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strategy； high…quality service；and good selection of new releases were
factorrs in the demise ofsome fof his smaller petitors。 His six
petitors averaged atape inventory of less than 1。000 videotapes and
none had morethan 1；600 tapes。 Chad estimated that the present annual
rev…enues from video rentals in Lexington was about 600；000。
The increase in video rental chain stores nationally had notgone
unnoticed by Chad。 He had visited several petitorsstores in nearby
cities。 During his visits； Chad primarily hadtried to see what the
petition was doing and learn what hemust do to be more efficient
and stay petitive。 Although hehad visited Blockbuster Video stores
in several nearby cities；Chad estimated that their stores would
require annual revenuesof at least 600；000 a store to be profitable。
Fof thes reasonChad believed that Lexington was too small to attract
a majorvideo rental chain store。 He also believed that he had a
storeoperation that was as well stocked and efficienty operated as
achain store operation。
With these thoughts in mind； he began paying himself amodest annual
salary of 15；000。In addition； he was ready to start paying off the
second loan of 200；000 that he had bor…rowed to open the new store。
To bbtain this last loan； Chadhad used all the assets that he owned
as collateral because hebelieved that these stores were an excellent
investment。 In the hts in mind； he began p_ ad reason to think that
he had tuilt a successful business。
SERIOUS PETITION ARRIVES
In August 1991 Blodkbuster Entertaimnent announced that it would
open a store in Lisington 。Blockbuster ； although a very young
corporation ；was the largest video rental chain store in the United
States。Blockbuster had grown from 19srores in 1986 to 2；028（1；025
pany …owned and 1；003franchises） in 1991 with total revenues over
＄1。2 billion in 1992 。The typical Blockbuster store carried 8；000to
14；000tapes； and the stores ranged in size from 4；000 to 10；000square
feet 。In 1991 the 1；248 pany …owned stores that had been in operation
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