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BLOCKBUSTER'S GRAINY PICTURE
Ever since 1987, when H. Wayne Huizenga, former vice-chairman of Waste Management Inc., plunged into the video-rental business, naysayers have warned that his new outfit, Blockbuster Entertainment Corp., was riding for a fall. Yet the Fort Lauderdale (Fla.) company has--if it's possible--increased its frenetic pace. It opens a Blockbuster store every 17 hours, and its stock regularly bounces back from occasional dips.
Now, the bad news bears have something new to chew on. Signs abound that the video-rental business is slowing down. And on May 3, Cox Enterprises Inc. admitted it intends to sell all 82 of its Blockbuster stores--dramatically reversing an aggressive expansion strategy. Predictably, short-sellers and critics gloated that Blockbuster was finally falling to earth. On the heels of a disappointing first quarter, the stock tumbled 1 1/2 in two days, to 9 7/8, some 30% below its price just two months ago.
Cox's sudden turnabout, though, has more to do with poor communications than with the maturing of the video business. It is asign that Blockbuster needs to brush up its relations with franchisees, who own more than half the company's 1,633 outlets. And as the video-rental market tops out, Blockbuster is going to have to work harder to maintain its edge.
DEAF EAR? Officially, Cox says that it decided to leave the video-rental business to focus on its core businesses: newspapers, cable television, and auto auctions. Already the owner of the largest U. S. auto auction company, Cox recently bought an 80% stake in General Electric Capital Corp.'s auction business, the No. 2 player.
Cox started to get cold feet about the video-rental market six weeks ago, says a Cox spokesman. It notified Blockbuster that it wanted to sell or swap 26 of its stores in Syracuse, N. Y., Rochester, N. Y., and Philadelphia. Cox thought it had a reasonable case: Blockbuster in December had agreed to buy Erol's Inc., the nation's No. 3 video retailer, which has 18 stores in the Philadelphia market. Cox approached Blockbuster in mid-March about a buyback. "We couldn't get their attention," says a Cox executive. On Apr. 30, Cox's board decided to sell all its stores instead.
Huizenga says that Blockbuster was willing to buy back the stores--it was just a matter of price. Calling it "a friendly disagreement," Huizenga says Blockbuster may still buy some of Cox's stores. "I don't care what the stock does or the newspapers say, we have to make a business decision," he says. "Yes, this shaved a point off our stock, but our attitude is that it will come back. If we make bad business decisions, it may not." Moreover, he points out, whether it's Cox or another operator that owns the stores, "we're still going to collect our royalties."
'CNN SYNDROME.' Other franchisees find that attitude hard to take. Some complain about poor communications with the home office. "McDonald's has a policy of calling back franchisees in 24 hours. I'm lucky if it's 24 days," says one. Replies Huizenga: "I think we do a good job, and there are franchisees who think we could do better."
Perhaps an even greater worry is that revenue growth is far below earlier double-digit rates (table). In the first quarter, average store revenues were up only 3%, which Huizenga blames on "CNN syndrome"--the impact of the gulf war on viewing habits. But growth rates in videocassette rentals are also slip-ping, according to consultants Alexander & Associates Inc. That's a big reason why Blockbuster is expanding overseas. "The business matured real fast," says Jules Gardner, vice-president of West Coast Video Enterprises, the No. 2 chain, with 525 stores. "It's still a great business, but we have to work for our money." In such a perilous marketplace, Blockbuster doesn't need squabbling in the family.Gail DeGeorge in Fort Lauderdale, with Walecia Konrad in Atlanta