DVD UPDATE

DVD is growing at a rate that surprises its most ardent supporters, and supermarkets are now taking greater advantage of it.Total DVD software units shipped to retailers since 1997 reached 1.6 billion by the end of the first quarter, according to the DVD Entertainment Group, Los Angeles, citing numbers compiled by Ernst & Young, New York. Meanwhile, the number of DVD players sold has reached 60.9

DVD is growing at a rate that surprises its most ardent supporters, and supermarkets are now taking greater advantage of it.

Total DVD software units shipped to retailers since 1997 reached 1.6 billion by the end of the first quarter, according to the DVD Entertainment Group, Los Angeles, citing numbers compiled by Ernst & Young, New York. Meanwhile, the number of DVD players sold has reached 60.9 million in 43 million U.S. households, which means more than 10 million have two or more players, the DVD Entertainment Group said, using numbers from the Consumer Electronics Association, Arlington, Va.

By the end of the year, more than half of U.S. households will have DVD players, the DVD Group predicted.

"For us, DVD continues to go up on a nice arc," said Greg Rediske, president, Video Management Co., Tacoma, Wash., which supplies rental programs to 120 stores and sell-through to 300 stores. "It's nothing dramatic, but every month, it's a little more."

"The prices on the players are so low, it makes it easier to convert over to DVD," said Brenda Vanover, director of video operations, K-VA-T Food Stores, Abingdon, Va.

"We see upside for DVD in the supermarket channel," said Bob Chapek, president, Buena Vista Home Entertainment, Burbank, Calif., and president, DVD Entertainment Group, Los Angeles. "This channel is underdeveloped relative to the demographic of the supermarket consumer base and has a tremendous opportunity with DVD to add value and convenience to the shopping experience for their consumer."

While some had expected DVD with its sell-through pricing to eclipse video rentals, rental had its strongest first quarter ever this year, adding incremental revenues to the overall video market, according to the Video Software Dealers Association, Encino, Calif. Consumers stepped up their rentals, but didn't cut back on purchases, industry observers said. VSDA reported $2.34 billion in total VHS and DVD rental revenues in the first quarter, surpassing the previous record of $2.26 billion set in 2001.

"We are doing really well with DVD," said Laura Fisher, video coordinator, Martin's Super Markets, South Bend, Ind. "A lot of our stores are running with about 70% DVD in rental," she said.

"Although some pundits positioned DVD as overwhelmingly a sell-through product which would undermine rental, the American consumer had other ideas," said Bo Andersen, president, Video Software Dealers Association, Encino, Calif. "There is now every indication that sell-through and rental can grow together. Consumers like both options and each is priced attractively."

"Supermarkets are well positioned to benefit, engaging consumers with low-cost rental and reasonably priced sell-through, along with unparalleled convenience," Andersen said.

More growth is expected as DVD players with recording capability come down in price. These machines will drop to under $400 by the end of this year, and could go as low as $300, reported In-Stat/MDR, a Scottsdale, Ariz., research firm. Shipments of DVD recorders will reach 32 million units in 2006, the research firm said.

"DVD is going to be huge," said Bob Gettner, video buyer/coordinator, B&R Stores, Lincoln, Neb. "Once they finally get those recordables out there at a decent price point, we are going to see VHS go away quickly."

But already Gettner sees DVD growing by "leaps and bounds. We are now tracking our VHS new releases vs. the DVD rentals, and in almost all my stores, DVD has surpassed VHS new release rentals." In some stores, DVD rentals are growing about 10% to 15% a week vs. VHS, with a company average of 5% to 7% increases, he said.

"It's even bigger than I thought it would be. I think there were just a tremendous number of players sold during the Christmas holiday," he said. B&R's rental mix has gone from 50-50 to 60% DVD to 40% VHS since November, he said.

One reason for the resurgence of rental, besides the burgeoning popularity of DVD, is DVD-owning consumers who have been on a movie-buying spree looking to rent again when it comes to films they don't really want to own, said Andrew Miller, direct, supermarket division, Rentrak Corp., Portland, Ore.

Last year, the rental market was "unhealthy" with lots of red ink, he said. "But this year it has been green, green, green, up, up, up. To me, that is the tipoff that DVD buyers are coming back into the rental market," he said.

"Low-cost DVD hardware and low-cost DVD software have created quite a sell-through opportunity for retail," noted Bill Bryant, vice president, sales, Ingram Entertainment, La Vergne, Tenn. "However, we must keep in mind that consumers will eventually become more selective with regard to the growth of their DVD libraries, creating many opportunities in the DVD rental category."

Rediske attributes the first-quarter uptick to more DVD owners, resulting from the sales of the low-priced players during the fourth quarter. "But it's also that the DVD owners tend to be more frequent renters. They are more excited about video, they are younger and they rent more movies," he said.

"I see continual gradual growth of DVD relative to VHS, and in general, rentals are higher than they were. Part of it is coming at the expense of VHS, but it is more of an increase in DVD. It is a healthy market at the moment," Rediske said.

The studios are monitoring the growth of DVD in supermarkets closely.

"The growth of DVD has been extremely strong dating back to the fourth quarter of 2002," said Jim Foster, senior vice president of sales and mass merchandisers and communications, Universal Music and Video Distribution, Universal City, Calif. "As the household penetration of DVD players has reached a broader audience, the grocery channel has been able to pick up more of the units sold. This will continue to increase as family product makes the transition to DVD from VHS." Supermarkets have a better chance of getting mothers to buy children's product in their stores than they have in appealing to those who got into the DVD market early, he said.

"I think it is continuing to sell extremely well," Foster said. "We are all waiting to see if there is going to be a slowdown and, as of the first quarter, it does not appear so. We had a huge January and February from the studios and great takeaway from the consumer perspective. The business as a whole seems to be very healthy and continuing to grow."

There was a time a year or two ago when the penetration of DVD players had not yet reached mass market levels and supermarkets were not heavily involved, said Kelly Sooter, head of domestic home entertainment, DreamWorks Home Entertainment, Glendale, Calif. As a result, they lost some of the video market share they had built up over the last decade. "With the explosion of DVD, they weren't able to maintain that market share. But over the last year, they started to become aggressive. What you are going to see is an ability for them to really start picking back up market share that they had lost," she said.

Supermarkets have done well with the major new releases, like "My Big Fat Greek Wedding" and "Harry Potter and the Chamber of Secrets," but there is great untapped potential for them in selling catalog product, said Rodney Saterwhite, vice president, retail business development, Warner Home Video, Burbank, Calif.

"We see many major grocers gearing up in catalog. They have realized that there is margin being left of the table by not selling catalog. Critical in the coming months will be store education and execution," he said.

"It's important to participate in both the new release segment and the value segment to satisfy consumers," Saterwhite said. The catalog trend will pick up as the year goes on as more racks are installed along with other necessary support systems. "I think we'll see significant distribution infrastructure being put in place by the third quarter."