EYES ON THE DIGITAL PRIZE

ORLANDO, Fla. -- Ready or not, here comes digital photography.market nonfood executives are trying to figure out their move into digital photo printing.It's safe to say that uncertainty reigns, especially among those who have little firsthand experience of digital photography.The challenges are many: expensive equipment that is decreasing rapidly in price; customer education; store-level training;

ORLANDO, Fla. -- Ready or not, here comes digital photography.

market nonfood executives are trying to figure out their move into digital photo printing.

It's safe to say that uncertainty reigns, especially among those who have little firsthand experience of digital photography.

The challenges are many: expensive equipment that is decreasing rapidly in price; customer education; store-level training; and the worry that mass merchants and drug stores may already have a significant leg up on the supermarket channel.

However, it is still worthwhile for retailers to pursue this market, according to the results of a study presented at the roundtable by Evelyn Lewinter, vice president, food channel sales, Fuji Photo Film U.S.A., Valhalla, N.Y. Digital camera sales will continue to increase while film camera sales decline. Camera phone sales will be incremental to digital cameras, digital prints will overtake analog prints, and retail will remain the primary source of printed images, whether digital or analog.

These and other issues were discussed at a roundtable during a recent General Merchandise Marketing Conference of the General Merchandise Distributors Council, Colorado Springs, Colo., and moderated by veteran nonfood journalist Glenn Snyder of Snyder Consulting, Mamaroneck, N.Y.

Participating were:

Jim Donnelly, president, General Merchandise Services, Bellefontaine, Ohio, a division of Nash Finch, Minneapolis.

Anthea Jones, GM director, Bi-Lo, Greenville, S.C., a division of Ahold USA, Quincy, Mass. Lewinter of Fuji.

Pat Linton, GM/photo category manager, Valu Merchandisers, Kansas City, Mo.

David Lowe, director, GM/HBC/Specialty Foods, K-VA-T Food Stores, Abingdon, Va.

Don Polsi, vice president, marketing development, seasonal/promotions, Imperial Distributors, Auburn, Mass.

Dan Spears, GM director, Ingles Markets, Asheville, N.C.

SNYDER: Let's start from where you are now: one-hour labs and/or drop-boxes in your stores.

SPEARS: No, not mine!

SNYDER: You're kidding. You are not offering film processing in any way at all?

SPEARS: Nope. We did have drop-boxes in days gone by, but in many rural areas, the film finisher couldn't get enough rolls per week to make it pay, so we dropped it from all stores.

SNYDER: So you're starting from scratch in photo. Maybe that's good.

SPEARS: I think so, hope so. We don't have any equipment investment that we're stuck with, and we're wide open to any new ideas.

LOWE: We purchased several stores from another chain that had photo labs. We found the expense of running them was too high, so we yanked them out. I made a deal with a guy to provide film pickup, but if the number of rolls fell below a certain number, you had to pay him for a drop service. It wasn't worth it, so I turned to a local guy who has a processor and a photography store. Now, we pick up the bags from the stores where we have drop-boxes, bring them to the warehouse, develop them, fill the bags, and send them back to the stores. Two-day service. We're doing pretty good with that. It's growing. SNYDER: Anything going on with digital?

LOWE: We're working on that now. We have lined up a Web site that customers can send their pictures to. The processor will print them, and customers can pick them up at their store. This is probably six to nine months away. We have to be comfortable with the way it works. We sure don't want to disappoint customers.

SNYDER: Sounds interesting. What do you think, Evelyn?

LEWINTER: The customers must get very comfortable with uploading pictures and picking them up at the store. As a bonus, you get that person back to do some shopping.

JONES: At Bi-Lo, we're working on some tests with both Kodak and Fuji. They're going to roll them out by store cluster: inner- city stores, rural stores. What we're going to do is strategically look at the ones that we can zone when they have an advertising program. In a few months, we're going to test with a small group of stores within a cluster. We're looking forward to it. Have to see if it works.

SNYDER: Freestanding or with mini-labs? And if freestanding, what about the customer assistance problem?

