If movie rental stores are dying, why is Family Video growing?

The latest word this week on the assumed demise of the store-based home video rental industry centers on news that Movie Gallery is declaring bankruptcy for the second time and closing around 760 stores.

Movie Gallery is the second largest US video rental chain behind Blockbuster. Along with an expected 1,100-plus Movie Gallery Stores, the company will also continue to operate around 800 stores under the Hollywood Video name, which it owns after it bailed that company out of its own precarious debt position a few years ago.

Blockbuster has dealt with its own fleeting market position in the last few years as more analysts and consumers anticipate the transition into a storeless movie rental system. The company used to be known as the giant in the industry and still generates a significant amount of revenue from its nearly 7,100 global stores (as of September 2009).

Blockbuster has announced plans to close around twenty percent of its stores in the near-term to cut costs in the face of its own sizeable debt load. While the company maintains its stance that there is still a market for store-based video rentals, its rapid development of movie streaming and kiosk-based retail alternatives shows company leaders obviously believe there is growing demand for those rental formats.

Netflix has been the darling of home video rentals in the last few years thanks to its dominance in the strong and fast-growing online DVD and Blu-ray rental sector. Company CEO Reed Hastings is widely credited with spotting this market trend while others waited or took to long.

Netflix has also been among leaders in the move to online movie streaming and digital downloads. While some believe the future of movie rentals is subscription-based online services, Netflix and other current leaders are using streaming movie catalogs mostly as support for its new release platforms. Netflix currently promotes a digital catalog over 17,000 on demand titles that unlimited rental customers can download through their computers, Roku players, or other compatible download device platforms.

DVD rental kiosks have most recently replaced online DVD rental programs as the ‘obvious’ choice to take the throne as a top movie rental platform. Sector leader Redbox reportedly has over 22,000 self-serve DVD kiosks nationwide with rental prices of $1. NCR partnered with Blockbuster in mid-2009 and it the kiosk manufacturer is currently working to place machines under the licensed “Blockbuster Express” kiosk brand, also with a $1 price point.

The future of the movie rental industry seems very clear to anyone suggesting that everything is a possibility at this point. Will online DVD rentals continue to grow? Netflix’s subscriber base does, but there is little broad competition and the pace of growth slows as time goes along. What about online streaming? It seems logical that now that internet use has overtaken TV use among the average American as a preferred entertainment meidum that online downloads could grow.

Kiosks are already projected to make up 30 percent of all movie rentals for 2010. This is a significant jump over current levels should it play out that way.

With the growing diversity of product offerings and the uncertain future of the store-based retailer, many people believe the winners in the industry are going to be those providers that can leverage the benefits of each platform while building loyal customer relationships through a new world version of multi-channel retailing. This sounds like a fairly simple projection right? Is Blockbuster correct in suggesting there is still room for some retail stores in this perfect amalgum?

What is most interesting about all of the talk in the movie rental industry these days is what no one is talking about. Everyone seems to be assuming that it is the store-based traditional rental business model that is dead or dying. What if it is the lack of quality providers through this format that have put it on the brink. Maybe the reality is that no one has been doing store-based video renting the right way?

The case for video rental stores by Family Video

There is no question e-tailing, or internet retailing, is fast-growing relative to brick and mortar stores. Around six to eight percent of purchases are currently made online, with growth expected to be great in the coming years. However, this number also shows there is clearly a thriving store-based retail sector that dominates total retail sales volume.  A key question is why is it that home movie products (discs) cannot be sold through traditional stores along with other channels as many similar sized, shaped and valued products can be?

Counting Blockbuster, Movie Gallery, Hollywood Video, and countless other small local and regional chains and stores, there have been or will be thousands of video rental store closings over the last few years.  Seemingly, this is because video rental stores are a dying breed giving way to more sophisticated online programs, streaming, and kiosks.

Why then has Family Video nearly doubled in size and states of operation since 2003?  Family Video is one of the largest private video rental chains in the US and it is still (unlike every other known significant industry player) growing.  The company currently boasts around 600 stores with operations in 18 states and over 5,000 employees helping run their stores.

Family Video is hardly a newcomer to the video rental business.  In fact, the company was one of the very first industry players when it began renting “videos” in 1978.

According to the Family video website history, the company’s origins trace back to the first half of the 20th century, when “In 1946, Clarence Hoogland started Midstates Appliance & Supply Company. In 1953, Clarence’s son Charlie Hoogland took over the company. In the 1970s, Midstates got ’stuck’ with a large quantity of videos. Charlie’s team got the idea to rent the videos, and in 1978 Family Video was founded. Today Charlie’s sons Keith and Eric lead our (Family Video) company as President and Vice President, respectively.”

Since it is a privately held company, Family Video does not have to disclose financial data to the public.  However, one could surmise that since the company has rapidly grown in the last decade compared to dying competitors, its business position is solid enough to generate cash and/or make it worthy of major credit allocations.

