Vending DVD venture

A long adventure began when the founders of Red Room DVD found they couldn’t rent a movie in the middle of the night. They decided to look into it and a business idea was born.

By Kristen Le Mesurier

Opportunity: Two young entrepreneurs in Sydney have plunged head-first into a market in turmoil — DVD rentals. As technology and consumer behaviour change radically, they are taking on Blockbuster and the other big boys building a franchised chain of DVD rental machine stores. They believe challenges for the established chains represent opportunities for newcomers.

Daniel Joyce (right) , co-founder of Red Room DVD, a chain of semi-automated DVD stores in Sydney, says that after 18 months of trial, error, and lots of lessons learnt, each store has broken even and is expected to turn over between $300,000 and $400,000 this year.

Joyce, 27, and his business partner Nic Di Venuto, 26, are planning to expand the franchise aggressively. They operate two company-owned stores in inner Sydney and have sold six franchises in New South Wales. “By December 2009 we plan to have opened 85 stores; 30% of those will be company-owned,” Joyce says.

But on top of the marketing misses, technology glitches and cash flow trials that plague most businesses in the first few years, the pair face a much bigger challenge: predicting exactly where the DVD rental market is headed.

“No one can say with any confidence where people will rent their movies from in 20 years. A whole bunch of businesses are tinkering around online or with pay TV. Then there are the Blockbusters that are clinging to traditional stores.

“Of course the uncertainty is unnerving, but in the meantime if you reinvent traditional stores to be cost-efficient, adopt new technology and know your industry, there are big opportunities,” Joyce says.

Rewriting the business model

Joyce and Di Venuto, with commerce, economics and law degrees between them, were so certain that a 2am epiphany would be a licence to print money that they quit their jobs at Macquarie Bank and Bain & Company respectively and started Red Room DVD in 2004.

“I was living with a French guy who hated that he couldn’t rent a DVD in the middle of the night. There were DVD “ATM” machines on every street corner in France, and he couldn’t believe there weren’t any here. Neither could I, so I started to look into it,” Joyce says.

Joyce and Di Venuto spent six months in Europe researching the DVD dispenser market and searching for the best manufacturer.

They realised that their first plan, to install the machines on street corners and in railway stations, for example, wouldn’t work because the numbers didn’t stack up.

The number of rentals they needed to break even on the cost of the machines ($30,000–60,000 without DVDs) was too high given that most people hire movies on Friday and Saturday nights and only one person can browse the machine at a time.

“There were other issues, too. How do you tell people walking past that these machines are there, how do you teach people how to use them?” Joyce says.

Realising that a shopfront and a staff member to field queries would be the key to their success, they developed a retail strategy and designed a brand. Each store is open 24 hours and manned by staff in peak times. Outside peak hours the stores are locked and membership cards are used to gain access.

The brand, which screams red and funky the minute you walk into the store, was originally targeted at the inner-city, 18 to 35 year-old market. “Then we discovered that our heartland was 35-36 year-olds in the suburbs,” Joyce says.

Being open 24 hours a day allows Red Room to charge a cheaper rate than most stores for six-hour rentals, as opposed to overnight. “The $2.95 for six hours definitely captures the price elastic parts of Sydney,” Joyce says.

Location, location, location

They learned that location was vital. Intuitively, rental stores are destination stores, so to save on rent Joyce and Di Venuto opened their Bondi Junction store in a back street. But that meant they missed out on their biggest market: customers that walk past mid-week and spontaneously decide to rent a movie. Later stores were opened on the main drag.

The importance of marketing

Their ad hoc marketing strategy in 2005 was hit and miss. “We thought we were being so clever with direct mail and emails, posters in cafes and bars,” Joyce says.

They have learnt that marketing is an investment because it builds knowledge of the brand. One radio advertising campaign in northern New South Wales last July, which was six months and $40,000 in the making, was so successful that 400-store rental chain Blockbuster launched a “remarkably similar” campaign three months later.

“I’ve got to be so careful about what I say, apparently. All I can say at the moment is that I fired off a cease-and-desist letter,” Joyce says.

“I guess I’m secretly thrilled that Blockbuster have noticed us. It speaks volumes for our marketing,” Joyce says.