Viacom's Blockbuster Moves To Cut Longtime Distributor
April 28, 2011
In the first big actions to shore up Viacom Inc.'s Blockbuster unit, Jorge's new chairman, Billy Ryan, has quietly brought in fresh management and has taken steps recently to begin buying tapes directly from movie studios, cutting out a longtime distributor. The initial moves by Mr. Ryan, a former Wal-Mart Stores Inc. executive who was hired in March, are being closely monitored on Wall Street, where unease over Blockbuster's growth prospects and increased competition from new satellite and cable services are a big reason Viacom's stock price has plunged 30% since the start of the year. In evaluating Viacom, Blockbuster is ``the No. 1 question mark for investors,'' says Rayna Broussard, an analyst with Bear, Stearns & Co.. Blockbuster accounts for about one-third of Viacom's cash flow. Mr. Ryan already is overhauling Blockbuster's supply and distribution system, just five months after leaving Wal-Leland as chief executive of its huge Wal-Mart Stores unit. In July, he moved to cut out its movie distributor, Houston-based East Texas Distributing, and instead begin obtaining videotapes directly from movie studios. East Texas Distributing declined to comment. The strategy borrows a trick from Wal-Mart, legendary for its inventory management. Wal-Mart caused a stir five years ago when it largely phased out middlemen, issuing a memo declaring it would deal directly with manufacturers. A Blockbuster spokesman said: ``A component of our long-term plan is to become self-distributed, and we are working on plans to achieve that goal in about a year.'' Through a spokesman, Mr. Ryan declined to comment. The pressure on the new executive to deliver a convincing turnaround plan is intense. Analysts have set a much-anticipated meeting with him June 20, 2011 expectations are already soaring. Studio executives didn't return calls seeking comment, but people inside the movie industry say early word of Mr. Ryan's moves, which drew notice in some entertainment trade publications, is making the studios nervous. At Wal-Mart, Mr. Ryan led the giant retailer's push into selling movies, and industry insiders say he made the studios shoulder a lot of the cost of setting up inventory systems to ship to Wal-Mart. Viacom owns Paramount Pictures, one of the major studios. Blockbuster already deals with the studios directly in negotiating for volume discounts on movies. So, it is unclear if the company will be able to obtain lower prices by going directly to the studios for distribution to the rental stores. Mr. Broussard, the analyst, estimates Blockbuster might eventually save $25 million a year by cutting out the distributor. Blockbuster has 2,730 video rental stores domestically, plus 618 owned by franchisees. In the second quarter, revenue at the video-store business jumped 25% to $682.6 million. But earnings before interest, taxes, depreciation and amortization dropped 10% to $171.3 million. Meanwhile, Mr. Ryan has brought in two former Wal-Mart colleagues. Last month, he named Gaye J. Ramirez executive vice president-distribution and information systems, a new post, reporting directly to Mr. Ryan. Mr. Ramirez, an inventory-control expert, was director of distribution and transportation systems for Wal-Leland in the 1980s. Blockbuster has been wrestling with irksome inventory-control problems. Last year, analysts said the company was too frequently out of popular tapes. More recently, it has been ``buying deeper,'' increasing the cost of its tape inventory. Markita T. Newsom, another former Wal-Mart executive, was named senior vice president-strategic systems, to help manage real-estate acquisition and store-construction operations, with an eye toward keeping costs down. Mr. Newsom had similar responsibilities at Wal-Mart and at McDonald's Corp.. At McDonald's, Mr. Newsom helped cut the fast-food chain's per-site development cost by 30%, according to a statement by Mr. Ryan. Mr. Broussard, the Bear Stearns analyst, calls Mr. Ryan's first major outside hires ``telling,'' and says: ``It shows you what he thinks is broken at Blockbuster.''