So what is the model for success that Family Video might offer to some of its competitors in the store-based movie rental sector?  The company is certainly not without inherent challenges, threats and weaknesses.  It faces the same basic variable costs of doing business that other stores have faced.  It’s stores are run by people, many of whom are younger than industry average, who deal with day-to-day struggles and bring natural human weaknesses to their jobs.

Here are just some of the basic Family Video business philosophies and service standards they may provide some insight into how the company has managed to survive and grow as others have fallen into oblivion (or close to it):

1. As evidenced by its history - Family Video has always been more than ‘just’ a video rental business.  One thing that sets the company apart is that it owns all or most of its properties.  Whereas other chains face tough lease demands that are quite expensive when broken (as in to close stores prematurely), Family Video owns its real estate even if a store were to be a poor draw.  Company leaders have long been prepared for the time when ‘traditional’ video rental stores would be less in demand, and a transition into something similar, or different might be necessary. Additionally, most of the company’s newer stores were built with rental spaces and contain rent paying customers like pizza makers and hair salons.
2. A higher employee standard – Family Video seeks only exemplary retail employees who possess customer-oriented skills and personalities.  With a work ethic that “there is always something to do”, the company does not have cashiers who simply collect money from patrons.  Employees, called Customer Service Representatives (CSRs), are always expected to be in motion, stocking movies, cleaning, organizing, checking inventory, making service calls, and more, with employees being the top priority.  Employees follow a business casual dress code during the week with Friday-Saturday attire including a more semi-professional look.  This is a far cry from the conventional untucked polo shirt with a store logo.
3. A growth within structure – Family Video hires Managers-in-Training (MITs) who learn the ropes at a local store for three to six months.  When ready to lead, the manager moves to take over management of an existing store, or to help open a new store.  The company allows managers with experience and a proven track record to take on higher volume stores.  Top store managers can become district managers with a few years (something the company promotes in its hiring), and regional managers oversee the company’s various regions of operation.  It is not uncommon to find store managers in their early 20s and some district managers in their mid-to-late 20s.  The company’s structure offers quick mobility for ambitious, talented and hard-working employees.
4. A customer first approach – This may the company’s single greatest strength relative to its store-based competitors who have long failed to grasp the real concept of effective movie rental service.  Here are some key examples of how Family Video does customer service better:

• 4 Daily Goals – Family Video asks employees “to learn, to teach, to WOW, and to improve” every day.  To WOW a customer, an employee would fix a problem that doesn’t exist or go above and beyond a customer’s expectation by finding a way to make them happy
• “What Can I Do to Make You Happy” – These are known as the magic words to company employees, who are expected to learn and memorize them within the first few days and weeks on the job.  The idea is to never let a customer leave unhappy.
• Defective rental process – The reality of renting discs is that they scratch.  Whereas most video stores simply replace your disc when you bring it back, assuming they believe you didn’t break it or scratch it, Family Video takes into account your inconvenience of time and effort and awards you an extra free rental on top of a replacement.
• The $9.95 plan – Family Video understoods the concept of loyal customers as a key driver.  The company allows regular and frequent movie and game renters to pay a $9.95 monthly fee in order to get half off rental prices.  Users typically break even with around six movie rentals or fewer game rentals.
• Late fee policy – Late fees have long been a key point of contention in movie rentals.  Many customers rack them up routinely and don’t pay.  Family Video prefers to never lose a customer over a late fee.  The company sends out invite cards to customers who haven’t been in store for several months because of a late fee.  It also attempts to work with customers who have unique circumstances that cause a late fee or who need time to pay one off.  As a rule, no customer is turned away because of a late fee.

These are just a few of the examples of how Family Video might offer hope to others who want to maintain stores as part of their multi-channel home video rental operations.  Many of the companies mentioned earlier highlight the move towered lower price, extreme value video rentals.  Family Video is not expensive, but with $2-3 DVD and Blu-ray prices, it is not trying to be the cheapest provider either.  The company does also leverage new retail channels including offering sales of new DVDs and video games on its website.

The company proves that there is a reasonable contingent of customers willing to pay a few extra cents per movie for a good total customer experience, a concept that still holds true in movies and in retail.

Conclusions about the status and future of the home video rental industry

Whether Family Video lasts for one more year, five, ten, or infinitely more as a movie rental provider, the company is well-positioned for long-term viability in some business form.

There is no question movie renting is becoming more high-tech and more self-service driven.  Online DVD rentals via Netflix and kiosk rentals through Redbox, Blockbuster Express, and other potential players appear to be the wave of the near future.  Online movie streaming subscription services, hopefully legally licensed by studios, appear to be the medium-to-long term direction of the industry.

However, despite what many have already reported, the store-based movie rental environment may not yet be dead.  It may just need a facelift that gets back to the root of the customer experience, value, service, good product at a fair price expectations that movie rental store goers long for.

Article by Neil of Movie Room Reviews – The author was a store manager with Family Video from 2000-2002 but has no material connection to the company and received no compensation for this feature

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