Change happens! Since the beginning of time, mankind found ways to turn change into opportunity–and commerce was born. Throughout history, some of the best commercial opportunities arose from individuals or corporations seizing opportunities during times of change. In fact, this is the primary role of a CEO. During my tenures as CEO of both 7-Eleven and Blockbuster, my interpretation of the acronym was not Chief Executive Officer–but “Change Equals Opportunity.”
Some CEOs and their respective corporations embrace change, seize the opportunity, and prosper–while others fail. The difference often lies in whether they have the prerequisites to a successful business transformation. It isn’t the change itself that matters, but rather their response to change that separates the winners from losers. Sometimes we learn these principles through a formal business education, but often they result from hard-earned experience. Nelson Mandela once said, “I never lose…I win, or I learn.” I have had some of those “learnings” that I’m now able to share.
There are three prerequisites to a successful business transformation in the face of change: cash management, confidence, and collaboration. Managing cash flow is, by far, the most important but maintaining sufficient cash requires confidence and collaboration.
Turning 7-Eleven around
7-Eleven was a case study on the importance of cash flow and the power of collaboration. During a leveraged buyout (LBO) announced in June 1987, The Southland Corporation had major plans to expand the world’s largest convenience retailer. By October, however, the financial markets experienced the severe market crash known as “Black Monday,” erasing over $1.7 trillion in value overnight. The Southland Corporation continued with its plans and ultimately funded the transaction–but with over $4 billion in debt at over 16% interest. After the LBO transaction, an immediate shift in priority was necessary to satisfy the massive interest burden. The sale of underperforming stores, ancillary businesses, and the fleet of corporate jets weren’t enough. By 1991, the company was forced into a Chapter 11 restructuring. Management, franchisees, and employees had lost confidence in the business model. Sales and morale dwindled.
A silver lining would emerge–thanks to cash-flow management, collaboration, and confidence. 7-Eleven’s largest and most successful licensee, Ito Yokado of Japan, provided financing and helped the corporation through a pre-packaged bankruptcy. An improved business model based on the successful use of technology and strength of new product introductions as demonstrated by the licensee helped the company reverse a 10-year cycle of negative same-store sales and embark on a record 40 quarters of improved same-store sales after transforming the business. Customers’ convenience needs change every day, and 7-Eleven harnessed technology to keep up with those changes in over 80,000 stores worldwide.
The near-death experience of the world’s largest convenience retailer was exactly the wake-up call needed to spark a recognition that change, and the proactive response to change, were fundamental in convenience retail.
Why cash is always king
Following the successful sale of 7-Eleven, Inc in 2005, I was anxious to put these learnings to work in another company challenged with the need for business transformation. What better target than Blockbuster? The company had successfully managed the evolution of media entertainment from VHS tapes to DVDs and even survived the “Blu-Ray vs. HiDef” DVD shootout–but did not have a clear plan for digital transformation.
Blockbuster was able to compete successfully with Netflix for the DVD By-Mail business but took extreme measures in that competitive battle. Netflix CEO Reed Hastings claimed to have been inspired to create the Netflix model after being annoyed with Blockbuster’s late fees. Blockbuster then countered by eliminating late fees–a decision that ultimately caused the company to give up $80mm in earnings before interest, taxes, depreciation, and amortization( EBITDA). With over $1 billion of debt on the balance sheet, the reduction of EBITDA not only constrained the ability to compete with Netflix but also made it more difficult for Blockbuster to satisfy its debt obligations.
During my first week as the new CEO in July 2007, I discovered that Blockbuster had violated a bank covenant (again) and was in a cashflow crisis. I was able to negotiate a forgiveness of the covenant violation based on the strength of our new transformation plan.
