2006 VIDEO RENTAL OUTLOOK

The future looks hazy for video rental in supermarkets.A combination of unpopular movies, and a declining interest in films in general, coupled with a growing consumer fascination with new delivery technologies, were a few factors in a flat-at-best rental market in 2005.Supermarket video executives and other industry experts agreed that there's nothing wrong with the video industry - and video rental

The future looks hazy for video rental in supermarkets.

A combination of unpopular movies, and a declining interest in films in general, coupled with a growing consumer fascination with new delivery technologies, were a few factors in a flat-at-best rental market in 2005.

Supermarket video executives and other industry experts agreed that there's nothing wrong with the video industry - and video rental in particular - that a few good movies won't fix.

"We believe the rental market will rebound some this year," said Denis Oldani, director of video, Schnuck Markets, St. Louis. "Some of the softness is due to the lack of [good] titles, but how much is hard to put your finger on."

The studios seem to be grasping for fresh ideas for new movies, said Bob Gettner, video buyer/coordinator, B&R Stores, Lincoln, Neb., pointing to the many films that have been made lately based on old television shows. "That is definitely going to impact what people are going to come in and get," he said.

The general softness of the movie market - as was reported widely in box office news last year - along with low-priced sell-through, and online delivery options like Netflix's and Blockbuster's, contributed to the rental downturn, said Chuck Porter, director, video and entertainment, Giant Eagle, Pittsburgh. However, "November and December had strong rentals, showing an upturn," he said.

Craig Hill, video specialist, Harp's Food Stores, Springdale, Ark., confirmed that his chain saw strong rentals at Christmastime, but following the old video-rental truism, warm January weather has so far kept the customers away. The college football bowl games are over, the Super Bowl will soon mark the end of pro football, and basketball isn't a big factor in his area. Now, "we need a couple of good snowstorms," he said.

Sometimes in the video business, it's just a matter of surviving a storm of poor movie product. "If we can weather through February, I think March will be all right" with titles like "Harry Potter and the Goblet of Fire" and "Chicken Little," he said.

In the past, a depressed box office has been seen to boost rentals as consumers wait for the video release rather than pay for a movie ticket, but this was not the case in 2005, said Leslie Baker, vice president, sales, grocery and drug, Ingram Entertainment, La Vergne, Tenn.

"The video industry was in a transition stage in 2005, but this business has always been cyclical, and has always rebounded incredibly well, as will be the case in 2006," Baker said.

There are many easy ways to access movies rather than going to stores, said Gettner, but customers still enjoy the retail experience. "We continue on because we still have enough demand from our customers who still want video rental. At this point, we still continue to make money, just not the money that we used to make," he said.

Home Video Essentials, a service of Rentrak Corp., Portland, Ore., reported that 2005 rental revenue declined 1.8% from 2004, to $8.8 billion, a number that includes revenue from stores, online services and sales of previously-viewed video units.

Rentrak's numbers verified reports of a strong holiday season for rentals, with rentals and previously-viewed sales up 9% in November and December over the year prior.

DEG: The Digital Entertainment Group, Los Angeles, reported that DVD rental revenue was up 14%, from $5.7 billion to $6.5 billion. Combined numbers for VHS sales and rentals were flat from 2004 to 2005 at $24.3 billion, DEG reported. However, some in the industry said VHS saw a larger rental decline, and some on the retail side weren't too happy about it.

Many customers of Video Management Co.'s retail clients still like VHS, but it's getting harder and harder to get, said Greg Rediske, president of the Tacoma, Wash.-firm. "I have some stores that still do 30% in VHS rentals, but you can't even get the stuff anymore. Overall, rental business has been about even for his company and Rediske expects this to continue.

"While many other factors impact rental trends, including cyclical title strength, going into a retail environment to inexpensively rent a movie is a behavior ingrained since youth in anyone under 30 years old - and this behavior won't be easily dismissed," said Mark Fisher, vice president of membership and strategic initiatives, Video Software Dealers Association, Encino, Calif.

A "format war" between Blu-ray and HD DVD, which are competing to succeed DVD in the marketplace, might hurt sales in the short term, but could help rental while consumers rent before deciding on what format to commit to, Fisher said. "In the long run, high-definition DVD, with both its dramatic picture quality and enhanced extras, will breathe new life into a mature industry," he said.

Top 10 SUPERMARKET DVD SELL-THROUGH TITLES

As of January 8, 2006

RANK: LAST WEEK: TITLE (# of Weeks Out) Studio, Retail Price

1) N; Wedding Crashers; New Line; $28.98

2) 1; The 40-Year-Old Virgin (3); Universal; $29.98

3) 2; Mr. & Mrs. Smith (5); Fox; $29.99

4) 3; Fantastic Four (4); Fox; $29.99

5) 4; Star Wars: Episode III - Revenge of the Sith (10); Fox; $29.98

6) 6; The Brothers Grimm (2); Buena Vista; $29.99

7) 8; March of The Penguins (5); Warner; $28.98

8) 7; Cinderella Man (4); Universal; $29.98

9) 9 Madagascar (7); DreamWorks; $29.99

10) 5; Toy Story 2: Special Edition (1); Buena Vista; $29.99

N = New

This chart, tailored for the supermarket video market, is based on information taken from more than 1,000 supermarket rental locations serviced by Ingram Entertainment, La Vergne, Tenn.

Has Video Vending Finally Arrived?

Video vending machines have had many unsuccessful trials through the years, but the latest generation of DVD rental kiosks seems to be taking hold.

Driven by its success with 99-cent per night rentals in restaurants of parent company McDonald's, Oak Brook, Ill.; Redbox Automated Retail, Oakbrook Terrace, Ill., is expanding and branching out into supermarkets. A partnership with Coinstar, Bellevue, Wash., is seen by some observers as the key to future success in the grocery channel.

A number of other players are competing to place these kiosks in supermarkets.

"For the first time in the history of video, it appears that vending machines are now working," said Andrew Miller, director, supermarket division, Rentrak Corp., Portland, Ore.

Video rental by vending has been around for a couple decades, "but the past year is the first that it's gotten traction," said Mark Fisher, vice president of membership and strategic initiatives, Video Software Dealers Association, Encino, Calif. "The hardware has gotten much more stable and reliable. More discs can be held in a smaller footprint, and the prices aren't as high. McDonald's Redbox installations into both fast food shops and grocery stores have [boosted] the credibility of this delivery vehicle. Once grocers and the vending companies agree on business models that work, this category could explode over the next couple years."

Industry sources who asked not to be identified said that the cost of the machines have come down to the $7000 to $8000 range from $15,000 to $20,000 a few years ago, and that because of deals with key supermarket chains and with Coinstar, there could be tens of thousands of these kiosks in supermarkets within five years.

About 20 chains, including different Kroger divisions, are testing the kiosks, the source said. Redbox has a contract with Kroger Co., Cincinnati, the source said, and the H.E. Butt Grocery Co., San Antonio, is doing extremely well with machines from another company.

B&R Stores, Lincoln, Neb., has tried one machine from a local supplier, said Bob Gettner, video buyer/coordinator. The retailer put the unit in one store while the video department was being remodeled and it did fair, he said, but it did better when it was moved to another store that did not have a rental department. "I honestly believe we are going to see more and more of these things," he said.