Drive-in Movies

The launch of a hits-only, drive-through video chain.

Tweet

THE QUESTION WASN'T WHETHER Todd W. LeRoy and Michael L. Atkinson were going to launch a business venture together. Late afternoons, when they were both working at Shearson Lehman Brothers Inc., they'd brainstorm over start-up possibilities. Atkinson had already created several restaurant concepts. Maybe their joint venture should have something to do with food. Hmm . . . food . . . dinner . . . dinner and a movie. Gourmet frozen dinners sold in video stores? Messy, but video stores . . . hmm. A video store . . . a convenient video store . . . a chain of drive-through video stores. Of course. That's it. Put them in strip-center parking lots close to commuter routes in suburban locations. Stock them with new releases. People drive up, order some tapes off the menu board, take them home. No hassles: Minimal overhead. Keep it simple. And yeah, franchise them for fast growth and minimal operational headaches.

They got the idea in March 1986, incorporated in May, opened two pilot stores last summer, and sold their first franchise to a Rochester, N.Y., investor group in August. Now, LeRoy, 34, and Atkinson, 33, are betting that the company, called Video's 1st, will become the hottest franchise in the country. In fact, they figure it had better become the hottest, because if it doesn't, someone faster is going to adopt the idea -- there's no way to protect it -- and steal the market out from under them. The greatest challenge they see isn't making the Video's 1st concept work, but using the 12- to 18- month head start they think they have to establish national market strength before a better-heeled competitor can. There were some dozen franchises open, or about to open, at the end of 1987. LeRoy and Atkinson's objective almost boggles the mind: to move from scratch to having sold 100 franchises for the kiosk-type video rental stores by the end of this year and 5,000 by mid-1990.

Here's why they think they'll make it.

Estimates vary, but in 1986 Americans spent at least $3 billion renting movies to watch on their home videocassette recorders. Last year they spent $1 billion more, bringing the video industry's revenues close to if not slightly more than the take at movie-theater box offices. This year, rental revenues will grow again. As the percentage of VCR-equipped homes increases from about half of those with TVs now to a projected 90% by 1995, one of the studies LeRoy and Atkinson like to cite predicts that the videocassette business will reach $15 billion annually.

Already it's hard to find a strip center, a mall, or a downtown retail district where someone hasn't planted a video store. Most rentals take place at these untold thousands of independent mom-and-pop and franchised outlets. But price competition here has put pressure on profit margins, and with a video store on every block, analysts wonder if the market isn't saturated.

In his research binder, Atkinson has filed a trade association survey reporting that the average video store in 1986 covered 2,089 square feet and stocked 3,478 tapes. But those tapes included 2,417 different titles, meaning that, on average, stores carried fewer than 2 copies of each title. And that, in turn, means that if just one or two other people in your neighborhood want to watch the same tape you hanker to see on the same night, you don't see it. Yet the average store rents just 12% of its titles every day. Some 88% of the inventory sits on the shelves. Brian Woods, Video's 1st's executive vice-president for marketing, likens an unrented tape to the proverbial empty airplane seat. Both represent a sale lost forever.

In a effort to boost margins, industry innovators have come up with two responses to retail saturation: the rack jobber and the superstore.

Rack jobbers maintain bare-bones inventories of tapes at convenience stores, gas stations, and other such places where potential customers are likely to be found anyway. Their emphasis is on convenience.

Superstores, on the other hand, are emporiums; they carry gadgets along with every title a videophile could imagine, in quantity.

These two retail formats appear to be the fastest-growing parts of the video-rental industry. They are, industry observers suggest, the direction in which the market is moving.

What's wrong with this picture, LeRoy and Atkinson think, is that conventional video stores pay a lot of overhead to house a lot of tapes that don't get rented very often. Then they also note that nearly 80% of the people who go to a video store to rent a movie go there looking for new releases, one or more of the 30 or so most popular titles that have only recently been released on video.

As for rack jobbers, Atkinson suggests that convenience store and gas station employees aren't attitudinally equipped to perform the two-way transaction that a video rental invoices -- checking the tape out, then checking it back in. Employee turnover rates in these outlets are too high, he says, to permit proper training.

Superstores, he thinks, are a great idea -- but expensive to build. And, he says, nationwide there are probably only 150 or so remaining markets in the country capable of supporting one of these rental monsters.

So, he and LeRoy reasoned, why not a small, inexpensive video store that carries just the current hot titles and in enough depth -- say, 10 to 25 copies each -- to assure almost every customer of getting the hit movie he or she wants? Or if not that hit, certainly another one. But in any case, not a dog. And why not put these 300 to 750 tapes in a Fotomat-type kiosk for which rent and utilities cost practically nothing? And why not expand this concept quickly? After all, LeRoy points out, the cost to erect one of these units is not very high, a lot less than it would be for a full-service, full-size retail rental store.

 1 | 2 | 3 | 4 | 5  NEXT