KPS MANAGING director Eddie Wang is hurt. Could it be that his appeal to the public on June 22 - 'I don't need applause but I need understanding and support' - has fallen on deaf ears? Since the day the cash-strapped video chain imposed a July 31 deadline on almost nine million outstanding coupons held by members, its image has taken a battering. Its head office has officially logged 2,000 complaints. Seven cases have been filed in the Small Claims Tribunal and the Consumer Council and Legco have both spoken out on behalf of customers. But Wang believes consumers should be grateful: KPS could have declared bankruptcy. 'The truth is, without doing what we did we could not have survived and we would have been even more condemned,' he says. 'When was the last time you saw a [newspaper] report telling people that this is a company doing its best to fight to survive and honour its obligations?' KPS director Tim Lane says, 'Only one per cent [of our members] have any heartburn [about the new system] and the vast majority, once we patiently take them through it, say, 'now I understand'. We know [ending the coupon system this way] is not perfect, but [it has been implied] that the right answer was to liquidate and everybody gets nothing. That is what I struggle with,' says Lane. 'If we have any frustration in any of this process it is that everybody has been doing their level best to see this business sustain and succeed when the alternative was to liquidate. While we don't expect to be canonised for that, we are clearly very surprised at the tone of much of what we have seen in the press.' Declaring bankruptcy would also have made the company worthless to a potential buyer. In July, Lane and Wang met representatives of United States' video giant Blockbuster in Hong Kong. The two companies had been circling each other since as early as 1995, when KPS founder and former managing director Garrie Roman told Window magazine he had offered to guide Blockbuster's operations in Asia, but the terms of a joint venture could not be agreed. In the end, said Roman, 'either we'll buy them out or they'll buy us out'. KPS insiders said the meeting with Blockbuster went well, but that an outright sale was unlikely. 'Why would investors endure what they have endured over the past few months just to sell? A joint venture is much more likely,' said one senior manager, who asked not to be named. Lane denies he was discussing the sale of KPS with Blockbuster, claiming the purpose of the day-long meeting at the Grand Hyatt was simply to 'listen to ideas'. Liz Green, a spokesman for Blockbuster in the US, refused to comment on the meeting. Blockbuster does not use a coupon system - an oddity peculiar to Hong Kong - which industry insiders said was a factor keeping it from opening branches in the SAR. The end of the KPS coupon system, they said, would have made it more attractive to Blockbuster: a consideration that may have been behind KPS' decision to dispense with its system altogether. It may also have paved the way for Blockbuster to start up afresh in Hong Kong - with no KPS coupon system to compete with. HOW DID IT come to this for a company which had been well established for 17 years, and with no competition to speak of? The strategy which undermined KPS, Lane says, was the move away from its core rental business into retail, as well as the rapid expansion it undertook in 1997. The move was approved by the same board of directors that appointed Wang and Lane - the board of investment company ChinaVest Consumer Services Group (CVCS). The majority shareholder since 1994, CVCS last year financed the growth from 30 to 42 stores. The opening of these stores 'in the wrong locations and at high cost', says Wang, damaged the company. Rodney Miles, chief executive of KPS from November 1996 to June 1997, oversaw that expansion. He is adamant the decision to expand KPS was taken before he joined the company. Miles declined to be interviewed for this piece but directed us to comments made by him in a letter sent by his solicitors to this newspaper in June. 'That decision was made by members of KPS management in early 1996,' states the solicitors' letter. He resigned, it continues, because he disagreed strongly with 'the practices and policies of management at the time'. Miles' departure was followed in November 1997 by that of company founders Garrie and Kitty Roman. Garrie Roman had been the public face of KPS during its 17-year history. Charismatic and always ready with a quote, he would be sought out for comment every time Hong Kong took a new step in the development of home entertainment, whether it was satellite television or video on demand. The departure of the Romans had been unceremonious and unpublicised. Today, Garrie Roman, once a willing interviewee, is not talking. Contacted at home in July, Kitty Roman declined a request for an interview with the couple. 'This is devastating to my husband,' she said. 