Is The Blockbuster-Circuit City Acquisition A Good Move?
The Wall Street Journal this morning is reporting that Blockbuster (NYSE: BBI) is trying to buy beleaguered consumer electronics retailer Circuit City (NYSE: CC), which the market is not to thrilled about: Blockbuster stock dropped precipitously in early trading while Circuit City stock jumped up.
The market analysis is that the deal would be less than stellar for Blockbuster, but would be a needed shot in the arm for Circuit City. At least, that’s what the change in share price seems to suggest.
But it’s actually a darn interesting idea, one that is a clear and logical partnership if you have walked into an outlet of the more successful Best Buy (NYSE:BBY) chain: Best Buy devotes a good 50% of its floor space to DVDs and music CDs. It’s an interesting mix because it shows the company focusing on both players and content, whereas Circuit City has barely any space devoted to movies and therefore is missing out on the "blade" part of the old adage that you give away the razor and sell the blades (or, the modern equivalent, lose money on the printer but make a killing on the cartridges)
Further, Blockbuster stores now stock limited hardware too and it would make so much sense for Blockbuster to expand to having a store-within-a-store where people could, for example, buy a Playstation 3 and rent a half-dozen games to go with it, or buy a low-end Blu-Ray player and get a few free rentals on the spot so they can enjoy the marvelous world of high-def TV.
Co-branding offers great potential too: For example, why not have a "Blockbuster Video Central" located within Circuit City, denoted with a different design, color scheme, and even an employee or two in Blockbuster uniform, and — a key idea — allow people to rent movies while they’re in Circuit City.
Vice-versa works too, of course. Imagine walking into Blockbuster and there’s a 500sf corner where they’re selling the ten hottest items from Circuit City’s video inventory, along with special in-store promotions. Have one well trained Circuit City employee (yes, I now that’s an Achilles heel of modern retail consumer electronics stores) on site and now the Blockbuster folk can focus on recommending movies and games, while the Circuit City person can answer compatibility and capability questions.
Just as critical, the two chains need to act as one in all but brands, so if I were to buy a DVD player at Blockbuster, I could take it into Circuit City for repairs, and if I rented a few movies while at Circuit City buying a new phone, I could drop them off at the local Blockbuster and they’d magically find their way back to the correct location. For that matter, buy a DVD player or TV at Circuit City and get three months of free membership in the Blockbuster online video rental service that competes directly with Netflix.
I’m excited at this prospect and think it holds great potential for mutual benefit in a way that most potential acquisitions/mergers don’t seem to truly offer benefit to both the acquirer and the acquired.
Yes, there are storm clouds on the horizon, most notably the razor-thin margins of consumer electronics which has been what hobbled Circuit City in the first place and the imposing recent entry of Wal-Mart into consumer electronics, but there’s a logic to this partnership that makes me puzzled why the Journal is reporting that Blockbuster is bringing its offer public because "[Circuit City] has failed to give the "due diligence necessary to allow Blockbuster to make a definitive proposal."
I think Blockbuster + Circuit City is a solid pairing. Now let’s see what the market thinks and how it all unfolds…