A PLACE FOR PROFITS

Supermarkets are getting deeper into the sell-through business and earning greater margins as a result.In its seventh annual State of the Industry Report, SN found more retailers are expanding with sell-through sections. In a related development, margins for the respondents were significantly higher than in last year's survey. The ability to sell high-margin catalog and children's titles along with

Supermarkets are getting deeper into the sell-through business and earning greater margins as a result.

In its seventh annual State of the Industry Report, SN found more retailers are expanding with sell-through sections. In a related development, margins for the respondents were significantly higher than in last year's survey. The ability to sell high-margin catalog and children's titles along with the price-sensitive hits boosts the overall profitability of the sell-through category, noted industry observers.

"The strong and consistent release schedule for sell-through products for 1998 will enable supermarkets to capitalize on feature titles on a monthly basis throughout the year," said Bill Bryant, vice president for sales, grocery and drug at Ingram Entertainment, La Vergne, Tenn.

As a result of this, supermarkets will sell more of the higher-margin secondary and catalog product, he said. "In addition, the increased flow of $9.98 suggested-retail-price product will continue to spur impulse sales in supermarkets," said Bryant.

"I think there are wonderful opportunities in supermarkets to have something going in sell-through every month," said Kirk Kirkpatrick, vice president of marketing for WaxWorks Video Works, Owensboro, Ky. The big titles are important to supermarkets, but products like National Association for Stock Car Auto Racing videos or an Easter program carry much better margins and do very well, he said.

According to the study, 32.4% of respondents were expanding the number of sell-through sections, up from 19.1% last year, and 56.8% said they have an ongoing program in a permanent section, up from 46.8%. Correspondingly, a smaller percentage, 27%, said they only offer hit products sold from shippers. This number has gone down for four straight years, from a high of 45.1% in 1995, to 38.2% in 1996, to 31.9% in 1997.

Meanwhile, 47.3% said they offer low-priced (less than $10) in-and-out programs, up slightly from 44.7% last year, and 28.4% were diversifying their sell-through program into such products as games and CD-ROM computer software, up from 21.3%.

The less-than-$10 product is ideal for supermarkets, said Bryant. "Impulse sales are so great in this price-point category and margins are also good." The profits from these programs help offset lower margins on hit sell-through titles, improving the overall category performance, he said.

The average gross margin for sell-through was 17.7% in this year's survey, up substantially from 1997's 12%, which was a decline from 16.1% in 1996. Industry observers noted that 1996, the year covered by the 1997 survey, was a benchmark year for sell-through video in which many more units of the low-margin event titles were sold than in 1997, supplanting shelf and floor space that could have held higher-profit videos.

More retailers were buying sell-through products directly from a major studio, 13.5%, compared with 10.8% in 1997. The number cutting back or eliminating video sell-through was up slightly to 6.8% this year from 4.3% in 1997.

There was some deterioration in some merchandising approaches to sell-through, according to this survey. Fewer are selling products from the main shopping areas of the supermarkets, 58.1% this year compared with 88.1% last year. And the number selling only from secured areas or a service desk has increased steadily for three years, from 8.8% in 1996, to 10.6% in 1997, to 13.5% in 1998. This reflects a problem with shrink in some locations which is exacerbated by the low margins on hit titles.

But many in the industry say it is worth the risk. "Stores can increase their sell-through sales by up to 42% by positioning the product in the main shopping area of the store," said Bryant. "That's a dramatic increase."

The sell-through of non-children's theatrical movies, such as "Liar Liar" and "Men In Black," remains a strong component of supermarket video business, 31.6% of sell-through sales, down slightly from 33.2% in last year's survey.

Most supermarkets regard mass merchants like Wal-Mart as their main sell-through competitors, but other classes of trade are making inroads. When asked, "Are electronics superstores like Best Buy becoming more of a competitive force in sell-through video in your market area?" 51.3% said yes.

This year's survey provided some insight into one of the more perplexing sell-through problems: Why don't retailers actively cross merchandise videos with other departments' products more often?

The study found the number of hit sell-through videos actively cross merchandised with related tie-in partners has declined for the fourth consecutive year, to 2.3 titles, from 2.7 last year, 3.2 in 1996 and 4.0 in 1995.

Three of the four biggest obstacles to this kind of cross merchandising were internal, the survey found. No. 1 was "lack of time to coordinate with other departments," cited by 54.8%; "lack of follow-through at store level," was cited by 49.3%. "Getting other departments to give up display space," cited by 38.4%, tied for third with "lack of support from suppliers."

Other obstacles, as checked on the multiple-choice list, were: "short lead times," selected by 34.2%; "complexity or unattractiveness of cross promotional offers," by 32.9%; "difficulty in coordinating advertising," 27.4%; "lack of top-management support," 24.7%; and "internal difficulties assigning costs," 9.6%. Shrink-related concerns were written in by 6.8%, indicating that this may have scored higher on the list if it were included as a choice.

Movie and a Meal to Go

More retailers have tried movie and meal tie-ins with at least some success, and more are looking into it.

Sell-Through Margins Reflecting a move to more permanent sections and increased sales of higher-margin catalog inventory, respondents reported increased sell-through profits.

Average Sell-Through Margins Reported by Respondents

199817.7%

199712%

199616.1%

199519.3%