DVD DRIVES RENTALS BACK INTO SUPERMARKETS

While it pales in comparison to the ongoing sales growth of DVD, video rental continues to be a strong profit center for many supermarkets.Rental contributes not only bottom-line dollars, but also store traffic, Hollywood excitement and convenience. Above all, video rental is one of the few offerings that Wal-Mart does not have in its stores, said industry sources.The video-on-demand threat that led

While it pales in comparison to the ongoing sales growth of DVD, video rental continues to be a strong profit center for many supermarkets.

Rental contributes not only bottom-line dollars, but also store traffic, Hollywood excitement and convenience. Above all, video rental is one of the few offerings that Wal-Mart does not have in its stores, said industry sources.

The video-on-demand threat that led many chains to get out of the rental business is still far off on the horizon. Meanwhile, sell-through-priced DVD has simplified the ordering process to the point where some retailers are now saying they are competitive with the big video specialty chains.

From conversations with retailers, suppliers and other industry experts, that is the state of video rental in the fourth quarter of 2003.

While down from its double-digit heyday in the mid-'90s, rental in supermarkets maintained a 5.3% share of the overall video rental business in 2002, according to Adams Media Research, Carmel, Calif. By comparison, supermarkets had 4.7% of the total DVD sell-through business last year, and 4.8% of VHS sales, Adams reported.

The Video Software Dealers Association, Encino, Calif., has reported continued health for the video rental business driven by strong growth in DVD rentals. In 2002, consumers doubled their spending on renting DVDs to a total of $2.9 billion, according to VSDA's 2003 Annual Report on the Home Entertainment Industry.

VSDA's VidTrac tracking system has reported that DVD rental turns (the number of times a given unit rents) have grown from 168 million in 2000 to 445 million in 2001, and to 915 million in 2002. Meanwhile, VHS has declined from 2.6 billion in 2000 to 2.55 billion in 2001, and to 2.02 billion in 2002. Total rental turns have been up and down: 2.8 billion in 2000, 3 billion in 2001, and 2.93 billion in 2002.

"Our rentals are up," said Ray Wolsieffer, video specialist, Bashas', Chandler, Ariz. "We are still doing close to 50-50 rentals of VHS and DVD. We stay focused on the main box-office hits and family titles."

For customers, "it is a convenience for them to come in, get their groceries and pick up a video, and go home. We also cross merchandise rental, and that works very well," he said.

"Video rental is strong, and will continue to be so. I don't see that changing anytime in the near future because we are providing a commodity that the customer has become very comfortable with, and we are very competitive," Wolsieffer said.

"I'm very upbeat about rental for the present and near-term future," said Chuck Porter, director, Iggle entertainment and video, Giant Eagle, Pittsburgh. "I don't think rental is going away despite everything that is out there trying to take rental's market share."

The popularity of DVD has brought consumers back to the routines of buying and renting, Porter said. "Renting or buying a DVD or a VHS tape is a great value, and I think consumers recognize that."

"The rental business continues to be strong for the supermarket retailers, and all indications show an increase over 2002," said Leslie Baker, vice president, sales, grocery and drug with video distributor Ingram Entertainment, La Vergne, Tenn. "The product selection in the fourth quarter should boost rentals even further. With the additional offerings and special features on DVD, this format should account for a large part of rental dollars."

By itself, renting is neither declining nor growing for Giant Eagle, Porter said, and the retailer is looking for ways to further develop the video game rental market. "There is a huge opportunity right now with the game business," he said.

While rental volume may not be increasing significantly, industry observers noted that lower product cost is contributing to improved margins.

"DVD is dramatically changing the economics of rental via the lower cost per unit to stock a department," said Tom Adams, president and senior analyst, Adams Media Research. "It appears that many supermarket chains are taking another look at rentals to take advantage of that," he said.

"The operating margins are much better than they ever were historically," said Andrew Miller, director, supermarket division, Rentrak Corp., Portland, Ore. Once, rental-priced VHS tapes that were not bought through revenue-share programs like Rentrak cost $70 each, with no guarantee on the return. Now with sell-through-priced DVD -- as well as VHS -- "you buy it cheap, you rent it well, you get decent turns on it, and then you sell it high," he said.

"In round numbers, you buy it for $20, rent it eight times for $3, and sell it for $10. That's a far better picture than ever existed before," Miller said.

Meanwhile, aggressive rental offers at chains like King Soopers in Colorado and Safeway in the Pacific Northwest are well positioned against the specialty chains. "For example, King Soopers has two movies for $5 for three days. Blockbuster can't compete with that," he said.

The weak link, Miller said, is the same issue making headlines in California and other parts of the country: labor. With competition from non-union Wal-Mart pressuring supermarket chains to cut labor costs, personnel to staff video departments is increasingly hard to find, he said.

Yet, video rental can be a two-edged sword when it comes to competing with Wal-Mart. "Every supermarket executive in the world will tell you that Wal-Mart is a concern, but other than its Internet [DVD rentals by subscription] operation, Wal-Mart is never going to rent movies," Miller said.

"So if you are looking for a competitive advantage over Wal-Mart, something different you can do, video rental should be part of it," he said.

"At this point in time, we are still holding our own pretty well," said Bob Gettner, video buyer/coordinator, B&R Stores, Lincoln, Neb. "DVD has put us back into the rental market, but VHS is not dead, especially in grocery."

As big rental chains phase out or de-emphasize VHS, supermarket video executives see a market opportunity.

"A lot of the Blockbusters and Hollywoods out there have eliminated VHS, which has driven the market elsewhere. Grocery has still embraced it because there are so many people out there with VCRs yet. We still have a very good business with VHS, at least in catalog. However, new releases in VHS have slowed way down, and our DVD rentals have picked up that slack," Gettner said.

"Our stores continue to get more and more DVD all the time. It's just a space issue in how we are accommodating all of this," he said.

A year from now, video rental will still be doing well, Gettner predicted, but balancing DVD and VHS inventory will be an ongoing challenge. "We have to do what the market is dictating," he said.

"In the future, I think VHS will eventually be out of the picture, but that is a ways off," said Laura Fisher, video coordinator, Martin's Super Markets, South Bend, Ind.

However, that trend is already taking shape. "There is a higher rental of DVDs over VHS in our departments, compared to sell-through where it is still 50-50." Fisher attributes much of that to customers wanting to see if movies are worth it before committing to a $20 or more purchase.

Martin's has video rental in six of its 19 stores, and some departments are doing better than others, Fisher said. "We have a couple of stores that do very well with it, and some others where they just basically get by and it is a customer service," she said.

As the Video Market Turns

Turns, or the number of time individual video units are rented, show the strength of DVD and a slackening interest in VHS

Year VHS Rental Turns DVD Rental Turns Total Rental Turns

2000 2.6 Billion 168 Million 2.8 Billion

2001 2.55 Billion 445 Million 3.0 Billion

2002 2.02 Billion 915 Million 2.9 Billion

Source: Video Software Dealers Association VidTrac