In a refreshing sign that Movie Gallery (Nasdaq: MOVI) has accepted its shrinking relevance in the retail realm, the struggling movie-rental chain wants to sublease space in nearly half of its 4,800 stores.
The company has contracted with Excess Space to unearth some willing retail partners looking to take up an average of 2,500 square feet at more than 2,200 of its stores.
It's the business equivalent of renting out a room in your apartment to help pay the rent. It leaves more money in your pocket, and if you choose your roommate wisely, you may even benefit from having cool new people come over whom you might never have met otherwise. Choose poorly? You might soon find that your new roommate is scaring your friends away, drinking your beer, and giving you good reason never to trust an open milk carton again.
The same thing can happen to Movie Gallery. Subleasing could pay off if the chain can find a tidy renter with compatible friends. If you're going to blur your brand by tossing it into a mixing bowl, know your fellow ingredients.
Scaling back won't be easy for Movie Gallery. The chain's site-selection process looks for spaces that are between 3,500 to 4,500 square feet. In other words, the company is looking to give up more than half of its space at some locations. DVDs take up less space than VHS tapes, but Movie Gallery will likely have to sacrifice selection or risk making patrons feel cramped and claustrophobic. Squeezing its stores into smaller spaces could clearly backfire for the company, given the growing alternatives of digital delivery and mail-delivered rentals.
Earlier this year, reports suggested that rival Blockbuster (NYSE: BBI) was also scaling back its new store sizes -- but that was expected, as Blockbuster tries to migrate users over to its online service. Unlike Blockbuster or Netflix (Nasdaq: NFLX), Movie Gallery doesn't have mail-order service.
Proper use of the rented-out space could make a big difference for Movie Gallery. The company's Hollywood Video concept had a winner on its hands when it began opening Game Crazy video-game stores within its existing locations. Blockbuster has partnered with everyone from Enron to DirecTV (NYSE: DTV) in the past to leverage its retail presence. And RadioShack (NYSE: RSH) has previously feasted on the opportunity to push certain wireless and satellite TV services over others.
The difference in those cases is that the retailer still retained control over the user experience. Movie Gallery is giving up a whole lot of space here. The market loves the idea, driving the stock as much as 36% higher yesterday on the news. On paper, I do too. Movie Gallery was dying, and if this works out, it will alleviate the company's cost structure substantially.
Just be wary of the renegade sublease tenant. Rowdy friends, swiped brews, and lipstick-smeared milk cartons can be just the beginning of a bad roomie gone wrong.
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