New Gallerys Niche Is Small Town

June 6, 2003
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GRAND RAPIDS — The third-largest video rental company in the nation recently opened its very first store in the region.

Movie Gallery, which is based in Dothan, Ala., and trails only Blockbuster and Hollywood Entertainment as the country’s leading renter of VHS and DVD films, made its local debut at 4676 32nd St. in Hudsonville in late April.

“They’ll be a dominant national player,” said Dave Denton, a retail specialist with Grubb & Ellis/Paramount, a commercial real estate broker that is finding space for Movie Gallery.

The move into West Michigan is part of the company’s drive to be in 50 U.S. markets by the end of this year. Steve Roy, Movie Gallery CFO, said his firm was also looking for more locations in the area.

“Some may or may not happen. It depends on real estate situations,” he said.

“But we are committed to four towns today: Coopersville, Sparta and Cedar Springs, in addition to Hudsonville. We certainly are working on probably six to eight additional towns in that immediate area.”

Allegan, Fremont and Lowell are other places that may get stores in the near future. Movie Gallery has 1,858 stores in 43 states and seven Canadian provinces. Eighteen stores are in southeast Michigan.

The company owns all its shops, but not the properties, as it prefers to lease freestanding and end-cap space. Most stores are between 3,500 and 4,500 square feet, and each storefront must have at least 40 feet of glass. The average daily traffic count near a store has to top 8,000 vehicles. Movie Gallery plans to open from 150 to 200 stores chain-wide this year.

But the company’s expansion plan differs from most firms in that it only goes into rural and secondary markets that have 3,000 to 6,000 households, a strategy that is imbedded in the firm’s 18-year history.

“We grew up in small-town America, so we’ve learned how to operate stores on a lower cost budget, if you will. We’ve built a pretty good model that operates that way,” said Roy.

“Traditionally, we’ve avoided the big guy, like Blockbuster, by doing that, so it has that advantage, as well.”

But Movie Gallery doesn’t completely avoid going head-to-head with the big guys, as about a third of its stores compete directly with Blockbuster.

Roy said a big benefit to locating in a small town is that once residents become familiar with Movie Gallery, they tend to become loyal customers who keep coming back.

“We feel that if we give them a good level of service and a good quantity of products, so they’re not disappointed when they come in on a busy Friday night, then we can do a pretty good job and create that loyalty,” said Roy.

“When you operate in towns like that, it is critically important that you cater to the local community as best you can and get involved with the community, and we try to do that.”

Besides renting films, Movie Gallery also sells blank tapes, VCR cleaning equipment, movie memorabilia and concession items. The firm also owns the Video Update chain.

Recent advances in technology, such as video-on-demand services from cable operators, haven’t hurt the rental business nearly as much as some experts predicted they would.

Roy said the home-video market, both purchase and lease, often accounts for more than half of a studio’s revenue from a film and movie producers aren’t ready yet to give up that source of income. Nor do producers feel they can make much more money by making their products available online or by other means. Roy also pointed out that the video demand service only offers new selections after films have run their course in the rental shops.

DVDs, however, are rapidly changing the business by passing VHS as the consumer’s format of choice. Roy said the switch to digital has been the quickest transition from one medium to another in the history of the entertainment business.

“DVD, today, accounts for just over 50 percent of our movie revenue. That is up by about 25 percent from a year ago,” he said.

Roy said the only reason that VHS is still hanging around is because it offers consumers an inexpensive way to make recordings. But once the price tags on DVD recorders come down further, Roy felt it would be just a matter of time before VHS becomes extinct.

Movie Gallery recorded sales of $529 million with net income of $20.9 million last year; both increases were 40-plus-percent gains from 2001. Same-store sales rose by 10.5 percent for the first quarter of this year, which topped the company’s projection.

“We’ve had a great run and we’re very proud of it,” said Roy.

Movie Gallery was founded in 1985 and went public in 1994. The company has had four consecutive years of substantial growth and employs more than 8,500. Shares of Movie Gallery are traded on NASDAQ under the symbol MOVI.           

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