Blockbuster Challenges Netflix With In-Store Drop-Offs For Online Customers

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Includes: BBI, NFLX
by: Davis Freeberg

When I first heard that Blockbuster (BBI) was offering in store drop offs to online customers, I wasn’t sure if this was a stroke of genius or if it was a sign of complete desperation by the company. Over the last few years, Blockbuster has been getting their clock cleaned by Netflix (NASDAQ:NFLX) after they made the unfortunate mistake of sparking a costly price war in the battle for DVD by mail dominance.

Throughout their rivalry with Netflix, Blockbuster has played more catch up then leader in regards to online rentals, but earlier this year, they took the bold step of leveraging their retail store advantage, by giving away 4 free in store coupons to online customers. The strategy behind the promotion has been to try and give online customers a reason to come back to the stores, in the hope that they would rent more then just their free movie.

The success of this promotion remains to be seen, but Blockbuster is betting that, at the very least, this key differentiator will be enough to keep Netflix from poaching their customers. The extension of this program to include online store drop offs is a natural progression of this strategy and it could be a powerful upselling tool, but unfortunately, like all things having to do with Blockbuster, it doesn’t come without significant fine print attached.

Part of that fine print includes Blockbuster dropping their $5.99 price point for a more expensive 3 disc $7.99 plan. While a $5.99 plan is more profitable for Netflix, the existence of Blockbuster’s free coupons actually made their version of the $5.99 price deliver lower gross margins for the company. While Blockbuster was always clear that they were only testing the $5.99 price, their abandoning the price point only serves as further proof that Blockbuster has lost complete control of online pricing for the DVD by mail industry. Now with the loss of their lowest priced plan, the company will no longer be able to match Netflix’s lowest priced plan and it will give Netflix a big marketing advantage for the most price sensitive consumers.

Initially, I wasn’t sure what to make of Blockbuster’s latest announcement, but after taking a closer look at the deal, I walked away unimpressed by this latest marketing gimmick. If you do take advantage of the free envelope coupon, it doesn’t update your queue, it doesn’t offer an all you can watch experience, and it doesn’t mean that late fees restocking fees won’t apply. Consumers who use the coupons will still have to return their movies to the Blockbuster they rented it from, which means a seperate trip back to the video store for customers used to the flexibility of using the postal system instead.

To add to more confusion with the fine print, franchises will not be participating in this promotion and the in store return program is only going to be apply to select areas of the country. What I found so interesting about this aspect of the fine print was that initially, the program is going to be limited to Colorado and a few other unannounced areas of the country.

With Blockbuster beginning to see their stores bleed red, they have begun closing stores and have taken a page out of Movie Gallery’s book by aggressively looking to sub-lease their long term leases to other vendors. What’s interesting about this is that the company has been especially seeking to sub-lease stores in Texas, Utah and Colorado. Denver and Colorado Springs have been particularly affected by competition because those are areas where they have faced a growing Netflix user base as well as market saturation by Redbox’s DVD kiosks. Facing a threat to their longtail business and their short head business simultaneously, it doesn’t suprise me to see the Staubach Company currently listing over 12.5% of Blockbuster’s Colorado stores as being available for sub-lease. It’s also no surprise that these listings are in the heaviest metropolitan areas where both Redbox and Netflix have found their highest market penetration.

A year ago, Reed Hastings said that Netflix was going to stay competitive on price in an effort to accellerate the tipping of video stores into unprofitability and with a year having passed, it’s clear that both Blockbuster and Movie Gallery are still struggling to keep their stores profitable. Had Blockbuster initiated this new promotion in stores located in healthier areas for the company, I may have have been able to dismiss this development as an escalation of their previously announced strategy, but considering that they are targeting an area that has been bruised and battered by competition for this test, it makes me think that Blockbuster is hoping more for a John Elway Hail Mary, then in developing a long term business plan for dealing with the threat to their core business.

Time will tell whether or not this promotion pays off, but in the meantime Denver is going to serve as a very good example of what life will be like for the company as DVD by mail and DVD kiosks continue to gain traction.

Disclosure: Author is long NFLX

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