JONES: We've done some other tests with a DVD kiosk where customers come in, rent a DVD, stick in their credit card, and receive the DVD. They can do that themselves. So we're going to do the same type of thing for photo, set up a similar program, and see if it works.

SNYDER: Do you have any experience with labs?

JONES: Oh, yes. Some of the stores will keep their photo labs, but the test will be in stores without them.

LOWE: I've got mixed concerns. I have some rural stores and mountain stores where there are no malls nearby. Part of me wonders if they're the kind of folks who'll take to digital. Meantime, I've made a deal to test a couple of processors in my better stores to see if they're worth the expense. The initial outlay is huge, around $25,000.

SNYDER: That's huge?

LOWE: Well, it's a risk. Am I going to put them in 88 stores? At $25,000 each, my return on investment would have to be pretty good and pretty fast.

SNYDER: But you could try out a few at a time, couldn't you?

LOWE: Right. We're going to do it in two of our better stores and see how it works out. I have an agreement that they're going to leave them there for 90 days to test and see, without any expense to me.

LINTON: We've got photo labs for one-hour processing in about 50 of our stores. They do a really good job because of weekly advertising -- that's what keeps them going. SNYDER: Conventional film? What about digital?

LINTON: Conventional film, yes. We're lacking on digital, pretty much. We do have several large-volume stores and we've done a few tests with kiosks, three or four stores out of 20, but it didn't work too well because we couldn't advertise it groupwide.

SNYDER: You can't advertise for single stores? How about big signs and [point-of-purchase] materials?

LINTON: You can't just put up POP materials and signs. To be successful, you have to advertise group or chainwide, and you can't do that if all stores aren't offering the same things. We've displayed digital printer kiosks in our trade shows. We had three different types at our last show from two manufacturers.

SNYDER: Say an independent's store has good volume -- $300,000 a week in 30,000 square feet. If he wants to put in a digital kiosk, backed by signs, handbills, promotion, etc., but couldn't put heavy advertising behind it like a chain, you'd say stop, don't do it? Don't put it in?

LINTON: No, I'd never say that. I think they could succeed. But all other things equal, a chain with strong advertising could be more successful.

POLSI: At our last trade show, we brought in a digital printer kiosk. We actually sold nine machines to independents. Price didn't bother them because they were in areas where they felt that it would be a big point of difference for them to have a machine there, instead of driving those customers to CVS or Walgreens.

About two weeks ago -- for the first time -- I went into a CVS store and actually processed a memory card. Has anybody here done that? My wife is usually in charge of the picture department, but I knew I was coming to this workshop, so I wanted to be prepared. Duty calling, you know.

Well, we had just gotten a digital camera at Christmas and were a little nervous about using it. We used both cameras for two months. Went to a party and brought the digital and also the film camera just in case we fouled up. The point I'm trying to make is that in talking with many people, I find a problem here -- a lot of us are a little nervous about the whole digital thing. It gets no better when you walk up to a talking machine that's telling you what to do, and there may be people behind you who are snickering about how slow and dumb you are. So you absolutely must have a knowledgeable store employee to be near that machine and help out as needed.

SNYDER: It can be a real problem.

POLSI: Think about it and try it yourself. You've got to put a code number in and rap the keyboard many times and worry that your prints will come out right. I know the first thing supermarket executives are going to say, "How can we afford to do that -- find people who understand the machines and risk taking them away from their work?" I say, there's got to be a way -- courtesy counter people or someone -- because I think the first stores to do it are going to be a big step ahead of their competitors. Why let Wal-Mart and CVS and Walgreens walk away with the photo business?

The prices on digital cameras keep falling, and that's going to expand the market. And promotion -- at the CVS, the special that week was 50 prints for $10, usually 29 cents each. That's pretty economical. Promotion and education are key, and that includes seminars for store people. How about telling shoppers: Bring in your card today and we'll do your pictures for free.

SNYDER: Do you think that an independent could make a digital program work as well as a supermarket chain?

