Black Friday: Blockbuster Busts Out Holiday Cheer

The holiday season is make-or-break time for traditional retailers. It's equally important to entertainment moguls like Blockbuster (NYSE: BBI  ) .

TV schedules go into reruns, and it's time to pick up some DVD gift cards as desperation gifts and a copy of It's A Wonderful Life for Christmas Eve. Blockbuster's fourth-quarter revenues have been, on average, 13% higher than the third quarter's for the past seven years, while no other period can present more than a 1% gain over the one before it.

So this Fool sat down with freshly appointed CEO Jim Keyes to have a chat about the business, and how the holidays will treat it. Here's the scoop.

Joy to the stores
Jim is a repeat customer here at the Fool, and he came across as his usual friendly and sharp self. The first thing he did was explain what the Netflix (Nasdaq: NFLX  ) rivalry is about these days.

"We haven't given up on Total Access," he said. "We have changed the business model, but we're still playing to be competitive, to get our fair share on any growth in the DVDs-by-mail market. It's just going to be a more careful, practical growth going forward."

Jim explained that marketing Total Access to existing customers by direct mail and in-store displays wasn't the best idea.

"Total Access is a great tool and a fabulous strategy, and marrying the by-mail model with our storefronts is still the right idea. We have to leverage that unique competitive advantage. It was just bad execution of a great idea" that led to subscriber growth and financial loss. "Instead of converting our own customers to the mailing plan, we should draw in new customers."

Deck the halls with extra copies
There will be plenty of holiday cheer in Blockbuster's stores this year. "We're doing a number of things," said Jim. "We'll test different ideas, see how customers respond, and use the information to build a stronger business. It's a great time to test-run the transition into a merchandise-driven store plan ... gift cards, gift subscriptions. Those are good ways to pull in new customers who haven't necessarily seen a store in a while. And there's a strong slate of holiday DVD releases coming up that we can try to sell alongside the rentals in different ways."

Shrek 3 from DreamWorks Animation's (NYSE: DWA  ) for example, will ship out in larger volume to the stores than the Christmas releases of yesteryear. You should see the rentals in-stock more often, alongside tons of copies for sale -- in eye-catching custom displays.

One of Jim's pet peeves with the old Blockbuster, after all, was the tendency to run out of stock on hot new releases. "With my retailing background, I can't stand to see empty shelves. It's horrifying."

Competition is coming to town
The online delivery market is the key to Blockbuster's future, says Keyes. That's different from what people call the online model today, which is more properly termed a by-mail model. And he agrees with Fool Rick Munarriz to some extent -- that the market may already be close to peaking.

"How big will it be? The numbers say that we have already reached a lot of the potential customers. Between us and Netflix, 50 million American families have tried it, and most of them said it wasn't their thing so they dropped the subscription. Less than 10 million kept it, and the remaining upside is anyone's guess."

The real competition right now comes from large, low-priced retailers like Wal-Mart (NYSE: WMT  ) , Best Buy (NYSE: BBY  ) , and Target (NYSE: TGT  ) . With that in mind, the most important thing is to "get back to the basics of retailing, block and tackle" to drive customers into the stores and get each of them to spend a bit more. Make them happy through proper inventory management and get good, free, word-of-mouth advertising. "We will improve, but not overnight," Jim said. "It's building a merchant culture and lots of little fundamentals. ... These things take time."

Go tell it on the mountain!
Jim Keyes is a clear-eyed businessman with a firm grip on reality, which is a lot more than you could say about the previous management team. I think he can grow Blockbuster into a serious entertainment contender again, although it will take time and the new Blockbuster may look very different from anything you've seen before. And the funny thing is that, as a Netflix shareholder, this doesn't scare me.

The dynamic duo will compete in the mailing space for a few years and then shift to downloads, and maybe I'll be terrified five or six years from now. But until then, they serve different demographics and can coexist and grow side by side -- with the occasional bump and bruise along the way.

And it all starts this Christmas. Good luck, Jim.

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