'It is like nurturing a child for years - you have no idea how bad it is for him emotionally to see the company doing this. I don't want to see him repeating the trauma. All I can say is that when we ran the business it was profitable. The company we left was not like the company it is today.' IRONICALLY, the video empire at the heart of the KPS controversy was never meant to be. What is now Asia's largest video chain, with a 60 per cent market share in Hong Kong and an annual turnover of $800 million, began life in 1981 as an experimental kiosk at the back of a Nathan Road electronics shop. It was the first video rental shop in Hong Kong, but was hardly intended to be the cornerstone of an empire. Instead, it was designed as a showpiece for other rental shops, which would then serve as an expanded market for what was then the Romans' core business: distributing films for which it had copyright on video. Garrie Roman was working in Taiwan when the first home video recorders were launched in 1977. Then, as now, the families of homesick US executives recorded popular television shows back home. As films were not yet released on video, these were the only pre-recorded tapes available. Eventually, the American Club set up a video library to circulate them. With a background in the entertainment industry - albeit as a disc jockey - Roman was considered the obvious choice to run the library, which is how he found himself, as he has said, 'running Asia's first pirated video club'. During his time as pirate king, Roman met his Taiwanese future wife, Kitty. Together, they recognised the potential for video in Asia. None of the major studios were supporting video (the only English-language films available in the medium were B-movies and adult films), so the Romans decided to buy the rights to Chinese kung-fu titles. At the time, however, Taiwan had no copyright protection, making the rights to films worthless, so when Kitty was transferred to the Hong Kong office of her company in 1979 the couple packed up and moved to the SAR. They were married in Canada shortly afterwards. By the end of 1980, Garrie Roman had persuaded Kam Kui International Holdings chairman, K.K. Leung, to front the money for a film distribution business to be known as Kam Production Studios - KPS. The Romans, who would run the company together for the next 17 years, began by renting out a selection of Chinese and Western films overnight for $15 each. By the end of the first year, KPS Video Network was running seven kiosks. It was sold twice in the early 1980s, and both times the Romans and their expertise went with it. By 1985 they were running the company for Richard Branson's Virgin International but no longer owned any shares in the business, having lost their options when it was sold. The industry was growing. By the end of 1987, there were 600 video shops in Hong Kong. KPS remained the major player with a 30 per cent market share, owing largely to the Romans' entrepreneurial flair for innovation. The biggest threat to the chain were competitors offering coupons, so KPS launched its own coupon scheme in the mid-1980s. After Virgin declined to open KPS Video Network's first Asian megastore in 1987, the Romans established a group of investors to buy it out in June that year. The new company was renamed KPS Retail Stores Ltd. It was run by the Romans. They now owned shares, although the controlling interest was held by Inter-Pacific Resources. Other investors included Tai Ping Carpets scion Russell Yeh. By August 1987, the company had introduced Hong Kong to its first megastore: 5,500 square feet and 10,000 video titles in Harbour City. Like the shops built after it, the video-rental megastore also offered goods for sale: videos, compact discs and laser discs. And, in what it claims is a world first, KPS teamed up with DHL to offer a home-delivery video service. The size and scope of the megastore was unparalleled in the industry. It also introduced an innovative real-time computer link-up system, which allowed customers to maintain centralised coupon accounts and drop off videos at any shop. The system became, and still is, the backbone of the business. Although megastores were expensive to open and costly to run, prices were kept down by sourcing cheap supplies and importing goods directly. This parallel importing - circumventing local distributors - was a crucial part of KPS' business. In a homogenous market, megastores allowed KPS to build and maintain a commanding market position over small-time competitors such as Fotomax. Service, the Romans reasoned, also distinguished KPS from its competitors. Time and again in interviews they expounded the 'bottom-up' management theory: the customer is the boss. 'I am working for everyone in the company - not the other way around,' Garrie Roman explained during an interview with ATV World in 1996. 'I am the lowest guy on the totem pole.' It was the company's policy that if a customer felt strongly enough about something, he or she would get their own way. Shop staff were paid a commission based on the overall performance of the store. 