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In the second installment of our retrospective series, we take a look at the story behind the video rental industry’s pioneering giant.
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Words by Kieran McLoone, editor of Global Franchise
If you were an avid moviegoer during the late 1990s and early 2000s, then that bold, blue and yellow logo probably scratches a nostalgic itch that few other brands could even hope to equal.
At its height, Blockbuster appeared to outsiders as a triumphant staple of the international retail landscape. It peaked around 2004 with 9,094 stores, employing approximately 84,300 people, and for film fans the brand couldn’t be beat when it came to getting their hands on the latest releases.
But behind the scenes, insiders told a different story. Everybody now knows about the infamous $50m Netflix deal that was turned down by then-CEO John Antioco in 2000, but Blockbuster’s problems can be traced back even further.
“I’ve come to believe the really great companies create the future, rather than having it defined by other people,” says Alan Payne, one of Blockbuster’s longest-running franchise partners, and author of the book Built to Fail: The Inside Story of Blockbuster’s Inevitable Bust. “Had Blockbuster done it right, I think there’d still be some stores open today.”
The beginning of the end
The Blockbuster that we know was created in 1986 when serial entrepreneur Wayne Huizenga paid $18.5m for 60 per cent of the company. At this time, the video store market was generating over $3bn a year in sales, and existing legal battles between operators and big studios had largely settled down.
The industry seemed like a surefire way for business owners to make money, and Blockbuster soon found itself with countless entrepreneurs looking to open their own stores.
“Blockbuster took off, and people were calling them and begging to get one of these stores,” says David Kahn, a Blockbuster franchisee who first joined the company as a district manager in 1988. “A lot of franchisees were known as ‘friends of Wayne’, and you didn’t see mom-and-pop operators getting involved; it was driven by corporations on the franchising side of things.”
Nowadays, those not in the know may not have even been aware that Blockbuster was at one time a considerable franchisor. That’s because the strategy employed by Wayne Huizenga during his tenure of 1986 to 1994 was to utilize franchising for rapid expansion, and then purchase the units once they were fully formed.
“Franchisees were never about more than one-fourth of all the stores. The only reason they did it was to develop markets they didn’t want to mess with like Alaska, where we were,” says Payne. “In the early days, they used it as a tool to grow faster than they could organically. All of the large franchise groups that were built in those early years? Blockbuster bought them all back. It was almost like an orchestrated deal where they would give a big territory to somebody who would develop it over three to four years, and then Blockbuster would buy it back. Everybody won.”
And in those exciting early years, everybody did indeed win. Stores were generating upward of $1m in annual sales, and the $500,000 that it cost to open a Blockbuster location was typically repaid in less than two years. If a franchise group decided that it didn’t want to expand any further, and the market was there for it, then Wayne Huizenga would simply buy the territory – often through shares in the company – and the gravy train would continue down its seemingly endless tracks.
“It was all about the cash flow being there. I know that Wayne was frustrated with a group that had built out Tampa, Florida, which had an exclusive territory,” says Kahn. “They’d built 20 stores and didn’t want to build anymore, but there were opportunities to continue growing the brand.
“That drove Wayne crazy. He was a builder. Plus, you make more money if you own the stores. You use the franchise model to grow the concept quickly, but you’re only getting six to eight per cent royalties off of it – you can get 30 per cent or more return if you own the stores.”
The cracks begin to show
Some say that the departure of Huizenga in 1994 was the beginning of the end for Blockbuster, as it lost its driving force and aggressive development backbone. After all, between 1994 and 1997 the brand went through three CEOs, eventually settling on John Antioco who joined the video rental powerhouse from Taco Bell.
“Wayne Huizenga was a builder and developer and acquirer, whereas John was an operator,” says Kahn. “He didn’t have the same mentality about acquisition. He didn’t know how to make a deal.”
1997 was also the year that Netflix was founded, and many who analyze the decline of the video rental giant pin its downfall on this shift to streaming. However, Netflix didn’t stream its first film until a decade later in 2007, whereas Blockbuster was on the downturn many years beforehand. The number of units it operated continued to grow, but it posted a net loss for every year but two between 1996 and 2010.
This net loss can be attributed to a plethora of factors, but it was in fact Huizenga’s passion for opening as many locations as possible – and as quick as possible – that many sources state paved the way for the brand’s inevitable decline. Franchisors nowadays recognize that growth is preferable, but not at the expense of strategy and sustainability.
“In its race to open stores faster than anyone else, Blockbuster made hundreds of real estate mistakes, accepting inferior locations in its haste to open 3,000 stores in six years,” wrote Alan Payne in Built to Fail. “These poorly located stores were underperforming, but more importantly, were extremely vulnerable to the inevitable competition to come.”
Competition initially came in the form of Hollywood Video, which went public in 1993 and grew to 1,600 locations just six years later. It wasn’t quite the same numbers that Blockbuster boasted, but its sheer presence highlighted a fundamental flaw in the latter’s model: Blockbuster simply wasn’t prepared for brick-and-mortar rivals.
“If a Blockbuster is on one corner and a Hollywood Video goes across the street, it’d take three-quarters of revenue from the Blockbuster,” says Payne. “You’d think that would raise some red flags, but over three years, Blockbuster did nothing about it. They allowed it to happen all over the country.”
Blockbuster’s final days
The rest of the story isn’t pretty, but to outsiders, Blockbuster still appeared to be on top. It opened its 8,000th store in 2004, and one year later, the brand eliminated the pesky late fees that customers despised so much – and which rivals highlighted as a source of competition.
Rather than making Blockbuster as popular as it was in the 1990s, however, the removal of late fees was a one-two punch that the brand simply couldn’t handle by this point. Its stock price fell by 50 per cent at the announcement of the news, and customers no longer had much incentive to bring back their rentals (DVDs, by this point) on time.
“When they eliminated late fees, it was like going to a rent-a-car on a business trip: you’d rent it for a couple of days but there’s no late fees, so you can then just drive it around,” says Kahn. “That puts stress on the inventory. You’d come in wanting to watch Titanic, but the guy over here wasn’t bringing the movie back.”
A decade later, and Blockbuster closed its last corporate-owned store in 2014. By this point, the brand name was synonymous with missed opportunities more than innovation, which didn’t exactly help the remaining franchise locations that were in operation. These included the 26 owned by Alan Payne’s organization, Border Entertainment.
“Our stores were Blockbuster stores in name only. Our markets were exclusive to us, we didn’t operate in ‘mixed markets’, and had no corporate stores nearby,” says Payne. “For the most part, Blockbuster in our markets were what we made it.”
“In its race to open stores faster than anyone else, Blockbuster made hundreds of real estate mistakes”
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