chain's decision to invest heavily in video game retail comes at an odd time, given the fact video game sales are in a slow period. But Blockbuster is banking on the game business rebounding when a new generation of game consoles from Nintendo, Sony and Microsoft start arriving in stores late next year.

According to PricewaterhouseCoopers, the video game market in the U.S. will increase slightly this year with $8.1 billion in sales and really take off in 2005 and 2006 when new versions of Playstation, GameCube and Xbox are released. The research firm predicts game sales will increase 13% to $9.1 billion in 2005, jump 20% to $11 billion in 2006 and increase another 25% to $13.7 billion in 2007.

Blockbuster is also tapping into other revenue streams in an effort to reduce its reliance on declining video rental revenues. It now buys and sells used videos in stores and recently launched an online rental model similar to NetFlix with plans to capture a big share of that market.

But video games will likely be the cornerstone of its growth in the near future as the retailer prepares to part ways with parent company Viacom Inc. in a $738 million buyout that's expected to close by the end of the year.

"We're going to establish Blockbuster as a major player in the game business both in the U.S. and across the globe," said Antioco.