'The reason staff listen to me or Kitty is because every time we speak to them, we say, 'How are we going to put more money in your pocket this month?' ' Roman said during the same interview. By the time Inter-Pacific Resources decided to sell KPS in 1992, it had 12 shops. Russell Yeh's father, Tony Yeh, bought into the company, becoming its majority shareholder and again diluting the Romans' share. The company continued to finance a modest rate of expansion using cash generated by existing shops. Company policy at the time was to devote 70 per cent of a store to video rental and 30 per cent to retail. Later, this became closer to 50:50, a decision Lane now considers economically questionable. 'Sell-through,' he explained, 'has narrow [profit] margins. The core video-rental business Garrie and Kitty built up was a terrific business, but it was allowed to migrate to a huge element of retail sell-through, which demanded increasingly large retail space. With the margin pressure being what it is on such products, the overall business proposition became strained.' It also meant KPS was taking on specialist retailers such as HMV and software outlets. The company opened four new shops in 1992 and two each in 1993 and 1994. In July 1994, Tony Yeh sold KPS, now at 19 shops, to CVCS. The US firm had already taken a franchise for Domino's Pizza in China and was looking for another business in which to invest. Research had shown the potential of video rental in Southeast Asia as up to 1,000 stores in the region, possibly 100 of them in Hong Kong. The Romans had by now, in the words of Wang, 'a very, very small number of shares'. RODNEY MILES left Circle K to join KPS as chief executive in November 1996. He was recommended by Russell Yeh and brought in by the Romans to run operations while they shuttled between Hong Kong and Taiwan, opening the first KPS branches there at the instigation of CVCS. The appointment of Miles was approved by the CVCS board. 'The previous management and shareholders,' Miles was quoted as saying in this newspaper in July, 'had accepted it was a small growing entrepreneurial business that now needed corporate leadership.' According to managers within the company, the board respected the Romans' entrepreneurial spirit but welcomed Miles' structured management style. While Miles believed in a regulated approach that called for conformity to procedures, Roman as managing director maintained the bottom-up, customer-sensitive style of management he believed was the secret to the company's success. Miles and Roman both refused to comment on their relationship. As chief executive, Miles gained respect from staff for his professional approach and hard work. According to a former KPS employee, he made more than 200 store visits in his first three weeks on the job. And he drew up a business plan based on a mandate from the board for expansion. In October 1996, before he joined KPS, a joint announcement from Miles and CVCS managing director Dennis Smith reported CVCS had raised US$26 million to invest in new stores in Hong Kong and Taiwan. 'The expansion ... did not rely upon or use proceeds of coupon sales,' Miles said in the solicitors' letter. Lane, who is also a CVCS director, disagrees. When asked whether coupon money was used to finance the expansion and keep the business running, he replied: 'Oh, absolutely. Coupons built shops and made tapes available. That's where that money went.' Asked about the $26 million, he pointed out the money was raised for the expansion of both Domino's Pizza and KPS and was divided evenly between the two. Rapid growth became the KPS business strategy and personality was to play an increasingly important part in the running of the company. Sources say Garrie Roman pleaded with CVCS not to expand beyond 24 stores. Any more than that, he was said to have argued, would lead to diminishing returns, with some shops cannibalising, or stealing business from others. Nevertheless, by the end of 1996 KPS had raised the number of stores to 30. It had opened 12 more by last November - four in April 1997 alone. Previously, Kitty Roman had been in charge of selecting sites and negotiating rents. She in particular took issue with the choice of sites and deals negotiated with landlords. Lane acknowledges that the rents of some shops in the expansion plan absorb as much as half of their revenues. They also have a ratio of 50 per cent rental and 50 per cent retail, a mix that Lane now says undermined the fundamental economics of the company by moving further from the profitable rental business towards the low-margin retail business. The Romans were said also to have disagreed with Miles' decision to take the staff off commission and to experiment with opening shops from 8 am until 11 pm or midnight. The move 'incurred additional fees and huge incremental costs' in terms of management fees and air-conditioning charges, says Lane. It also required a third shift of staff. 