If you saw Family Video’s profits, you’d open a video store too

Written By Sun-Times Wire Posted: 01/17/2014, 07:52am

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Wasn’t the video store supposed to be dead by now?

Once-ubiquitous Blockbuster shut its doors last year, three years after the demise of Hollywood Video. Those chains and countless small video shops fell victim to the relentless onslaught of Redbox and Netflix, which offer convenience and prices that the brick-and-mortar outfits can’t match.

Or can they?

Keith Hoogland certainly thinks so. And he’s not ready to believe the video store is doomed. In fact, Hoogland can barely keep track of all the Family Video stores he’s opened in the last two years.

“The video business, as far as I’m concerned, is cranked up,” says Hoogland, the company’s owner and grandson of the founder.

Suburbanites know the evergreen-colored awnings of the Family Video stores, fronted by tall glass obelisks and a slanted orange logo. There are 36 stores in the Chicago area — all in the burbs.

Even as its biggest competitors die off, and even as the dust begins to gather on many Americans’ DVD players, Glenview-based Family Video is thriving. With a loyal customer base, a remarkable agility and a diverse portfolio of complementary businesses, Hoogland’s company just had its best year ever. And it shows no signs of slowing down.

The same can’t be said for the industry he’s in. The last decade has been devastating for video rental outlets. Today just over 6,000 brick-and-mortar stores are open nationwide — down from 27,882 offering video rental in 2000.

Some of that resulted from pressure applied by online services like Netflix, some from the growth of rental kiosks like those owned by Redbox. Its 35,000 kiosks put it within a five-minute drive of 68 percent of Americans. Kiosks accounted for 46 percent of DVD and Blu-ray rentals in 2012, up from 38 percent in 2011. That year, stores’ share of rentals fell to just 22 percent, according to the NPD Group, a Port Washington, N.Y.-based market research company.

It’s not surprising then, that most of Family Video’s storefront counterparts are in full retreat. Hastings Entertainment, a movie, music and video retailer and rental chain, has 27 fewer stores than it did six years ago, leaving it with 127 across the Midwest, Southwest and Mountain States. Its revenue fell 20 percent in that time.

Meanwhile, Hoogland just keeps opening stores; he won’t give exact numbers, but says he added around 18 outlets in 2012, and more than 10 last year. In October, Family Video’s same-store sales rose 4½ percent over the year before. According to Hoogland, the company’s same-store sales, which indicate that a retailer is growing without opening stores, have gone up in 29 of the past 30 years, with 2004 as the only exception.

That accounts for most of Family Video’s existence. It sprang from a wholesale distribution business, called Midstates Appliance & Supply Co., started by Hoogland’s grandfather Clarence in 1946. In 1977, under Clarence’s son Charlie, the business found itself holding a bunch of videos it couldn’t legally sell. After some legal maneuvering, Family Video opened shop to rent them in 1978. Keith took over as president in 1994 — the year that Viacom bought Blockbuster, then the country’s largest video-rental chain, for $8.4 billion.

Now the largest rental chain belongs to Hoogland. Family Video has about 780 locations in the U.S. and Canada, mostly at busy intersections and on high-traffic thoroughfares where the locals can’t miss it.

Hoogland uses low prices and forgiving late-return policies to build a loyal base of customers who live within three miles of a store. While Blockbuster charged nearly $5 for new releases, Family Video’s cost $2.59. Kids get free movies for A’s on their report cards, and a handful of videos are free to everybody.

“We’ve always been the cheapest guy,” he says.

And let’s not forget that, for plenty of Americans, particularly those born in the 1970s or before, trekking to the video store is still the preferred way to seek a night’s entertainment.

“In Chicago or New York or LA, we kind of have this assumption that everybody’s using on-demand and iTunes and Netflix,” says Russ Crupnick, video industry analyst for NPD Group. “The reality is that the majority of people don’t.”

And even for the young and digitally savvy, video stores can offer something the newfangled services don’t have.

“I always thought the experience of being in the store, browsing, getting recommendations from a clerk that knew what they were talking about were very valuable experiences,” Crupnick says. “Frankly, I don’t think they’re experiences that digital has replicated quite as well.”

Of course, none of those advantages is guaranteed to last. As streaming services sign up more members, they’re likely to get access to more titles. Netflix already has 40 million streaming members, who can watch unlimited movies at home for just 8 bucks a month.

As digital services expand their catalogs, improve their streaming speed and possibly cut their prices, it will put even more pressure on the razor-thin 3½ percent estimated profit margin that the average storefront rental shop produces, according to an IBISWorld 2013 report.

“There will come a tipping point when streaming or digital or whatever you’d like to call it becomes really dominant,” Crupnick says. “Who knows if they’ll even be making DVDs in 10 years.”

If that day comes, Hoogland says he’s ready for it. Over the years the family’s operations have veered opportunistically from wholesale to retail and in a host of other directions.

“We’re an entrepreneurial business,” he says. “The video business, that was just another thing we were trying and that took off.”

The Hooglands have sold dial-up Internet service, commercial coffee machines, mood rings, 10-foot satellite dishes and microwave popcorn, among other things.

Today they own a fiber-optic network near Peoria and a chain of fitness centers.

Hoogland’s best hedge against a DVD collapse is his real estate business, Legacy Pro. In the early 1980s, the company began buying old gas stations and rehabbing them to house Family Video stores.

“We said, ‘Boy, when the video business ends, if it ever does, what are we going to be left with?’” he says. “Let’s say we were leasing a store. We moved the store down to the corner where the gas station was. And guess what happened? Our business went way up.”

Today Legacy Pro owns about 680 of Family Video’s locations. Some of them are in the more than 800 properties it owns, where it also leases space to retailers like Starbucks and Jimmy John’s.

“McDonald’s flips burgers to buy their properties,” Hoogland says. “We rented movies to buy real estate.”

And as the video-rental industry shifted, Hoogland has tried to roll with it. When clunky VHS cassettes were replaced by DVD and Blu-ray discs, which take up far less room, Hoogland went looking for higher uses of his extra space. He began franchising Toledo-based Marco’s Pizza, which now operates restaurants in more than 35 Family Video stores, with plans to have 125 total open this year.

That kind of creative thinking has been key to Family Video’s success, says Georgeann Bender, founder of retail consultancy Kizer & Bender, who has developed training programs for the company.

“The last seven dying words of a company are, ‘But we’ve always done it that way,’“ Bender says.

Not that Hoogland is ready to declare video rental dead. From where he sits, renting movies from stores still looks like a pretty good business.

“We have nothing that isn’t doing well,” he says. “Picture our store in Arlington Heights or Homewood. That store has been there for 15 to 20 years, or maybe 30 years. We are doing more business in that store than we ever have in any other year.”

ABOVE: Keith Hoogland, president of Family Video. Photo by Globe Newswire.

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