DVD company launches trial with Pizza Hut, warns bricks and mortar stores to cut costs

RedRoom DVD has expanded its business, with the company partnering with Pizza Hut to offer rental kiosks in three New South Wales locations in the hope of making the company’s offering more convenient for customers, with the aim of eventually offering home delivery.

But founder Dan Joyce also warns physical DVD rental stores are dying due to high overheads, and says they will not be able to survive unless they focus on cutting costs.

The Pizza Hut trial will occur in three locations, but will expand early next year if the experiment is successful, Joyce says. He argues the trial is meant to make hiring videos more convenient, as any DVDs rented through a Pizza Hut location can be returned at any other RedRoom location. Eventually, he says, the two companies hope to combine the DVD and pizza offering into a home delivery product.

“We think it’s a complementary product mix. The films can be returned at any location, and we think the issues around convenience makes this a good trial, because it just means they don’t have to make a second stop.”

“That goes to some of the more tactical challenges in the business. It’s all to do with site selection, because we have to make sure these machines are going in the right areas. You want more family titles in some areas, and you want more of some titles in other areas. That’s a key operational challenge to make sure sites are doing well.”

But Joyce also warns physical stores to start cutting their costs or suffer the consequences. He makes the comments although RedRoom itself has 10 physical locations, but says the company handles its costs well.

“With regards to bricks and mortar stores, Video Ezy and Blockbuster recorded sales growth last year. They will probably have sales growth each year. They are not irrelevant to customers. But that’s in the short-term.”

“Our retail stores have a fundamentally different cost structure. Our stores have over 2,000 titles, and we operate cheaper. We operate 40 square metres, so already that’s cheaper. We hire one person to work up to 10 hours a day, as opposed to other stores which have two or three staff at the same time.”

Large retail spaces and expensive rents were precisely some of the issues provided by Blockbuster in September when it filed for bankruptcy. At the time, local Blockbuster head Paul Uniacke says Australian stores will avoid that problem by focusing on smaller locations and through closing poor-performing stores.

However, Joyce says the retail market here won’t survive unless it moves into digital distribution and starts adopting more convenient solutions for customers.

“There is a time coming where these companies fall off a cliff. And when that happens, it will be an issue of “last man standing”. We call these companies dinosaurs because they aren’t moving into the digital era.”

Uniacke has previously said kiosks are a “flawed” model and Oovie and RedRoom are discounting too much. He was unavailable for comment this morning.

Joyce wouldn’t reveal revenue, but said RedRoom’s earnings have grown 50% over the past year and the company operates about 100 kiosks. Its main competitor was Oovie, which was snapped up by Hoyts last year – but he says there is plenty of room for both companies.

“We think there are some fundamental differences between us and Oovie. We do compete head to head with them, but the Australian market has room for 2,000 vending machines and combined we have a few hundred. There is plenty of room for both companies, our real competitors are the bricks and mortar.”

The other major challenge, Joyce says, is branding. Kiosks are a relatively new concept and inviting customers to trust a new rental structure, after sticking with physical stores for so long, is a difficult task.

“We think our brand is very much a young, high-energy type of business. And we need to build customer engagement around that, and that is a primary challenge for this business.”