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Best of 2005: A Retail Perspective

By

"Blockbuster started it"

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Editor's Note: This article was published on 5/20/2005

In his prime, my dad was a brilliant retailer.

I don't write about him often. We aren't here to talk about family and, to be blunt (as is one of dad's legacies), I generally find the practice of bragging about one's parents to be obnoxious.

Regardless, I need to mention that my dad is Ken Macke because I want to talk some retail 101 in a series of columns, using Blockbuster (BBI) as a What-Not-to-Do case study for openers. I want to put some meat on the harsh bones I pick with the chain so regularly and dad taught me very-nearly everything I know on the topic of retail. His teachings are why I start an analysis of any business from the perspective of its customers. It would feel disingenuous to not mention the base source of any retail thoughts I share. With my dad ailing in the late stages of Parkinsons, it would also feel disrespectful.

On with the show...

Retail is deceptively simple, when it's being done correctly. A good retailer humming with traffic, well stocked and well staffed, is akin to watching a great athlete in their prime. The grace on display seems effortless but those who try to do it themselves usually end up getting hurt.

Bad retail, conversely, is agonizing for both customers and any visiting Old School Merchant. Once you see everything from the perspective of "Is this creating a good experience for shoppers?" you quickly begin to take actual personal offense at bad experiences. You start thinking things like, "the people running this mess obviously don't respect me and I shouldn't take it." Bad layouts, surly service and poor in-stock positions become loathsome insults, hurled at you as you work through the store.

From that perspective, it's not aggression to pick on Blockbuster, it's self-defense. They baffle customers, seemingly by intent. Their stores yell hurtful things at all who enter and, frankly, I'm not sure they can be fixed without burning them to the ground and starting from scratch.

Among the problems:

Flow: Renting a movie is a longer transaction than purchasing goods. All lines at Blockbuster flow to common checkstands. The retail customers BBI covets wait in longer lines at the store than literally any other place they could shop for DVDs. And there are a lot of choices for places to buy DVDs.

Inventory: Box sets and highly desired titles for purchase are kept under lock and key. Remember "flow?" The kid with the keys is also in charge of running the register. A customer who is able to wrest service from the check-stand faces the glares and dark-light of the people in line who, remember, are waiting longer than anywhere on earth, save the DMV.

Rentals are stocked with a system combining Chaos Theory and the alphabet. "New titles," the exact definition of which is unknown, are sort of organized by title. Or genre. Sometimes both.

The selection is limited to the smallish footprints of the store, putting the choices roughly as varied as that you'd find at Target (TGT), only much less organized.

Keep It Baffling, Stupid: Blockbuster claims to have spent $50 Million, and foregone hundreds of millions in profits, eliminating late fees. You'd think the easiest part of the process would be successfully actually ceasing to charge late fees.

You'd be wrong.

I find Blockbuster's efforts on the late fee front to be worthy of the New Coke Pantheon of Horrible Decisions.

" 'Synergy'? Isn't that where the Reds play?": 10,000-odd stores, world-wide, each with its own customer database. It's a short par-5 between some Blockbuster units but it still requires separate membership cards for each.

In terms of the customer experience this creates, the pain is nearly overwhelming. If given the choice for my shopping experience I think I'd trade, "One Blockbuster card works at any location," straight up in exchange for random thugs roaming the store, occasionally mugging me.

If I didn't feel so bad for the employees who need to ask customers for social security numbers in order to run credit checks, while a dozen angry people toting 5 or 6 howling toddlers wait for their turn to rent their fourth choice title and return the movie they took out 10 days ago and got charged full-retail for (and then scream with murderous rage when the mentally-shot-at-16 cashier has to explain that "it isn't a 'late fee', it's a 'restocking charge'") it's the kind of thing that I'd want to complain about to the store manager.

But I do feel bad for those employees. So I don't complain. I stand in line, thinking in angry run-on streams.

Bonus: Investor Communications. Slides like this (claiming Blockbuster's "shrinkage" is due to a shrinking industry), to a good analyst, are what USA Today "picto-graphs" are to Phd. statisticians.

When coupled with actual soundbites, awkwardly deliberate soundbites, from the CEO using folksy People-Speak like, "if we could just sit back and ride out the rising tide of video rental, throw off ever-growing oodles of free cash flow and not have to invest in the business. But it just ain't so," it's flat-out picking a fight.

The problem is that the excuse stubbornly ignores the growth in DVD sales in the same time period. Blockbuster claims to be a retailer, remember? DVD sales grew from nothing (zero) in 1996 to just under $4 billion in 2004.

Best Buy (BBY) has used the emergence of DVDs to gain billions in market-cap and stomp Circuit City (CC) into talcum powder. Seems to me that Blockbuster, as the biggest player in the old videotape bid'ness, woulda had a nice angle on grabbing some more than enough DVD biz to durn near totally offset that ol' rental decline.

You know, to put it in the language of the masses and such.

All things considered, I regard Blockbuster's commitment to, "focus on driving retail sales," to be similarly disingenuous. I don't think the chain is actually a "retailer" any more than you'd call Sea World a tee-shirt store. Without a radical overhaul, Blockbuster will never be a retailer. They are a library with a magazine rack.

In light of Thursday's news, they are also an internet concern with suicidal cashflows, focused on stealing customers in a market only 10% penetrated. There's a reason Icahn was looking for a way out of the BOD seat. His situation calls to mind the old Coyote Ugly joke about being willing to chew off your own leg to escape.

Whatever the company is, I'm not long or short the name. I don't have a monetary ax of any sort to grind. I'm simply offended by what I regard as an ongoing insult of a chain. A bit irrationally so, perhaps, but not alone.

C'mon, Get Happy

We'll get positive and go through some of my personal Best of Breed retailers look like, both operationally and from an investing perspective, over the next few weeks.

No positions in stocks mentioned.

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