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for more than a year were averaging monthly revenues of ＄74；984。
Although the growth in the United States in consumer spending on
video rentals seende to have slowed ；Blockbuster Video believed it had
the opportunity to take market share away from the smaller petitors
through its strategy of building large stores with a greater selection
of tapes than most of its petitors。 As the largest video rental chain
in the U…nited States ；Blockbuster also had advantages in marketing
and in the purchase of inventory。 Blockbuster video 's standad pric…ing
was ＄3。50 per tape for two nights； but local stores had some pricing
discretion 。
In the fall of 1991 ；Blockbuster built a new store almost the stores
ranged in size from 4；0�*_ ？*_of its petitors。 As the chased a
vacant lot for ＄310；000 and then leased a 6；400spuare foot building
that was built to their specifications undera long …term lease
agreement for ＄8。50 per square foot for the first three years 。The
cost of pletely furnishing the building ；including the
videotapes ；was about ＄375；000 and Blockbuster spent over ＄150；000
on the grand opening promotions 。Thus Blockbuster spent about ＄
835；000 to open its store pared to the just over ＄200；000 that Vidao
Con…cepts had spent to open its similar …sized store。
Blockbuster's operating costs were very similar to Video
Concepts'since the puter checkout equipment was similar and toth
firms had approximately the same personnes costs。Both firs depreciated
their tapes over twelve months。
BLOCKBUSTER'S IMPACT ON VIDEO EDPTS
Chad decided mot to try to meet the gradn opening blitz by
Blockbuster with an advertising promotion of his own ； but he did start
including brochures on Video Concepts with each rental 。The brochure
noted that the rental fee at Video Con…cepts was lower than
Blockbuster's ； that Video Concepts had a new game section where
Nintendo games were available； that Video Concepts was a family
entertainment store （i 。 e。 ； no X… rated videos ）； and that Video
Concepts was a locally owned store that supported local school
events 。Chat felt his past rep…utation for low prices （＄1。99 versus
＄3。50 at Blockbuster）； was ＄3。50 per tape for two nights； but local
stores had some pricing discretion 。
propriate response to a well … financed petitor 。He did not
believe that he should vevn attempt to match Block buster's advertising
budget and that he should not try to beat Block…buster at its game 。That
is； he must continues to do what hedid best and not try to match
Blockbuster's marketing strategy 。He did ； however； increase the
number of tapes pur…chased for cach new release。
With the opening of the new Blockbuster store and its at…tendant
grand opening …in marketing campaign ；VideoConcepts'revenues droped
about 25percent for two monthsand then srarted slowly climbing back
to its pre… opening levels。 During this two … month period ；Chad had
worked even harder to provide excellent customer service througn brief
trainign sessions for his employuees。 He had always had em…ployee
training sessions ； but these emphasized the petitivethreat from
Blockbuster and the need to provide the best cus…tomer service possible。
The primary points of these sessionswere directed toward informing
customers ；as they checkedout ；of how many rentals they had before they
could obtain a free rental ；the customer's ability to reserve videos ；
and Video cepts ' willingness to deliver videos to a customer's home
atno extra charge。（These were all services that Blockbuster did not
offer。）
Unfortunately； Video concepts' revenues hit a plateau of just
under ＄40；000 per month and stayed there ；with the nor_ uring this
time ；Chad attempted several marketing promo…tions inchrding rent
one…get one free on the normally slownights （Mondays； Tuesdays； and
Wednesdays）； mailedbrochures to all Videl Concepts customers； which
included a brief highlighting of the advantages of shopping Video
Con…cepts over Blockbuster（lower price and additional services）；and
a free rental coupon。
The promotions seemed to help Videl Concepts maintainthe current
renue level； but they also decreased the prof…itability of the
operation。 To try to improve the profitability；Chad examined his
operation for ways of making it more efficient。 By studying the hour…by
…hour sales patterns； hewas able to schedule his emplouyees more
efficiently。 Healsoused the information provided by the software
program to de…termine when the rentals of 〃hit〃 and/ or new releases
had peaked。 Chad learned that there was a fairly good market for used
tapes for a short period of time ；but ；if the tape was not sold
during this time； he would end up with a tape that hadvery little rental
demand and little resale value。
The problem with the 〃hit 〃videos was twofold。 The firstproblem
was the determination of how many tapes topurchase。 There semmed to
be little correlation between a hit at the box office and a hit from
rentales。 When the video was firstreleased for rental； Chad would buy
forty to fifty videotapes at a cost of about 60 each。 The demand for
these videol wouldlity；Chad examined his operation for ways of making
it more efficient。 By studying the hour…by …hour _ 1he demand would
drop sinificantly 。The second problem；therefore； was the
determination of when and ow many of the tapes to sell before the
demandwould drop to the level of non… hit videos。 Chad believed that
he had solved the secondproblem by carefully watching the sales figures
for the tapes；Analysis of this information helped to minimze his
investmentin his inventory of tapes which marginally improved cash
flow。
THE DILEMMA
Two years after Blockbuste had opened its store； Chadcarefully
analyzed the financial statements for Video Concepts。The pany was
profitable and had been abvle to maintain its market share。 （See
Exhibits I and 2。）What wal evident wasthe fact that the arrival of
Blockbuster had increased the de…mjand for videl rentals in
Lexington to and estimated 1；300000 a year； Blockbuster's share was
estimated to be about 700 ；000 a year and the few remaining
independents hadaround 100；000 as year in revenues。
To Chad the current situation was fairly straight forward。Videl
Concepts had a store that was parable to Blockbuster's in tape
selection； personnel costs； and efficiencyof operation Videl Concepts
had a cost advantage in havinglower store leasing costs（ 3。50 per
square foot versus 8。50）；but Blockbuster had b bigger advantage in
being able to use its purchading power to purchase Videotapes at a much
which marginally improved cash flow。
THEower rental price （ 1。99 versus 3。00）；but Blockbuster uti…lized
a much larger advertising budget to attract customers。（All of the
Blockbuster stores in the region charged 3。50rental except the one in
Lexington。）
As had happened nationwide； the growth oif videl rentalrevenue
leveled off in the Lexington area starting in 1992。（Na…tionwide in 1992；
sales increased only 4。7 percent for block…buster stores the had been
in operation more than one uyear。）future growth did not look bright
as indications that advancesin cable television technologggy cousd
render videl store rentalsobsolete ad foberr optics allow cable
subscribers to order a widevariety of movies at home through pay …
per …view services。This technology； bhwever； is still in developmental
stages；and its spread to small towns is certainly many years away。
Looking to the future； Chad felt that for all his efforts；；the net
ine fromthe Videl Concepts operation would notproved him as high
a return on his time and his capital as hehad expected。 He was still
paying only the interest on his long…term loans and paying off the debt
seemed several yearsaway。 From Chad's viewpoint； he had several
options。 Chadconsidered raising the price of and overnight rental to
2。49 to make the business more profitable but was afraid of what the
consequences of such a move might be 。He also considered hir…ing
someone to manage the business and find another job for himself。 He
had offers of corporate jobs in the past and was yearsaway。 From Chad's
viewpoint； he had several _ as to try to sell the business As Chad
pondered these alternatifves； he tried to t
