Looking through the “Visit our Stores” section I counted only 18 Bricks and Mortar stores left. 17 of these are Franchisee owned and only 1 is company owned. When EzyDVD went into receivership last December there were 58 stores including 32 owned by Franchisees. So what has happened to all the stores?

15 stores that were franchised in December 2008 are either closed completely as is in Canberra, or have jumped ship to another Franchise Chain. In my post of January 10, 2009 I speculated that a buyer of the EzyDVD chain may have been more interested in the online arm of the business that the physical stores and a nearly 70% reduction in the number of stores would tend to support that thought.

I hope for the sake of the Franchisees that they have been picked up another franchise group, as if they folded due to lack of profitability then they may be in a world of hurt.

Bidding starts at just 99 cents so get in quick. Auction Ends 8 PM 11 March 2009

I spoke to a friend who lives over near Belconnen and they said that the store there closed down last Wednesday. It seems they closed for Stocktake and then took the stock. There was no closing down sale as far as I can tell so it looks like the franchisee just packed up and left.

The franchisee in question has, as far as I know, a couple of stores in South Australia, maybe one in Victoria. I wonder if they are still operating.

According to reports, EzyDVD went into receivership with debts of $18 million. According to Ferrier Hodgson’s Press Release, “the group purchased the EzyDVD brand and online business, the franchise network, as
well as stock, plant and equipment and 11 company-owned EzyDVD stores.” Other reports say that FEG paid $10 million for the assets of EzyDVD. This would appear to leave a $8 million hole yet to be filled.

While EzyDVD was under the receivers control, people who had EzyDVD Gift Cards were told to lodge a claim with the receiver and that they would be listed with other unsecured creditors. I think that with the $8 million deficit unsecured creditors would have little chance of seeing their money back via that avenue.

So where is the money that customers paid for the Gift Cards with? To answer this we need to look at how the gift voucher systems work. When we opened our EzyDVD stores in 2003 there was no plastic “Gift Card” system for EzyDVD. What we had in stead was a gift voucher system that was printed off and recorded at the point of sale (POS) terminal in store.

What this means is that when a customer bought a gift voucher from us say for $100 we banked the money in our (franchisee) bank account. The amount of the gift card was shown as a liability in our accounting records. When the gift voucher was used in store at a later date, the voucher was recorded on our POS as a payment and the liability in our accounts system was removed. What was good for us at the time was that the gift vouchers (like the current “Gift Cards” had an expiry date. Inevitably a percentage of Gift Cards purchased were never redeemed. This meant that when the gift card expired we (the franchisee) kept the money. (The expiry period was 12 months from purchase, but generally gave customers 12 months grace)

This process is common amongst businesses and it is possible for unredeemed gift vouchers to be worth several thousand dollars per year. Free money for their franchisees… not on their game plan… Introducing the EzyDVD Gift Card.

The EzyDVD Gift Card system is similar to the multitude of Gift Card systems available today. What they are designed to do is remove the ability of a franchisee to make a bit of extra profit from unredeemed Gift Cards and put that money in the pocket of the Franchisor. These Gift Card systems are usually operated by a third party company. The Gift Card in most respects is the same as a debit card. When a customer buys a Gift Card the money is deposited in a special account to be held until the gift card is used or the card expires (12 months from the date of purchase). When the Gift Card is used, the money is taken out of this account. The EzyDVD Franchisee does not have the money paid to them for the purchase of the Gift Card.

So how much is this worth to a Franchisor? Let’s say that each store sells $1000 a week in gift cards. That is $52,000 a year. Let’s say 5% of gift cards are lost or otherwise not redeemed, $2,600 per store. At the time of going into receivership EzyDVD had 58 stores in the chain… 58 x $2,600 = $150,800

Of course this example could be wide of the mark, but you can see why a franchisor may want to operate a gift Card System this way. Now let’s consider FEG position on the EzyDVD Gift Cards. Say each store sold $1,500 per week in gift cards in the 3 weeks up to the receiver halting the sale and redemption of the cards, and that none of these cards were redeemed. 3 x 58 x $1,500 = $261,000. This is a substantial amount of money to come up with little hope of getting the money back. But is it a small amount to pay to win back all those disgruntled EzyDVD customers? And if they chose not to honour the Gift Cards, how will those customers feel about EzyDVD’s new stable mates, Video Ezy and Blockbuster?

