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From a $3000 website to a company with turnover of $100 million is no mean feat. EzyDVD’s Jim Zavos achieved it all in less than 10 years. He tells JACQUI WALKER about the journey, and what the future holds.

Jim Zavos started selling DVDs online from a website that cost him $3000 to build in 1998. In less than 10 years he has built the online business based in Adelaide into a national chain of 70 franchised DVD retail stores turning over about $100 million a year.

He tells Jacqui Walker about his growth, making franchising work, new trends in the industry and the next stage of expansion for EzyDVD – converting video rental stores to retail/rental outlets under his brand.

  To listen to the interview, click here. To download this mp3 file and listen to it later, right-click this link and “Save target as…” to your computer (Macs; option-click).

 

Jacqui Walker: Jim, tell me about the niche you found and how you came to establish EzyDVD.

Jim Zavos: I started the business back in 1999. Effectively for me it was very much a transition. I was running video stores back then. I knew at that stage that people weren’t collecting videos. There’s no point in collecting a video. You take it home, watch it once, put it up in your collection.

Come back six months later it probably would have deteriorated in quality, and by now DVDs had really established themselves in the marketplace.

People were familiar with that format and I had a feeling that if we could give the consumers movies in the same sort of format as what we gave music, that people would want to collect those, so really that’s where it all started. For me it was really a transition going from video rental into retail.

Did you own a video rental business?

I did. Look I’ve been in the business since 1982 and I was running rental stores, and in 1998-99, when I decided to get into the DVD business, I was running six video rental stores in Adelaide so for me it was very much of a transition. It really got to the point where it became a bit of a conflict of interest for me. I had to make a decision on whether I would run video rental stores or pursue my career in retail, and retail was it.

And did you have franchisees at that stage, or other investors in the business?

No it was purely myself and my wife. The business started off online only and back in the early days of 1998-99, it was also the start of the dot-com era as we know it now.

It cost me a total of about $3000 to set up the website, but back in those days consumers who came on line had absolutely no expectations. Spending $3000 on a website wasn’t a lot of money and I think I got what I paid for: which was not very much. The website evolved over a period of time to the point, where in its second year it turned over $3.5 million online. At this stage I knew that DVD was going to take off.

We had consumers saying to us ‘we love your website, we want to purchase DVDs but we have a real problem purchasing online because we worry about putting our credit card details online’.

So that’s when we started thinking about setting up what we now call bricks and mortar stores. So we opened up our first bricks and mortar store in 2000 in Rundle Mall out of a 60 square metre store, and that store went on to do $1.8 million worth of business. It was a runaway success, and I suppose that’s where the idea came from that we thought we were on to something.

And again when I say we – my wife and myself – we thought we were on to something and the only way we could expand into more bricks and mortar stores was to go out there and franchise, so we lifted some advice and help from some professionals and it wasn’t long… it was in 2001 before we were franchising our first store in Sydney.

And tell me about the website before we get into the bricks and mortar stores. How did you market that in the beginning?

It was really interesting. I think the most important thing that we did was I think it was just word of mouth.

I think we did some pretty clever stuff back then. We didn’t have the budgets. We didn’t have great relations with suppliers because back then the video business was very much dominated by what we call mass merchants, the Kmarts, Targets, Big Ws. So we had no advertising budget. I suppose we were being very strategic online.

How did you do it? Can you give me some examples?

Really promoting ourselves in newsgroups. Associating ourselves with information websites. DVD information websites. It was very nichey back then. It was a new fad. There were people setting up all these websites, information websites the likes of DVD.net, DVD Plaza, and what we did was, working with those guys, we did online advertising with them, we put banners up on their pages. They did reviews, we gave them product where they did reviews and referred people back to EzyDVD and just working through various newsgroups got our names out.

We did things with print media. We would send sample DVDs to preview. Back then there were products that we were selling and importing from the US that weren’t readily available in Australia, so we would send them previews for their review and of course they would refer people through the newspapers and magazines back to our website.

But I think more importantly, and I’m not sure how easy it is to do these days, we were very much a pioneer in the online business and very much a pioneer in DVD. People were buying DVD players from overseas and they were buying them locally, but they just could not get the product and I think through word of mouth… that really went a long way to help establish the website to where it is today.

You’ve got a large number of stores now, many of which are franchised. What proportion of your sales are online now?

