The Real Deal New York

Video stores go the way of the Betamax

November 16, 2007
By Jen Benepe

The credits are starting to roll for Blockbuster in New York City, and there may be unhappy sequels for other video retailers.

Close to 30 percent of Blockbuster Video stores in the city will see a reduction in space or will close over the next year and a half, according to real estate insiders.

The move, following disappointing video rental sales in 2005 as many chains and individual stores lose market share to services like Netflix and Internet-based video, is part of the company’s downscaling of 4,000 stores across the nation. Last month, the Dallas-headquartered company announced plans to close about 150 stores across the U.S. over the next two years, as well as significant cuts in general and administrative expenses. Its stock price took a beating as its business model was eclipsed, dropping 58 percent in the last 52 weeks to its Jan. 20 closing at $3.87 a share.

The company would not con- firm specifics regarding its 63 New York stores across the five boroughs, but industry insiders have said that up to 19 of the area’s Blockbuster stores would be affected by the company’s strategy.

Four current leases up for renewal in 2006 are expected not be renewed and another 10 to 15 stores are expected to be reduced from their current average size of 4,000 to 5,000 square feet to about 2,000 square feet. The company plans to achieve the reductions by negotiating with landlords for smaller spaces or subleasing the additional space to another tenant.

Retail rents in New York may be adding to the pullback. Prices for retail space continue to climb, with Manhattan space averaging $102 per square foot in fall 2005, up from $97 the year before, according to the Real Estate Board of New York. Some of the areas seeing the biggest increases included Third Avenue from 60th to 72nd streets, where rents surged 32 percent to $248 per square foot, and the Soho corridor on Broadway between Houston and Broome streets, where rents rose 27 percent to $228 a square foot over the past year.

Revenue from rentals and sales of used videos dropped by 11 percent during the third quarter of 2005, a decrease that affected the earnings not only of Blockbuster but also of competitor Movie Gallery, which owns Hollywood Video, which recently closed a store in Manhattan on Columbus Avenue and 86th Street. Overall, U.S. home video rental revenue was $8.8 billion in 2005, down 3 percent from the year before, according to Rentrak, which tracks industry information. It did not specify how much of that revenue came from Internet-based services such as Netflix, as opposed to store-based rentals.

Despite the sagging video rental environment, some Manhattan video game retailers, adult entertainment shops, and niche video retailers continue to do a stable business. Gamestop, which has 16 stores in Manhattan alone, three more than Blockbuster, reported a 133 percent increase in total sales in the last nine weeks of 2005, though much of this was due to its recent acquisition of Electronics Boutique stores, according to Chris Olivera, a spokesman.

With a total of 56 combined Gamestop and Electronics Boutique stores averaging 1,800 square feet each in the five boroughs, the company does not foresee a decline in its bricks and mortar business in the near future.

“We continue to see the New York metro area as an area of growth,” said Olivera.

Specialty video rental stores are also faring better in the online-Netflix environment because they go broad instead of deep, offering foreign and specialty titles that cater to the sophisticated urban viewer. Rather than retrenching, Kim’s Video, long a mainstay of New York hipster-underground movie culture, opened a new store in Jersey City to complement its three Manhattan locations.

For monoliths like Blockbuster, however, the strategy now involves an increased focus on online sales coupled with the retail pullback.

With plans to double its online business by the end of 2007, Blockbuster is looking to catch up with newcomer Netflix, whose four million online rental customers dwarf Blockbuster’s one million.

“The profit of an online customer for us is still a very attractive proposition,” Blockbuster chief executive John Antioco told an investor gathering last month. “We will continue to convert as many of the customers to online as we can.”

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