It looks like 15 of the 26 company owned stores that were open at the time EzyDVD went into receivership have closed or soon will be. The remaining 11 company owned stores will move over to the Franchise Entertainment Group who manage the Blockbuster and VideoEzy groups. As for the 32 franchised stores, there seems to be no news announced regarding the mechanics of the transfer and how it will affect them.

The article goes on to say that the EzyDVD warehouse in South Australia will close with the loss of about 30 jobs. I would speculate that the EzyDVD online sales machine will continue to operate as before, and it would seem that the Franchise Entertainment Group will not in the short term alter the operation of the bricks and mortar stores. I do wonder, however, what will happen longer term. At Tuggeranong Hyperdome, where one of the EzyDVD stores that I owned is located, there is a Blockbuster store in the same centre. It will be interesting to see how the stores will maintain difference in sale offerings as one would expect the purchase prices offered to the “two brands” will be the same.

I also wonder how the current EzyDVD franchisees have fared over the last month or so since the announcement that EzyDVD was in receivership. I spoke with a friend the other day who shop regularly at EzyDVD and he said that some stores were not taking Sales Orders or Lay-Bys With all the issues like these along with the impact of EzyDVD Gift Cards not being honoured this must have had a detrimental impact on customer good-will towards the stores.

Anecdotally, I have heard that customer patronage and hence sales in some EzyDVD stores has dropped off. As it happens we are now approaching a very quiet time in the DVD sales front. My experience of sales in the weeks leading up to “Back-to-School” time is that they are dismal. Despite the large amount of money my wife and I lost in our time as EzyDVD Franchisees I do not envy any current franchisees. At least when we made the decision to bail out in 2007 there was someone to buy us out, even for the pittance they paid. I would imagine the any franchisee who goes under now may have a much harder time of it.

What ever happens now, I wish them luck.

Even if a buyer has been found, this does not mean smooth sailing for those franchisees. As it seems that some of the losses incurred by EzyDVD were due to poorly performing Bricks and Mortar stores, it is possible that a buyer could buy the company just for the online arm of the business. If this is the case the buyer may not honour existing franchise agreements. So buyer or not - what now for the EzyDVD franchisees?

It is likely that the franchisees do not have the capacity to put together the type of back-end support system that is required to run a business of this nature. It is certainly unlikely that they have the capacity to go it alone as independent DVD retailers, particularly as they are all in major shopping centres. The overheads required to come to terms with up to 100 or more new releases per month, as well as scores of promotions across multiple suppliers would be crippling.

If the franchisees are left high and dry by these events their only real solution is to get on board with another franchisor. This presents a difficulty however, in that there is no other DVD only retail chain in Australia. Signing up with another franchisor may cause conflicts with their current lease terms. Our leases stated that the Use of the Store was for retail sales of DVDs. This would on face value exclude the inclusion of selling CDs, or changing the store to a sales and rental model.

Another issue with moving to a new franchisor is re-branding the stores. While they may be able to continue for a while with their current fit-out, in time complete a full refit to the new chains format wouild be required. This is a very expensive exercise. Not only would the franchisees have to cease trade for the refit time (or trade from a temporary location) they have to pay for the removal of the old fit-out, and design and installation of the new. This process would take two weeks or more and could easily cost in excess of $200,000.

This is certainly not a position I would like to be in, especially if I was one of the people who bought their franchises in the last 12 months or so.

The local economy has taken a bit of a beating over the last several months, and I would expect that many EzyDVD franchisees have not done as well as that may have hoped. Now that January is upon us there is the inevitable sales slump to come. Particularly in Canberra, where many residents take extended holidays at the coast, retail revenue is set to fall dramatically.

Of course, January sales will continue, however, I wonder at the stock that the EzyDVD stores will be carrying. In past years much of the January clearance stock came from head office. While I am sure that Head Office would be doing their best to provide for these sales, I think that the receiver would be unlikely to supply stock to franchisees with out payment up front. This would place the franchisees in a bit of a pickle… use the cash from pre Christmas sales to but January sale stock or keep it to pay their other supplier accounts?

