Wade Armstrong

Video's Main Course?

Posted Thursday January 22, 2009 in Business

Last Saturday, my girlfriend and I got some takeout, brought it home, and watched a DVD from Netflix. Kind of a rare event, actually - these days, it’s more about Tivo and delivery; a craving for Pinkberry brought us out for the takeout from the Asian place next door. It occurred to us that, ten years ago, movie and takeout would’ve been a typical weekend evening for almost everyone - how much business must the restaurants in the same strip malls as Blockbuster have done? And how much has Netflix killed these restaurants?

It seems like every successful product has an ecosystem pop up around it, as we heard endlessly about the auto industry as it asked for a bailout. I’d never thought about the video rental ecosystem before, but a trip to pick up takeout at a local joint sure brought back the memories. How many meals did you have at a place that was near the local Blockbuster or independent video joint? How many times did you pick up coffee or donuts from a place nearby when you dropped off the video the next morning?

And, most of all, what happened to those stores after you stopped driving out to get that movie? For a donut or coffee shop that depends on traffic passing by to bring customers, the big markups - 400% or more on donuts - may offset the drop in customers, but, for a full-service restaurant that also offers take-out, the typical 4-8% profit margin doesn’t leave a lot of room to lose customers. Did restaurants pay the price too when video rental went out of style?

If local restaurants that depended on take-out traffic did close, who picked up the now-unsatisfied demand? The candidates, and the evidence we should see for them, are:

• The same restaurants, now offering delivery, offering convenience to match the Netflix you already have - if so, then we would probably see a big increase in free delivery offers matching the growth of Netflix and on-demand.
• Other restaurants specializing in delivery only, like pizza, which would be convenient if you already had Netflix at home - if so, then the total number of franchisees should increase as the total number of Blockbuster locations decreases. We might also see new chains, like Papa John’s, grow matching Netflix.
• Fast casual restaurants, offering fun, quick dining with reasonable-quality food, like Applebee’s, if people decided to go out rather than stay in - if so, then we should also be able to see an increase in franchisees as Blockbuster locations decrease.
• Fast food, picked up on the way home from work - if so, then drive-through volume should increase as Blockbuster traffic decreases.

We saw growth in the last three categories over the last few years. It’s generally accepted that overall economic growth, combined with busier lives in which people didn’t have time to shop and cook, contributed to this growth. Could it be that the decline of video rentals was a key factor too?