The following appeared in a memorandum from the owner of Movies Galore, a chain of movie-rental stores.
“In order to reverse the recent decline in our profits, we must reduce operating expenses at Movies Galore’s ten movie-rental stores. Since we are famous for our special bargains, raising our rental prices is not a viable way to improve profits. Last month our store in downtown Marston significantly decreased its operating expenses by closing at 6:00 p.m. rather than 9:00 p.m. and by reducing its stock by eliminating all movies released more than five years ago. Therefore, in order to increase profits without jeopardizing our reputation for offering great movies at low prices, we recommend implementing similar changes in our other nine Movies Galore stores.”
Write a response in which you discuss what questions would need to be answered in order to decide whether the recommendation and the argument on which it is based are reasonable. Be sure to explain how the answers to these questions would help to evaluate the recommendation.
The author claims that in order to reverse the recent decline in movie-rental store profits, Movie Galore must reduce operating expenses at its nine remaining stores. He suggests that the only viable way to do this is to stock fewer movies, which, he claims, will result in increased profits. However, he fails to consider that raising rental prices is not a viable way to increase profits, as he acknowledges that Movie Galore is already famous for offering great bargains. Therefore, reducing the stock of older movies will severely limit Movie Galore’s customer base, thereby limiting store profits. Furthermore, it is not clear why this store located in Marston was chosen for these tests, as the other nine stores are located in larger cities. Thus, implementing these changes will only result in losses for those stores that follow suit.
The problem facing Movie Galore is the decline in the number of customers, which has resulted in lower profits. The author argues that the only way to reverse the decline is to reduce operating expenses. He is correct that operating costs are a significant component of overall expenses. However, lowering expenses may prevent Movie Galore from increasing profits, as fewer customers will be willing to buy fewer movies. In addition, the author points out that this store made these changes in their Marston location. Therefore, it is unknown whether they will have the same effect in other store locations. Since Movie Galore is profitable and plans to expand, it is not wise to cut expenses without careful consideration of whether a change will in fact improve profits.
The author makes several other claims in this memo. For example, he suggests that reducing the hours of this store will deter competitors from opening branches in the same vicinity. Since Movie Galore is already served by several competitors, it is unlikely that these competitors will forgo opening branches in order to undercut Movie Galore. Furthermore, the author claims that closing at 6:00 p.
m. rather than 9:00 p.
m. results in lower operating expenses. He assumes that no other movies were rented after 9:00 p.
m., but it is not known whether this was true. If customers did not want to rent movies after 9:00 p.
m., they may have been willing to pay higher prices to do so. Therefore, the author has not provided sufficient evidence that closing at this hour resulted in lower operating expenses.
Finally, the author states that reducing the number of movies will result in higher profits without raising rental prices, but it is unclear why Movie Galore would want to do this. In order to raise profits, Movie Galore needs to increase its customer base. If fewer movies are rented, fewer people will frequent the stores, and profits will continue to decline. For this reason, raising rental prices instead of reducing the number of movies may be the only viable way to keep Movie Galore’s profits from continuing to decline.
A movie-rental store is a business that depends on repeat customers. If Movie Galore wants to improve its profits, it must retain customers who are willing to purchase or rent movies on a regular basis. The reduction in expenses may be a reasonable option if costs can be reduced without harming the company’s reputation. However, if the store cannot reduce expenses without severely affecting revenues, then raising prices is the only viable solution.