An essential element of that transformation was the acquisition of MovieLink, a streaming video service created by collaboration among five of the six major film studios. MovieLink had the largest library of streaming videos at the time with over 3,000 movies available. Blockbuster’s acquisition of MovieLink, renamed Blockbuster OnDemand, provided a significant competitive advantage over Netflix’s DVD-by-mail business and even their nascent streaming offer which provided a very limited assortment of older movies. In contrast, Blockbuster had the most convenient access to media entertainment with an offer called Total Access that provided entertainment at over 5,000 Blockbuster stores, Blockbuster By Mail, Blockbuster Kiosks, and Blockbuster On Demand.
Well positioned to declare victory in the video wars, Blockbuster announced strong net earnings and nearly doubling EBITDA in its third quarter 2008 earnings release. The company’s cash flow crisis had been averted for the time being–but a debt repayment in 2009 was looming and it was essential that Blockbuster refinanced its debt. Meanwhile, the financial markets worldwide were beginning to crumble with the collapse of Lehman Brothers, sending shockwaves through the market. We had been lobbying Moody’s and S&P to review Blockbuster’s debt ratings and were rewarded with a two-notch upgrade from Moody’s, but in their press release the agency reported that uncertainty in the financial markets caused an increase in Blockbuster’s probability of default. A third of Blockbuster’s $1 billion debt was due to be refinanced in 2009, and Moody’s warned that the company may be unable to refinance its debt.
Despite the company’s proactive response to change, the unexpected collapse of the financial markets in 2008 caused an immediate need for action. Sustaining the confidence of the board, employees, and shareholders during this challenging time was essential. Collaboration became more important since it was clear that the company would not have the cash runway required to both refinance its debt and continue its investment in digital transformation.
Several collaboration opportunities were explored. A potential collaboration with Viacom would have provided exclusive access to digital rights for over 60% of the older movies in the market. Blockbuster already had access to new release streaming through its MovieLink acquisition. The Viacom deal would have prevented Netflix from access to streaming content, but it carried a huge price tag. The five-year, $500mm commitment was simply more than Blockbuster’s cash flow could support at the time, causing the board to decline the opportunity and opening the window for Netflix to acquire non-exclusive access to streaming content. A second, even more exciting deal was in the works with Google. The Google collaboration would have put YouTube and Blockbuster side by side with any free content going to YouTube and any paid content going to Blockbuster. Having Google as a distribution partner would have provided a significant competitive advantage and facilitated the one-stop-shop that still doesn’t exist for access to streaming media entertainment. The Blockbuster board signed the definitive agreement, but the deal stalled when the LA Times reported a “rumor” that Blockbuster may be forced to file for bankruptcy.
The rumor also created fear among the movie studios. One by one, they reduced Blockbuster’s credit terms from 90 days to cash payment, taking nearly $300 million of float out of the Blockbuster system within a matter of weeks. Confidence among stakeholders is difficult to maintain–but it can make the difference between a Chapter 7 liquidation and a Chapter 11 restructuring. Thankfully, we were able to bring another collaboration partner to the table with Dish Network rising to the occasion to acquire the company through restructuring. With Dish, Blockbuster would live to fight another day in the streaming video wars. While still on the shelf, the brand could reemerge one day under Dish’s leadership, perhaps providing the aggregation of content access that doesn’t yet exist in the video streaming market.
Learnings from both the 7-Eleven and Blockbuster journeys point to the need for any business to adapt to change. That adaptation requires confidence to chart a new course and to successfully navigate the turbulent path to business transformation–but the proactive management of cash flow remains job number one. While debt can be an essential tool for the growth of any business, during turbulent times and financial market volatility, cash will always be king.
James Keyes is the chairman of Key Development LLC and a former CEO of 7-Eleven and Blockbuster. He is the author of the forthcoming book Education is Freedom.
More must-read commentary published by Fortune:
- Economic pessimists’ bet on a 2023 recession failed. Why are they doubling down in 2024?
- ‘Parroting Putin’s propaganda’: The business exodus over Ukraine was no Russian bonanza
- WEF president: ‘It’s time to revitalize trade—and reverse the trend of Slowbalization’
- The anti-DEI movement has gone from fringe to mainstream. Here’s what that means for corporate America
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