Look it’s probably… our website does $15, $16, $17 million a year. Which is a pretty substantial business but they’re still, in terms of a percentage of our overall business, is still sitting at around 15% of our total business. So it is substantial. The reality is that most consumers still buy their products over the counter, still go shopping on a Thursday night and still want to walk to the store. They want to physically see the product and they’ll still buy it over the counter.

We should be clear here, I guess. You’re not selling video on demand online are you… you’re selling DVDs, so you’re posting them once they’ve been ordered.

And that’s where we are at the moment. People still like the physical product. They like to get all the special features and I suppose it’s still a tangible product. They’re paying $30 for a new release and they’re getting something for it that they can put into their collection.

So you started growing a bricks and mortar network of stores. Tell me about that process and what the challenges were for you there.

The company had some really rapid growth and I suppose one of our challenges was just trying to keep up with the demand. We were certainly the flavour of the month and every shopping centre in the country, every major shopping centre in the country and I’m talking about, you have the Westfields here and the Westfields and the likes, wanted an EzyDVD store in their shopping centre.

And I suppose the challenge for us was we wanted to get in there, we wanted to beat everybody else to the [mark] because we were trying to limit our competition in the marketplace.

Our challenge was to continue to position ourselves as the premium DVD retailer in the marketplace and once we’ve done that, get to the point where Westfield was only talking to us (there was no one else in the marketplace). The challenge for us was to get out there and open up all these stores, which we did in a relatively short period of time to the point where, like I can tell you now, that at one period there in 2003 we had six stores open in one week, which was a massive, massive task.

Of course the other challenge was, when you’re franchising, finding the right franchisee.

That continues to be a challenge for us these days. It doesn’t matter whether you’re in the DVD business or any other business, franchisees can make or break a store. It’s interesting that we have stores that under one franchisee don’t do that well. The franchisee decides to sell the business and somebody else comes in and literally, in a lot of cases, overnight you can see the store starting to improve just by having somebody different behind the counter.

So how do you make sure that you’re hiring the right people as franchisees?

Well we go through a process. At the time we had external consultants that found suitable franchisees and they went through an interview process, a series of questions and tests to ensure that there is a right fit between ourselves and those franchisees.

And you do that to the best of your ability. Sometimes, you know, franchisees that you are not even 100% sure of, go on to do really good business, and vice versa. So sometimes trying to pick the right franchisee is not always that easy. And I would expect that would be reflected in any franchise business.

Do you have any rules of thumb as to the type of people that you avoid or someone who you know will be a winner?

Well not so much avoid but more that would be the winner. I think they’d have to be movie buffs to start with. I think knowing your product… and they’ve got a personality, they can get out there and talk to people, then I think that probably puts you into the box seat to become a successful franchisee.

And how would you describe your relationship with franchisees?

I think we’ve got a very good relationship with our franchisees. I think we’re extremely transparent.

It’s important that, from our business point of view, our franchisees are successful, because the reality is if they’re not successful then we’re not successful. So we try to share with them as much as we possibly can.

We try to give them as much vision about the business, about where we’re going. There’s a lot of things that we do in our business that are different to everybody else.

We have a real point of difference. Again we’ve been a specialist. We have a lot of point of difference in terms of exclusive product that we source ourselves direct from suppliers. Special packaging.

So it’s about you’re delivering something of value to the franchisees?

Yeah, absolutely.

And they need to perceive that…

It gives us the point of difference and when you’re in a business like this where we’ve all got the same sort of commodity: DVDs. Sometimes you have to give them something different to give us a point of difference and look, the franchisees get a real buzz when we might do a Star Trek Deep Space 9 box that retails for about $279.

I’ll give you that as an example. They’re limited, they’re numbered, all fully approved by Paramount Pictures and Star Trek in the US. We’re doing 3000 units at $279 a pop, which is heading up towards the $900,000 worth of business mark. You have to sell a lot of DVDs at $10, $15 to make up that sort of business.

And often with that sort of product, because we try to keep it nichey and we try to limit it, 3000 units, you’ll find that a lot of that stuff stores do sell out pretty quickly. They might get 20, 30, 40 units but you know, at $280 a unit it generates good revenue, and they get a real thrill out of having people walk into the store and they know the only place they can buy it is through an EzyDVD store.

You’ve been dealing with franchisees for a few years now. What mistakes have you made in the past in franchising and what have you learnt from that?

Look, I think going back to what we said a little while ago, in terms of mistakes I suppose they certainly weren’t intentional mistakes, but I think again finding, appointing perhaps the wrong franchisees… Lots of people come along. They’ve got the money, they’re ready to go. They seem extremely passionate about getting into this business, but finding people who maybe got into the business from an investment point of view rather than being an owner-operator behind the counter makes a big difference.

