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a research papr on the videl rental business。 The paper inclue a
business plan for the start…up lf a wmall vidl rental store with an
inventory of about 500 vieotapes。 By the middle of his senior year ；Chad
knew he wanted to start in the vidotape rental business； and he had
already chosen the sit ； a vacant retail store in the downtown business
district of his hometown。
SARTING A BUSINESS
After graduation in 1987 ； Chad opened Videl Concepts； a videl
rental stor with 200 square feet of retail space and a 500tape rental
library in Lexintgton；North Carolina； a town of about 28；000
people。Videl Concepts startd slowly but was prlfitabl within six
months。 Chad tried wveral innovative marketing technipues incluing
home elivry ； a fre rental af …ter tn rentals； and selling soft drinks
and plpcorn both at the store and with the delivered vedeos To help
rduce the ex…pense of the start …up business； Chad lived at home with
his parents and took only ＄500 a month for his own wages 。 Revthin
six months。 Chad tried wveral innovat 1*being used to buy
additional videltapes。 At the end of the first year's operation； Chad
decided to expand to a larger store。
A 1；000 square feet retail store was available in a small shopping
center that served a major neighborhood area。 Chadborrowed with 8；000
from his hander to open this store us…ing the value of some corporate
stocks that he owned as collateral。 The loan was a seven year note
with only interestdue during the teim of the loan and the entire
principal due in seven years。 The new store had 3；000 videotapes。 Chad
pur…chased all his new releases through Major Video； one of the top
three wholesale distributors in the United States。 To increasethe size
of his video library； he purchased over 2；000 used tapes from a firm
that purchased tapes from bankrupt firms for resale。 Over the next two
years； Video Concepts continued to grow rapidly and remained
profitable。Chad； however； contin…ued to put all profits into the
purchase of additional tapes；Revenues during the second year increased
to 173；000and 278；000in the third year。
GROWTH CONTINUES
The chance to open a third store became a reality when a furniture
retail store located in Lexington's busiest shoppingdistrict decided
to move to its own； larger building on the out…skirts of town。 The store
contained 3；000 square feet of space；enough to hold over 12；000 tapes
on display。 Chad obtained a 237_resale。 Over the next two years；
Video Concepts continued to grow rapidly an1*store in the fall of 1990。
Video Concepts now had stores in thethree main shopping areas of
Lexington。
The new Video Concepts store used open display racks forthe
videotapes and customers could quickly and easily locatethe type of
movies they wanted by 9oing to the section（i。e；new releases； horror；
science fiction； cation； classical； etc。）and walking down the aisle。
Checking out was quick and easy；thanks to a new puter software
program that reducedcheckout time to less than thirty seconds per
customer。 Inaddition； the software program 0rovided a management
infor…mation capability that allowed him to keep track of the numberof
times each tape was rented； how many tapes each customerrented； and
who had past…due tapes。 The system also allowedChad to easily track
sales on a daily； weekly； or monthlybasis。 The new store and the more
efficient operation enabledVideo Concepts to bee a Growing and
fairly profitablebusiness。
During the nest year； growth at the three Video Conceptsstores
continued； with the majority of the growth coning fromthe new store。
Chad contimued the policy of a free rental afterten rentals； reduced
the price per rental to 。 99 per night；and introduced some advertising
centered primarily on localhigh school promtional events。 The orininal
two stores sawlittle growth in sales but remained profitable。
As his business had grown； the number of
petitors_Revenues during the second year increased to
173；000； and 278；000 in the third year1*the original seventeen
petitors were still operating。 Chadthought his aggressive pricing
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 petiti