POLSI: Yes, because an independent has to make it work. It's a big investment for him. LEWINTER: You can get equipment from $6,000 to $25,000, first class for a kiosk with all the bells and whistles.

POLSI: The only fear I would have is that processing/printing machines are like computers. Whatever you buy today is going to be obsolete tomorrow.

LOWE: A machine offered to me last year for $29,000 is now available for $15,000.

SNYDER: Are you thinking that you could make that $15,000 back in a year?

LOWE: Probably not, but my thinking goes past a year.

SNYDER: What about leasing?

LEWINTER: All photo suppliers have leasing programs.

POLSI: Success will not be easy. It won't happen by accident.

DONNELLY: We're a wholesaler, servicing a lot of independent stores. We've had the same problem with film processing. No vendor wants to come in and pick up one or two rolls, come back with the prints, and find that there's nothing to pick up. So the digital side brings a true opportunity. No film processing to worry about. Good-bye drop-box.

On the chain side, one of our best customers is deep in the photo category with in-store labs. They're doing an excellent job, and they're no amateurs. They've been going to PMA [Photo Marketing Association International, Jackson, Mich.] shows and seminars for years. Photo's a big deal for them. It's tied into the video, near the video department, near dedicated personnel. They've been into digital for nearly two years and successful at it, going head-to-head with CVS.

SNYDER: Early birds for supermarkets with a strong photo program. They had a good base to go forward with digital.

DONNELLY: Like Don [Polsi], I have a digital camera. I use it and I am still a little scared of it, too. When I go for prints, there's no place nearby except for CVS and Wal-Mart. I won't go in Wal-Mart, so I go to CVS. You stand in line to use their machines. They have a program where you use your frequent shopper card. This past weekend, they offered 10 prints for the price of five. But getting your pictures can be time consuming, especially if you're behind a realtor who's printing up a whole bunch of pictures of houses. You don't want to just stand there in front of that machine and wait for the pictures to drop out. It does take some time.

POLSI: I was fascinated by the fact that your camera could almost completely screw up a picture and that the machine could fix it. I didn't just put my card in and print 50 prints. I put the card in and for probably 25 out of 50, I played with them. Different cropping, lighting and so forth. Whether it's your daughter, your son or a wedding, whatever, you want the pictures to be as perfect as possible, and the machine can do that if you take the time.

SNYDER: Overall, are we going to be better off in the average supermarket in, say, two to three years, in terms of dollars in the bank, comparing digital printing to conventional film processing?

DONNELLY: It depends on what we do with it. POLSI: The costs are coming down. The market is growing.

LOWE: We'll have to walk in or walk away. You know, I got a good surprise last year. We finished the year at a positive 9% in film. We ran a lot of multi-packs and did a lot of promotional things to drive the business. This year, so far, it's up about 5%. True, the company figure includes my mountain stores, but I have to ask myself, "OK, where's this film business going for me?" As for the digital craze, we have to get involved at some point. Otherwise, we'll be walking away from a market our customers want.

Say, did I mention that I'm selling cameras? I had digital cameras on sale for $69 and they did great. An awesome little camera.

LEWINTER: The digital solution. There are a lot of options out there, and I would say explore them. But you can't just expect to put in a piece of equipment and expect it to sell itself. It's got to have a lot of commitment behind it, including advertising.

SNYDER: It's going to be kind of scary for some nonfood managers, considering the capital investment involved, everything else going on in the stores and the terrific competition. Walking into a meeting and telling top management that you need "x" amount of dollars to get into the digital printing business doesn't sound like fun. You'll have to do the research and make a really good case for it.

LEWINTER: There's no doubt that digital is where the photo business -- and a lot of consumer interest -- is headed. If you wait too long to enter the business, waiting for equipment prices to fall even lower than they are so that your entry will be "cost-effective," you may have lost the business before you had a chance to get it.

POLSI: Let's not forget the leasing approach. You'll make a little less profit in the beginning, but with much less risk. Don't wait too long, thinking you'll make a big profit when you get around to it.