B’Buster, Videovisa: Devalued Relations

In the first international showbiz ruckus following peso’s devaluation, Mexico’s Blockbuster franchisee has fallen out with VideoVisa, this nation’s dominant video distributor and faces an uncertain future with its U.S.-based franchisor.

Industry sources say the franchisee, Grupo Mexicano de Video, is behind in its royalty payments to the Florida-based Blockbuster and that both parties are looking to dissolve their relationship.

VideoVisa distribution director Miguel Angel Rocha adds that the franchise holder owes his company nearly 2 million pesos ($350,000). VideoVisa, which has contracts with all the major Hollywood studios, has refused supplies until the debt is paid, says Rocha.

Grupo Mexicano de Video is owned by an investor group led by Carlos Peralta, a member of Mexico’s billionaire elite, and by Houston-based Alfredo Brener. The group has built 100 stores in Mexico’s major cities.

The local franchisee’s manager, Jaime Petersen, denies that the franchise is in jeopardy, though admits it may change hands. He says that following the devaluation Blockbuster has agreed to renegotiate the terms of the concession, which originally called for another 45 stores this year.

Petersen claims that the break with VideoVisa was his own decision, arising after the distributor hiked prices by up to 60% following the December devaluation.

“For ‘Maverick’ the retail unit price was set at 163 pesos ($31), and Videovisa invoiced me at 237 ($45),” Petersen says. He adds he may approach the major studios to bring pressure on VideoVisa, but has scheduled to negotiate directly first.

Acknowledging delay in royalty payments to the parent company, Petersen says the problem is normal in a situation where obligations are in dollars and the local currency collapses. But VideoVisa’s Rocha says the devaluation is only half the story: “We’ve been having problems with Blockbuster since the last year,” he says.

Rocha adds that the franchise has long had cash-flow problems arising from its rapid expansion scheme. Many of Blockbuster’s Mexican rents are dollar-based, as the franchise has tended to target upscale neighborhoods.

Since the beginning they’ve been living on credit, says Rocha, although he concedes that liquidity problems are a reality of the Mexican market.

Since it entered Mexico in 1991, Blockbuster has had a bumpy ride, hit not only by tight credit but also by ownership doubts. For some months, Peralta has tried to sell out, first to VideoVisa – which shied at contractual obligations to the U.S. parent – and then to Petersen.

Petersen sought to do a leveraged buyout, but then the devaluation hit, an industry analyst reports. Petersen, who himself reportedly owns several video stores, confirms he is still interested in purchasing the franchise from Grupo Mexicano de Video.

A Blockbuster spokesman in Florida said the company never comments on franchise operations.

Blockbuster’s Mexican operation controls about 10% of a retail market worth $150 million to $200 million in 1994. Its business plan originally projected 280 stores by mid-1998.

Rocha says VideoVisa is anxious to settle differences with Blockbuster, on which it depended for an estimated 10% of its distribution revenue in 1994.

“We’re looking for a solution because we have dollar contracts that are based on the overall potential of the Mexican market,” says Rocha.

However, both Blockbuster and many independent retailers fear an inflation-spawned upsurge in piracy, and claim that VideoVisa’s price hikes are out of proportion with December’s 40% devaluation.

The claim was denied by VideoVisa in an ad published in the Mexican press Feb. 8, which said unit prices for new product had been raised by an average of just 35.6%, while sell-through product such as “The Lion King” is about to be released to the consumer with its pre-devaluation pricetag of $12, less than half the suggested U.S. retail price.

Mexico’s homevideo market is said to have good medium-term growth potential, especially in sell-through.