I do not envy any current franchisee in the EzyDVD chain. While being a franchisee took its pound of flesh from me, I am, at least safely out of it now. I foresee much pain coming to those that currently have franchises.

The EzyDVD system was a good experiment that should have ended several years ago. Far too many hard working people have put their savings into the business and then been left by the wayside having lost most, if not all, their assets when their store failed to perform as expected.

Some friends of mine bought two stores on the Central Coast in 2005. The stores did so poorly that they walked away at around 12 months.

EzyDVD started out as an online only DVD retailer, but in 2002 they opened their first “Bricks and Mortar” stores. Back then, as it was when we opened our first two stores in 2003, new release DVDs sold for $35 or more and if you picked up a DVD on sale for $15 it was a bargain. The rapid growth in competition quickly pushed the price of DVDs down to crazy levels. I would always cringe when I read in trade catalogues that a new release DVDs RRP was $39.95 but we had to sell under $30 to compete with the likes of Big W and KMart.

Making $1 or sometimes less on a new release DVD was very hard to deal with.

Now, just 6 years on, there is some doubt as to the future of the chain. It is interesting to note that several of the stores have had 3 or possibly more Franchisees since opening. The Store that was located at Westfield Woden, in Canberra, was opened by a franchisee in 2003 who went into receivership in 2005; operated by us for 6 months until mid 2006 (in which time we lost over $30,000); operated by the company for a while, operated by another Franchisee who operated it for several months before handing it back to the company, and then final closing down at the end of it’s 5 year lease in November this year.

In November 2007, EzyDVD had 32 stores available to franchise. Four of those have since been Franchised, six closed, 12 reverted to “Company Owned” and the other 10 still listed as available for franchise.

The franchised EzyDVD store in Mount Druitt, NSW, is listed on the EzyDVD website as being for sale. I would suspect that the franchisee there is already hurting, and that todays announcment will make it difficult for them to find a buyer.

The article referenced above states that EzyDVD Pty Ltd lost more than $3 million over that last two years. What is really wrong with all this is that Austalian Law does not require Private companies to disclose their financial statements to prospective franchisees. The information in a Franchise Disclosure Document may not reveal all you need to know to make a vaild decision on any particular business. In some cases as a prospective Franchisee, you don’t know what you don’t know until it is much too late.

I think it would be a no brainer to not enter a franchise agreement with a company that was losing money.

What next for EzyDVD? Only time will tell.

When we turned up to Parramatta for the handover we were told that their were no staff rostered for the next few days trade, as all available staff had personal committments to deal with. Fortunately Charly and another of our Canberra staff had gone to Parramatta and could manage the store while more staff were hired. Several of the Parramatta Staff came back to work there for a while, which helped with the transition.

We initialy rented, on short term lease, a unit within walking distance of Westfield Parramatta at $1,800 per week until early January. Charly spent several weeks in Parramatta and, on an ongoing basis various senior staff from Canberra would spend time in Parramatta working with the new staff. We placed Parramatta up for sale in Januay 2006 and it took until May 2006 to sell it.

At the same time (November 2005), the franchised EzyDVD Woden store closed temporarily as the franchisee went into liquidation.

In order to maintain faith with the Customers of the Woden store, Laybys, Customer Orders and associated stock were moved to our Hyperdome store for servicing. We were asked to review the hard copy reports and order the stock required to fulfill the customer orders.

As we were a listed creditor of the EzyDVD Woden store, we were privy to some aspects of the winding up of the franchisee’s company. Once the Woden franchise was placed in liquidation, EzyDVD Pty Ltd took over the lease and purchased the shopfit from the liquidator for $22,000.00 The CFO, MD and one other staff member came to Canberra to sort out the future operation of the EzyDVD Woden store.

It was at this time that EzyDVD Pty Ltd asked us if we would take on the Woden store. We indicated that while we were not in the position to buy the franchise, we would be prepared to help them out. EzyDVD Pty Ltd offered us an agency arrangement that we agreed to in principle, however, no formal agreement was signed.