So maybe not screening our franchisees well enough right from the beginning is probably one of the mistakes. At the time they seem to be the right people, but just some of them didn’t work out.

Now to the contrary of that, we’ve got a lot of fantastic franchisees who walked into these stores who’ve made a huge difference. This week, we’ve got a massive 12-page catalogue out in the marketplace [and] I can count at least six or seven franchisees who’ve rung up and congratulated us on what a great job we’ve done with our catalogue because it does make … a big difference to their business.

Now if we can just think about the industry in general and consumers are increasingly going online and wanting to download movies. How are you responding to this challenge?

I think they are increasingly going online and I think there are people that want to download. My opinion is out of the research that I’ve done and you know, I’m talking to people who are in that field at the moment as well. It is my opinion that we’re still a way off that taking a hold.

What do we need? Better broadband?

I think we definitely need better broadband. I think initially people will still probably have a problem downloading a movie for X amount of dollars when they can still rent the physical product. It’s my opinion that downloading will work somewhere down the track and I can see people watching a program on Channel 9 and if they miss that program they can download an episode and watch it on the computer and I think people don’t have a problem with that; but I still think … just my opinion … I still think we’re a few years away from that.

How else is your industry changing at the moment?

I think our industry is getting to the point where it has matured. It’s a $1.2 billion industry at the moment at retail and I think people are getting a lot more selective to what they are purchasing today. So I think it’s changing from that perspective. So we have to continue to get out there. We need to be a lot smarter with the way we promote ourselves, the way we position ourselves in the marketplace and one of our challenges moving forward is making sure that we get our fair share of the pie.

What would be your market share now?

Our market share’s approximately 10%. As a company we do approximately $100 million a year.

And so you’ve obviously grown a lot in the last 10 years. Has that growth slowed now as you’ve seen the market mature?

I think it has matured, although I have to say that this year we’ve seen growth of about 15–20% and a lot of that I think has been because we’ve been a lot more strategic with the way we do business.

We’re doing a lot more exclusives, high-priced exclusives like the Star Trek boxes I talked about, and look we’ve got dozens of those in the marketplace at the moment that we’re working on.

What about the transition to HD-DVD or Blu-ray, because that’s akin to the VHS / Beta fight of the 1980s. Do you have to make a decision about which technology you’re going to support?

No. In fact we’re supporting both at this stage. There are other retailers out there who are supporting one or the other.

Because Blockbusters has gone with Blu-ray?

Well, Blockbuster in the US certainly has, and you’ve got other retailers in the marketplace here and JB, for instance, is backing Blu-ray, solely Blu-ray. We’re behind both because we don’t know which way the high definition thing’s going to go. I’ve got to tell you that both forms at the moment are performing pretty well for us.

Overall it’s a very small part of our total business, but collectively between Blu-ray and HD the business is selling upwards of 600, 700, 800 units per week on a 50/50 split at this stage so… and I think part of the reason why we’re probably selling a better share of HD is because other retailers aren’t supporting it and effectively giving consumers no choice but to come to EzyDVD to purchase their product. Which way will it go? Honestly I don’t think anybody knows at this stage.

Now are you going to put more energy into building your online site, or are you more focused on bricks and mortar now?

I think it’s evenly focused. I think with the online business there is only a limited market … we don’t expect our website to go from $17 million to $30 million. There’re not enough consumers out there who have the will to purchase online.

DVDs sold online probably represent no more than maybe 4% or maybe 5% of the total business, so 95% of DVDs are still bought over the counter. So from our perspective it’s important that we continue to promote and push our bricks and mortar stores.

So, Jim, you’ve been in this business for a long time now. What are your plans? Do you have an exit strategy?

I don’t have an exit strategy. I haven’t really thought about it. I mean I’m pretty passionate about this business and we have a few more ideas we want to roll out with, something that we haven’t spoken about. We’re getting into the rental business and what we mean by that is we’re looking at expanding into rental stores, your traditional rental stores out in the marketplace.

We see that as a really big opportunity for us, and why? Because a lot of those stores are renting at the moment but they see the potential and the future of retail.

They want to get into that business, but one of their problems is perhaps there’s a stigma connected with the brand that they’ve got at the moment, where the consumers think about buying Scrubs Season Five, which is the latest DVD in the marketplace, they don’t often think about going and purchasing it at a rental store, but they’ll purchase it from a specialist retailer or a mass merchant.