'It was a noble aspiration, very customer sensitive, but totally uneconomical,' he says. Turnover had jumped from $280 million in 1994, the year CVCS took over, to $800 million in 1997/98. But the company was not making a profit. By the end of 1996, the company had posted a loss of $12 million; by the end of 1997 that loss had snowballed to $115 million. In an interview with this newspaper in July this year, Miles said he had given the board an ultimatum to give him more decision-making power. When the board wavered, he resigned in June 1997. 'There was no question of my being fired or forced to resign or any hard feelings,' he said. Staff say the Romans immediately reinstated the commission system and instructed staff to return to bottom-up management. Confident their reinstated policies would turn the company around, the Romans left for their annual two-month fishing trip and tour of the US. But in August they were summoned from their holiday to the San Francisco office of CVCS. Shortly after that meeting they resigned. Garrie Roman said only that he and Kitty were asked to leave. 'The board,' said Lane, 'always tends to act in the interests of the shareholders and the business. There is no question the business was at an economic crossroads. It was felt that changes in roles were appropriate and those were the decisions that were made. Garrie and Kitty did a terrific job as entrepreneurs, but the board made some decisions as to the appropriateness of management in the face of some concerning mounting numbers and they decided to bring in some new talent to take a fresh look at the business, to re-concept it, if you will.' Even so, Garrie Roman's management style may have prevailed, said staff, had he not been sidetracked by his prolonged public struggle against the proposed Copyright Ordinance sub-section that would eventually ban parallel imports. Roman had been lobbying the Government for years not to close channels for parallel imports, claiming the consumer would pay higher prices while seeing choices drastically reduced. In April, KPS staff picketed Legco, presenting a petition signed by 84,000 customers. 'I predict 38 per cent of English-language videos will disappear from rental shelves and 99 per cent from sales shelves if the law is passed,' Roman told legislators. The bill became law on July 1, 1997. As Roman predicted, the ban hit both the company and industry hard. 'Product availability was cut by 30 per cent,' says Lane. A former KPS buyer said it would not have hit quite so hard had the company drawn up a contingency plan in the event of losing its legislative fight. Just as Roman had predicted, cutting off consumer choice gave a tremendous boost to pirates who cost the SAR's legitimate retailers an estimated $900 million last year. FRESH BLOOD arrived at KPS in the form of Wang, who replaced Roman as managing director on October 15 during the Romans' three-month notice period. Wang had worked previously in Asia as the managing director of Rupert Murdoch's Star Warnaco. He outlined the company's economic problems in early 1998, describing 1997 as a 'thunderstorm year' and taking a kitchen-sink approach to naming factors responsible for the company's financial woes. Wang pointed to external factors such as the political situation surrounding the handover, currency turmoil, the economic downturn, the Copyright Ordinance, lower consumer activity, a challenge from Hongkong Telecom's video-on-demand service, and the actions of KPS' suppliers. Internally, he said, the company had been affected by 'rapid expansion, unjustifiable sites and scales, poor store management and up to 30 per cent retail cannibalisation'. He had budgeted for a loss this year of $18 million. Of 42 stores, Wang said in his presentation, 16 were considered poor performers - and of those, six opened last year. A budget proposal outlined what Wang dubbed 'Operation Cutting Edge', a plan to close under-performing stores unless sufficient rent cuts were negotiated. The plan called for hard bargaining in what was termed the 'Landlord War Game Plan'. This was to involve deferring rents, where necessary, to the point at which landlords either sue - as some have - or negotiate. 'Thank God,' said Lane, 'some very responsible landlords in this town have been forthcoming with help.' Where landlords have not been sufficiently forthcoming, KPS has proved a tough negotiator. Referring to a writ taken out against KPS by the landlord of its head office, Lane said unpaid rent was part of a 'normal process'. 'Up to now, some [landlords] have not responded and we have to think of some way to really get the landlords to talk to us,' Wang said. 'So with one of the stores we decided to pay 60 days late, then show them the books and sit down to work out a package.' The strategy appears to be working. So far, three stores have closed (two of which were opened in April 1997). Wang said he hoped to close only three more stores, thanks to capitulating landlords. The home-delivery business was shut down earlier this year. THE CLOSURE of Maria's Bakery in April and news pictures of thousands of coupon holders clamouring for compensation saw coupon sales at KPS fall to zero, according to Lane. 