During the week leading up to 7 December 2005, I spent most of my time setting up the Woden store for its “Grand Re-opening”. During this time I interviewed and hired new staff for Woden as well as looking after the other two Canberra Stores.

The store reopening went quite smoothly and the December sales were OK. The revenue was certainly not in line with either the Hyperdome or Belconnen store however, it was adequate and we put the lower performance down to customer dissatisfaction with the closing of the store for several weeks.

We streamlined our three Canberra operations as much as we could, leveraging resources and reducing expenses in doing so. However, it just was not enough for the Woden operation. In early February 2006, after reviewing the January accounts we became extremely concerned with the continued poor performance of the Woden store and contacted EzyDVD Pty Ltd to discuss the options available to us. We indicated that we would be prepared to terminate our agreement at this point. For various reasons, it took until May 2006 for EzyDVD Pty Ltd to respond to our concerns and that response was an offer for us to purchase the store for $140,000. Not only was this nearly 7 times what they had paid for the store, we had taken on the operational expenses of the store and had already lost money on the endeavour. We disagreed with their predictions for the stores performance and advised that we would be terminating the agency agreement. We gave 2 weeks notice of our intent to hand back the management of the store.

Being aware of the impact that an ill prepared exit from the Woden store could have on our other two stores, we waited for EzyDVD to take ‘control’ of the store again as per the plan that was agreed and documented. To say that this plan, although agreed in writing, did not go smoothly would be an understatement.

With the Parramatta store sold (May 2006) and our exit from the demands of the Woden store, we found that our two existing stores were operating well. By removing the Woden store from the picture, we were able to better focus on the Hyperdome and Belconnen operations and further improve their performance.

In our six months operating the Woden store, it cost us more than $30,000. The majority of this loss was experienced between February and June 2006 whilst we tried to extricate ourselves from the store.

In the mean time however time and expenses have marched on. Since we left our businesses and sold our investment property, we still have loans in the order of $600K. Interest payments on these loans are about $5,100.00 per month. This is over $61,000 per annum that we have to find, after tax, before we can even buy food.

Over the last 11 months we have managed to make every mortgage payment on time and in full and still have some sort of life, but we are now just about out of options, with our teenage children lending us money to make July’s payments.

Our last major our asset, our house, is worth about $300K or so and we have come to the decision that we MUST sell it. Even after that we will still have debt over $300K. So at the age of 42 I will be $300K worse off than when I left school. The loans we have left are to my parents and to my in-laws, approximately $150k each.

My father is 80 and my mother in her late 70’s and they are in no position to pay anything towards the mortgage on their house that funded the money they lent us. My in-laws while somewhat younger, again are unable to fund the mortgage payments on their home for the money they lent us. So if my wife and I fail to make their payments they are at risk of losing their homes, and all for the fact that they believed in us.

So I think you can understand our need to keep making payments for our respective parents mortgages and hence the need to sell our home.

Still, I have my family and my health. I know there are many people worse off than me.

At times like this I look towards people who inspire me such as Robert Kiyosaki who spend some time living in his car. He is now the best selling author of the Rich Dad Poor Dad series of books and a self made millionaire. You see I am much better off than he was.

On the whole the family are all dealing with this very well. It is fortunate that I get on very well with both my in-laws, as we will soon be moving in with them. It will be a bit of a squeeze, with 4 adults and two teenagers in a 13 square (122sqm), three bedroom house. Luckily, there is a caravan there so my teenage son, Morgan, will use that as his bed room.

The tricky bit in this compaction is what to do with two households worth of stuff. I guess that ebay will start to see some of our stuff. If you see our stuff listed in our ebay store, go ahead and bid high!

On a positive note, my Electrical Contracting business that I run with my father in-law has been very busy over the last month, and my wife has developed a course to train people in internet marketing.

What will the future hold, I am not really sure, but I know that, along with my family, I will get past this dark period of my life. I even know that at some stage I will buy another home. But for now it looks like the joy of living with the extended family. Oh Boy, Oh Boy, Oh Boy!

I hope you are enjoying my journey, and I will try to get more of the franchise story out in short order. In the meantime if your are enjoying the tale, and you want to help me pay my ISP, feel free make a donation at the top right of this page