So you think there’s opportunity there for you as a DVD retailer to go into rental?

We’ve done a roadshow around the country and we’re talking to various parties at the moment and we’ve already got commitments from stores who are converting over to EzyDVD in July and August.

And what chains were those people with? Can you tell me what brand those stores are now?

Probably best not to say at this stage. We will be going out with an announcement pretty soon and a press release about that, but they are involved with the brands that are easily recognisable in the marketplace.

And how many stores are you talking about?

We’re talking between now and Christmas we anticipate that we will have 20 stores in the marketplace. Our longer-term prospects that we’re looking at about 200 stores in the next 18 to 24 months. So now we’re talking 200 stores over and above the 70 stores that we already run.

That’s a massive plan. Are they franchises?

They’ll all be franchises, so at this stage we’re not looking at greenfield sites. We’re talking about existing stores.

Conversion?

Yeah, they are purely conversions. They’re stores that are already in the marketplace but they are stores that are doing reasonable business in rental. They’re already doing some retail but just want to take it… they see this as an opportunity to take it to the next level.

By taking it to the next level what that does is give them a branding. All of a sudden it opens up a new world for them in terms of retail. They get our catalogues. They get all our exclusives and they effectively become an EzyDVD rental/buy store.

And what’s the risks for that for your business?

There is a slight risk and that is that it’s important for us again. We talked earlier on about finding the right franchisees. From our perspective when you walk into an EzyDVD store at the moment you do get good service and you get people behind the counter who know their business really well.

We’ve got to be careful that the brand continues to be well represented in the marketplace and if the stores decide… if we decide to sell the stores on we’ve got to make sure that they get behind it 100%.

Part of the plan is not just taking the existing store but having almost a full refurbishment of their store and putting in dedicated sections in the store so when a consumer walks into a rental store it does look like an EzyDVD store in, it does look like a store in the store and it looks like those guys are serious about retail of DVDs as well.

So the risk to us is really making sure that the brand is well represented in the marketplace and if we’re going to join somebody they’ve got to make sure they do the right thing.

And just finally, for franchisees, what do they pay to be in your system?

Look it’s relatively cheap. We’ve come up with a pretty basic system. What a lot of the stores are looking for though is really the intelligence as well. We’ve got franchise fees… flat franchise fee of $1500 a month to become part of EzyDVD.

And do they pay an upfront fee?

No, they don’t pay an upfront fee, but there are costs associated with joining the brand and that is there is an expectation that they’re going to refit their stores to bring it into line with what our expectations are. It’s not a huge fee but it can vary from one location to the other and depends on how well they’ve looked after their store, but it could be anywhere from $20,000, $25,000 maybe up to $50,000.

A lot of these stores have been in the marketplace for a long time and a lot of them are in need of a bit of a refresh and this is what I said earlier on, that it’s important that we protect our brand and it’s not just a matter of just joining anybody up. The stores have to be in pretty good condition. They’ve got to have some reasonably good potential as well.

And what about new greenfield stores? Are you looking at opening more of those and what’s the deal for those franchisees?

We are. When we talk about greenfields stores we’re getting quite a few inquiries about opening up new rental stores in greenfields sites as well. We’re not quite ready for that yet. I think we need to go through a transition and for us it’s important that we convert. We’ve got a heap of stores that are converting over into EzyDVD now, which are existing rental stores. We need to do that first so that’s one phase of our expansion, of our continued expansion.

The other one is that we’re still looking at premium shopping centres around the country. Look we are in most of them, the ones that we want to be in. There’s probably still maybe half a dozen or 10 bigger shopping centres that we’re not in at the moment and I can tell you now we’ve got a few proposals from them at the moment that we’re looking at, at the moment having gone through some expansions.

Some we just haven’t had an opportunity to go in there before so we’re still looking at those, but really in terms of expansion for us, it’s not so much the specialised EzyDVD outlet in a major shopping centre, it’s more from a rental perspective.

Is there anything you’d like to add?

As always, we consider ourselves to be an entertainment business and we continue to talk to different people, and when we talk about the future we’re looking at getting involved in anything that is entertainment-based, particularly movie-based.

And you’d be aware at the moment there are online opportunities and download opportunities and there’s online rental as well that we’re looking into as well, and all these different media and delivery systems are all options for us that we’re looking into at the moment, so we’re not discounting any opportunity moving forward.

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