Advice to Blockbuster: Drop the Retail Paradigm Nonsense

It's hard to believe that Blockbuster's (BBI) bid for Circuit City (CC) was just last week. It seems forever ago, especially since the news seems to have receded so deeply into the back of my consciousness already. I like Oligopoly Watch's take:

Movie rental chain Blockbuster added some comedy to the business pages this week by making a $1.35 billion unsolicited bid for consumer electronics chain Circuit City. They are kidding, aren't they?

The real difficulty is deciding which company is more likely to go belly up first.

But, even forgetting that, there is not even a whiff of synergy between the two companies. There is some talk of setting up Blockbuster kiosks in Circuit Cities, but the problem is that 1) people are not going into Circuit City stores very much; 2) they certainly aren't likely to drop in every week to pick up a movie; and 3) while Blockbuster stores are in easy-in, easy-out strip malls, Circuit City stores are in large shopping centers with a long walk in and out of the store. The other thought is that maybe Blockbuster could sell electronics on the side. Wrong, the company tried that a decade ago and it failed miserably.

I also enjoy Om's take quite a bit, as it most closely aligns with my own thoughts, having listened through the conference call:

So, Blockbuster's genius CEO, Jim Keyes, wants to combine his struggling retail giant with Circuit City. WHY? It's the kind of deal you can only justify if you're coming off a major spring break bender.

The first word (honestly) that came to my mind after the conference call: Mushrooms. I kid you not.

Here's a little business advice for all the captains of corporate America courtesy of The 'Wart. Nobody believes you when you try to sound like visionaries. When you announce a major acquisition, don't try to sound like geniuses. Stick to brass tacks, like cost savings and footprint redundancies. Don't talk about some new retail paradigm nonsense. Nobody's going to believe it. Even Steve Jobs doesn't do that. He rolls out the product and lets everyone else talk about paradigms.

Oh, and especially if you're the CEO of Blockbuster. Don't try to sound like a visionary.

Comments

[ezequiel]

Couldn't agree less with your article. First off, I don't know what you mean by (paraphrase) -- not many ppl walking in the store. Last time I checked there was over $10B annually walking through the store. If you want to sound witty or like a genius, you don't have to exagerate the facts.

Second, we are talking about a buyout for less than book value. I think based on that BBI is not displaying any delusions of granduer about the proposed merger. It could come down to nothing more than a real estate play for which I cannot comment on the merits or lack of merits of a company operating like investors (aka Icahn) rather than executing a business plan. That would be another topic for discussion.

Thirdly, I don't think we are talking in absolutes here. No, not every Circuit City Store would be ideal for renting Blockbuster movies -- maybe no store would be ideal for racking out a bunch of movies but that does not mean there are no crossover opportunities. Coupling online movie rental memberships with CC purchases would be an inexpensive way of growing BBI's online movie rental business. Some, not all, BBI locations would be ideal for crossover sales of electronics. Combined there is some opportunity for cost savings in combining locations. Undesirable properties could be sold to increase cashflow.

If we are talking about two dying companies that separately everyone is stating the writing is on the wall; it's just a matter of when they will go belly up, and if together they could delay the inevitable (buy time), why wouldn't it make sense to merge.

[billddrummer]

There's no real estate to speak of in this deal. All but 5 CC locations are leased, and so are the distribution centers and the bulk of its HQ complex. No synergies to speak of--can't imagine going to a BBI to buy electronics, any more than going to a CC to rent movies. Footprints are mutually exclusive, so redundancy wouldn't save much. Only reason this would work is if banks are willing to throw lots of good money after a bad deal--and that's not happening now with the credit markets still limping.

This deal makes no sense.

[Jack Black]

I find it hard to understand the extremely high level of skepticism around Blockbusters bid to purchase Circuit City. Many analysts have been less than kind with their description of Blockbuster and the reasoning behind the offer. It seems strange to for retail analyst to deride and mock the decision of a very successful retail veteran such as James Keyes who has enjoyed a high level of success. It also seems strange to do it when he has the backing of Carl Icahn who has a history of very successful and profitable investment in companies less than popular with analyst. They question the availability of financing when Blockbuster has the 46th richest man in the world and shrewdest investors in Carl Icahn as its biggest shareholder and who is backin g this offer. The analyst act like this is one big joke. I can assure them that the combination of James Keyes and Carl Ichan is indeed no joke. The reasoning is obvious. The financing is as good as done. In Circuit City Blockbuster and Mr. Ichan will acquire a poorly run company that has huge potential to be turned around and that is what Mr. Keyes does best. You add in the real estate rationalization, complementary products, marketing, technology and distribution and the resulting synergies and the deal just keeps getting better. People seem to forget that Circuit City was performing at least mediocre up until January of 07 and Best Buy has shown the business model works as long as competent people are running the show. That is what this merger will do.

There are analysts I have great respect for but in this in particular situation I will have to disagree. If James Keyes and Thomas Casey have convinced board members Strauss Zelnick, Ed Bleier to support this deal and Carl Icahn along with his staff of Keith Meister and Vince Intrieri to support and finance this deal then it’s good enough for me.



Lee

[ezequiel]

In response to billddrummer:

My mistake. I probably should have posted on a discussion board. This board is more for pushing agendas and facts are therefore not entirely important.

You said:

"There's no real estate to speak of in this deal. All but 5 CC locations are leased, and so are the distribution centers and the bulk of its HQ complex."

What about the 504 Canadian stores. What about the $304M in building/land on the balance sheet and the $100M in construction in progress. Does any of this have a liquidation value. Maybe not as much as what is stated on the books, I don't know but I know there is value there -- a little more than "...no real estate to speak of...."

I wouldn't go to CC to rent a movie either. I would buy a movie or sign up for an online subscription rental service on impulse though if I were already there.

[billddrummer]

ezquiel,

In response to your post:

The $304M is those stores I mentioned in my post. The construction in progress is more than likely tenant improvements for new stores that will debut under "TheCity" banner. As far as the Canadian operation, there's a better-than-even chance that if the deal goes through, CC will sell its Canadian stores. And the surviving company will be leasehold-heavy, RE light. Unlike SHLD, where the bulk of those stores were owned by Homart before Eddie Lampert recapitalized them, the majority of the CC locations in the US are leased. (Out of 682 stores, only 5 were company owned last year. I confess that I haven't reviewed this year's 10-K.)

[gabethecsr]

ok listen here, ive been working for bb for about two years now, as a cashier (csr). This guy saying that there aren't many customers walking in is ridiculous. There are plenty of customers providing their business to BBI. The problem started around 2001, when we let go of late fees. During that same period, Blockbuster online was introduced. These two things combined made a huge mess of things. Late fees, if i understand correctly, were about 25% of our company's income. We lost 25% of our business, then started giving out free rentals with a free trial of the online program. Great.

What we need to do now is completely change the strategy in which the company is going. Bringing back late fee's is out of the question. The online is becoming a major problem with increasing prices, and not as much benefits. Bring back benefits to in-store customers, cheaper movies, and updated stores.

Trying to make the employee happy once in a while wouldnt hurt either. Maybe making the store a casual environment, intead of the dull khaki and blue shirt fiasco. Happy employee+better attitude= happy customers.

Make Blockbuster "the ultimate source of entertainment".