West Coast Entertainment Corporation

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West Coast Entertainment Corporation

Route 413 and Double Woods Road
Langhorne, Pennsylvania 19047
U.S.A.
(215) 968-4318
Fax: (215) 968-5164
Web site: http://www. westcoastvideo.com

Public Company
Founded: 1983
Employees: 2,640
Sales: $123.8 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: WCEC
NAIC: 53223 Video Tape & Disc Rental; 45122 Prerecorded Tape, Compact Disc & Record Stores

West Coast Entertainment Corporation owns and operates about 286 video stores and about 217 more franchises, most under the name West Coast Video, located primarily in the Northeast and Midwest United States, although some are located in Canada, Peru, and Curaco. West Coast Video stores rent and sell new and used videos, video games, and DVDs (digital versatile discs). The company also operates an electronic commerce site, www.westcoastvideo.com, which offers customers over 150,000 new and used video titles along with industry news, features, and film trivia. Customers can use an online store locator to find a map and directions to the closest West Coast Video store. Once the world’s largest video chain, West Coast Video trailed industry giants Blockbuster and Hollywood Entertainment in the late 1990s. West Coast was founded by millionaire Elliot Stone, who also owns Sorbee International (a sugarless candy company) and Medical Products Laboratories (a Philadelphia firm that sells prescription drugs and dental supplies to dentists). The Company’s sales for 1998 were $123.8, with net income reported at $3.6 million.

A Bright Idea in 1983

Company founder and millionaire Elliot Stone had a reputation for fixing what irked him. In 1978, when Stone was working at family-owned Medical Products Laboratories, which serviced dentists with prescription drugs and dental supplies, he noticed that the lollipops dentists gave out to kids were high in sugar. “It seemed a little silly to me for a dentist to be giving sugary candy to a kid who just had a cavity or two filled,” Stone said in the Philadelphia Business Journal Soon after, Stone founded Sorbee International, a sugar-free candy company.

West Coast Video was created along the same lines. Stone first conceived of the company in 1983 when he and wife had trouble finding the tape they wanted in a video store. “I looked around and I saw all these people in the same situation we were in, and walking out because they couldn’t find the movie they wanted. I thought, ’I could run a video store better than this’,” Stone explained in the Philadelphia Business Journal. A few months later, he invested about $300,000 in his first video store, located in Northeast Philadelphia.

Stone reportedly chose the name West Coast Video to evoke the sense of a glitzy West Coast retail chain. Stone stocked the store with over 6,000 tapes and computerized the inventory and customer list. He made sure there were enough copies of new releases and placed an empty tape box on display for each copy of a video, while the videos themselves were stored behind the counter. Within four months, Stone opened three more stores, and the West Coast Video chain was launched.

Stone hired Richard J. Abt as executive vice-president of the company, and together the men planned to open more stores and over 100 franchises. Initially, franchisers had to pay around $85,000 to open a West Coast Video store, $12,000 of which was a franchise fee to West Coast. The remaining sum paid for tapes, building improvements, and links to the computer systems. Franchisers then paid seven percent of gross sales to West Coast each year.

Acquisitions and Expansions in 1988

The company rapidly expanded its video-store chain, and by 1988 West Coast Video had grown to 215 video stores and franchises. In September 1988, the company purchased National Video, adding 455 more stores to its portfolio. With the addition of National Video stores, West Coast could boast a total of 660 stores and revenues of about $110 million. The acquisition made West Coast the largest video store chain in the world.

However, competition in the field soon heated up, as rival Blockbuster Video oversaw some 1,500 stores by 1990. Moreover, Blockbuster’s stores were larger and in prime locations. West Coast tried to compete by keeping its operating costs lower with smaller stores and less overhead. The company tried to generate additional business by promoting its stock of lesser-known “B” titles, movies shown on cable or offered for the first time to West Coast Video stores. To bolster customer service, flash cards were inserted in each video box with a synopsis of the movie, its rating, and its stars. West Coast also used posters to highlight the lesser-known titles.

Bankruptcy and Reorganization in the Early 1990s

By 1992, changes in the industry had begun to take their toll on West Coast. Larger video-store chains were buying more stores and consolidating the industry. Moreover, video sales in general had declined, following economic recession and the increasing popularity of “Pay Per View” movie viewing services. Still, West Coast attributed most of its financial problems to $6.6 million in loans it made on behalf of Red Lion Entertainment, a limited partner in West Coast that owned and operated 70 video stores before filing for bankruptcy.

Recovery from these challenges did not ensue, and in March 1992 West Coast filed for Chapter 11 bankruptcy. At the time, the company reported $3.6 million in assets and $9 million in debt. The West Coast bankruptcy worried some industry analysts, who feared it was a reflection of the health of the industry as a whole. Some predicted that Blockbuster would buy out West Coast stores and further consolidate the industry. West Coast franchisers in general were concerned that the company would not be able to continue its services; some even withheld payments. West Coast remained in Chapter 11 protection for nine months.

Nevertheless, Stone maintained his faith in West Coast and insisted he could turn the company around. He unveiled a plan to reorganize West Coast, which called for a new company to purchase West Coast’s fixed assets and franchise agreements. Stone unveiled a plan to acquire 20 new or converted stores a year for two years and twice that number of stores by 1995. Under Stone’s plan, all new West Coast stores would have a new “ultra store” format. The stores would be bigger than most West Coast stores—about 5,000 square feet—and built with adjustable interior fixtures, so the layout could be changed easily. New stores would be free-standing to ensure customers easy access and lots of parking.