'The clock stopped for this system,' he said. 'Coupon sales evaporated overnight.' Cash flow dried up and the company needed to switch to a cash-only system quickly. Things heated up at the beginning of May when an Internet user posted a message to several Hong Kong news groups suggesting the chain would fold in a few months. Although KPS called the claim libellous and tracked the alleged author, it took no defamation action, citing legal advice as to the difficulty of proving who was actually responsible for the message. Although KPS held meetings with the Consumer Council in May to discuss its plan to phase out coupons, Wang said the decision to end the system was not taken until May 31. Even then, it was not announced publicly until June 22. At the time KPS was dealing with the Consumer Council, the public was told only the meetings were to discuss ways to protect coupon holders from future scares. KPS sources said the company was asking for the Council's support for its unilateral deadline on coupon use. This has been denied by Wang. 'Of course they asked for our support,' Consumer Council spokesman Kenneth So said, adding he was unaware the two parties had reached any agreement. A press release from the Council on the day of the KPS announcement did not condemn the company. 'Coupon holders are rightly dissatisfied' was its strongest wording. It was another month before the Council, in the face of public pressure, announced that as trustee of the Consumer Legal Action Fund (CLAF), it had consulted its lawyers about the feasibility of sponsoring members' legal action against KPS. Council spokesman Christina Wong says the CLAF is committed to taking action but has not yet decided what form it will take. Meanwhile seven customers have initiated action through the Small Claims Tribunal, although one has since settled with the company. The first cases have been adjourned until the end of this month. KPS sources said Council action would be disastrous. 'How can you run a business in Hong Kong that has been successfully sued by the Consumer Council? Its reputation would be worthless.' Wang claims the company has been sensitive to consumers. As an illustration, he points to the decision to impose the coupon expiry date during the summer 'when kids are available so they have more time to rent, and maybe this is a time parents can take their vacation'. KPS' DECISION to impose a coupon expiry date was a public relations disaster. On August 1, when KPS made the transition from coupons to cash leading to the public furore, Wang was in LA picking up his son from summer camp, and Lane was out of town. CVCS managing director Dennis Smith was on vacation. When asked for comment from any CVCS director, the response was they were all on vacation. Perhaps everybody had gone fishing. When the various extensions on the coupon system have expired later this year, the company will have wiped out a $130 million debt from its books and encouraged potential investors, such as Blockbuster. It will also have improved its cash flow. However, the company's future is still uncertain and expansion plans are on hold both in Hong Kong and Taiwan, where the company has seven shops. For KPS, the rehabilitation starts now. A corporate image company, Forrest International has been appointed. Its first job was to encourge KPS to be more transparent about its problems. A press conference was held at which KPS gave journalists a four-line summary of its balance sheet, showing huge losses and consequent capital injections from shareholders of $78 million in the first seven months of this year. A membership survey will be held later this month. KPS marketing director Olivia Kan has engineered a range of offers designed to reward the faithful and entice new members, including a bonus-point scheme. Members are awarded two points for every video rented or 10 points for every $150 spent. Like frequent-flyer points, these can be redeemed for products and services. One of the most prominent offers is a discount on medical check-ups grouped under the title 'Working King Check-up Package'. Under one offer, for 160 points and an additional $450, members can have themselves screened for sexually transmitted diseases. Alternatively, women can turn in 430 points to save themselves $530 on a pap smear and breast and pelvic examination. 'We want to be more than just a video rental chain to members,' says Kan, explaining the seeming incongruity between video rentals and cervical smears. 'The epidemics earlier this year have made people more health-conscious.' Says Lane, 'Everybody has been doing their level best. We are an object lesson for other companies: we are doing everything possible to reach out to the customers who have suffered alongside us.' Says Wang, 'We chose to honour our obligations and if you asked me if I'd do it again, I'd would say yes. Without reservation.'