Stone agreed to pledge $1 million of his personal stock from Sorbee International to fund his plan. He persuaded creditors to accept 25 cents on every dollar West Coast owed, instead of the expected ten cents, if they agreed not to take legal action against the company. CoreStates Financial Corporation, one of West Coast’s largest creditors, would receive ten percent of the reorganized company’s stock.

In the six months following its filing for Chapter 11, West Coast generated a positive cash flow of $600,000. In 1993, West Coast changed its name from West Coast Video to West Coast Entertainment Corporation to reflect its diversification into areas other than video stores.

One such diversification was GamePower Headquarters, which the company opened in 1994 in Newtown Square, Pennsylvania. GamePower was the first store to combine the rental, sale, and trade of entertainment software. GamePower’s strategy was unique in comparison with that of most toy stores, which sold entertainment software in unopened packages, in that GamePower customers could try out the software before buying or renting it. Employees supplied customers with coins that activated terminals for three or four minutes per coin. GamePower’s rental costs were lower than Blockbuster’s, and customers renting software earned credits toward the purchase of new software. GamePower also sold the hardware that customers needed to play the games at home.

Moreover, West Coast video store franchises were given the opportunity to incorporate the GamePower concept into their stores. Each franchise that incorporated GamePower would operate under the name West Coast Video Plus and was guaranteed an exclusive territory. In addition to franchises, Game-Power Headquarters stores were built in shopping centers, strip mall centers, and downtown shopping districts.

While GamePower and West Coast Entertainment Corporation shared a common ownership and the same upper-level management, they operated as two separate companies. GamePower traded under the name Interactive Electronics Corporation.

New Leadership and New Challenges in the Mid-1990s

In 1995, Ralph Standley and his son Kyle purchased the West Coast Video franchises and took over the name. The Standleys owned and operated the small-but-ambitious Giant Video Corporation, which had recently acquired five small video chains for a total of 105 stores with revenues of $50 million. Under the direction of the Standleys, the franchiser West Coast video went public in 1996 with an initial public offering of 5.4 million shares at $13 a share. Net proceeds from the initial offering were about $163 million and were used to redeem outstanding notes and reduce bank debt.

Company Perspectives:

West Coast Entertainment Corporation’s goal is to be a leading video specialty retailer with a distinctive approach to operations and growth. Our stores are designed and managed to create an atmosphere that enhances the appreciation of movies, children’s video programming and video games. In general, our stores rent and sell videocassettes, rent video games, and sell certain popular electronic accessories along with a variety of confectionery items.

However, 1997 marked the beginning of new troubles for West Coast. A planned acquisition of more than 170 stores in Canada and Australia fell through, and the company’s stock plummeted when it failed to meet earning expectations. In fact the company was eventually delisted from the Nasdaq National Market because it was unable to maintain the $1 minimum bid price.

An industry shift to revenue sharing gave industry giants Blockbuster and Hollywood Entertainment a significant advantage over West Coast and other small, regional video chains. Before revenue sharing, video stores bought videocassettes of new movies for about $65 to $75 each. With revenue sharing, video stores could purchase videocassettes for only $8 to $12 each if they agreed to share the rental revenues. This enabled large chains to line their shelves with many copies of each new release, giving customers a much better chance of renting the movie of their choice. Because of its small size, West Coast was unable to take part in revenue sharing at first, though it eventually was allowed to share revenues on some titles.

Striving to offer the latest in movie-viewing technology during this time, West Coast entered into an agreement with Warner Home Video and Toshiba to introduce digital video technology to its customers in New York and northern New Jersey. West Coast customers could rent DVD players for private demonstrations on their home systems. West Coast stores stocked their shelves with DVD software and related hardware.

The company also executed an expense reduction program in 1998 to reduce operating and administrative expenses by $4 million over the next year. West Coast planned to close 25 stores and reduce corporate personnel and administrative expenses. As a result of the store closings, West Coast endured a one-time charge of $6 million.

In 1998, West Coast launched a television advertising campaign consisting of two 60-second spots. One spot featured a parachute-less sky diver and the other a comical paint ball warrior. Both adventurers were caught in hunter’s headlights while viewers heard the voice over, “Need a new release? West Coast Video.” Both spots won the 1998 Addy Award for television from the Philadelphia Advertising Council.

Around the same time, West Coast entered into a partnership with Microsoft to offer free rentals of a “Discover Microsoft Windows 98” video. West Coast customers could also rent free copies of the educational and entertaining McGruff the Crime Dog videos.

E-Commerce in 1999

In May 1999, West Coast launched an online e-commerce site at www.westcoastvideo.com. To launch the web site, West Coast entered into partnerships with American Cinematography Magazine, Videoscope Magazine, and KidFlix.com. Customers accessing the site could search for their favorite movies by title, actor, director, film theme, or content. An “Advanced Search Feature” even allowed customers to search for movies by character names, original works on which movies were based, or film locations. West Coast offered more than 150,000 new and used videocassettes and DVDs on its web site. Customers could access movie news and information about new releases on the site. West Coast strove to make its site superior to the rival Hollywood Entertainment web site at reel.com.

Through a deal with America Online (AOL), West Coast created a strong marketing presence in AOL’s Digital Cities, a group of web sites designed for specific cities. Standley estimated that the web site would generate a positive cash flow within two years. While the outlook for the web site was good—over 10,000 people visited the site in one week—industry experts claimed that the future of the company was still uncertain. Industry trends toward consolidation, they speculated, might eventually involve the sale of West Coast to a larger video-store chain.