RENTAL KEEPS HANGING ON

Supermarket video rental is expected to keep doggedly hanging on at some chains and even grow in several others despite strong pressure from the burgeoning sell-through business and a variety of technological and channel alternatives ranging from Netflix.com to Wal-Mart and the reappearance of vending machines.The overall video rental business was basically flat in 2004, which was good news to many

Supermarket video rental is expected to keep doggedly hanging on at some chains and even grow in several others despite strong pressure from the burgeoning sell-through business and a variety of technological and channel alternatives ranging from Netflix.com to Wal-Mart and the reappearance of vending machines.

The overall video rental business was basically flat in 2004, which was good news to many given the advances of technologies like video on demand and TiVo, a hard-drive-based digital video recorder.

Revenue from the rental of VHS tapes and DVDs across all retail channels in the year just ended rose 0.4%, according to the Home Video Essentials product of Rentrak Corp., Portland, Ore. In the face of the immense sell-through product that has "bombarded" the market, said Andrew Miller, director of Rentrak's supermarket division, even so modest an increase should be viewed as a sign of strength.

There is little doubt that home video as a whole remains a growing force in American culture.

Consumers spent a record $21.2 billion buying and renting DVDs in 2004, according to DEG: The Digital Entertainment Group, Los Angeles.

DVD retail sales grew to $15.5 billion in 2004, an increase of 33% over 2003.

In addition, consumers spent $5.7 billion renting DVDs.

When including VHS sales and rental, the dollars spent on home video rose 9% over last year.

In the fourth quarter of 2004 alone, nearly 530 million DVDs shipped to retail, a 39% increase over the same period in 2003. There are currently some 29,000 DVD titles available across a wide variety of genres.

Retailers Speak

While many supermarket executives have seen rental fall off, others report it holding fast, while still more are working hard to spur growth.

Denis Oldani, director of video for Schnuck Markets, St. Louis, Mo., said DVD and video rentals are a "value-added service offered at specific Schnucks and [sister concept] Logli locations where the demand is present. The area has not experienced significant growth, but we do have a core group of customers who continue to rent from us."

In the coming months, Oldani noted, Schnucks hopes to energize sales with a variety of marketing and merchandising efforts designed to draw attention to new offerings. Over the course of the next two years, he added, "I believe the industry will see a decrease in the demand for VHS rentals due to the anticipated introduction of the portable DVD recorder."

"We do extremely well with rental," said Ray Wolsieffer, video specialist, Bashas' Markets, Chandler, Ariz. Forty-three of the chain's 161 stores have video departments, as will all new stores going forward.

In fact, Wolsieffer noted, "We do much better on rental than sell-through. Obviously, when they're underpricing at Target and Wal-Mart, we can't compete with them. They sell them for under MAP [Minimum Advertised Pricing]."

Bashas' ran a 62% gross profit on rentals for calendar '04, said Wolsieffer, "and it's still going strong. We still keep our rentals at an affordable rate, and we don't do any weird gimmicky stuff that confuses the consumer."

On the other hand, Laura Fisher, video coordinator for the 19-store Martin's Super Markets, South Bend, Ind., noted that she hasn't seen "any growth" in rentals of late. "They basically have been staying pretty much the same. It's better just to buy them. If you rent them a couple of times, you've basically paid for them." As a result, Martin's does "a lot better" with sell-through.

About 70% of movie rentals at Martin's are DVDs, said Fisher, and that percentage is climbing. "We hardly bring in any VHS. We bring in mostly DVD." Sales of DVDs far outstrip rentals by a margin of more than 2-to-1, she said.

Martin's has been using a variety of promotions to raise the profile of and build business in its video department. These have ranged from coloring contests and trivia questions to merchandise giveaways.

Fisher is dubious about an eventual comeback of video rentals. "There are just so many alternatives now, like that Netflix online service, where you never even have to leave your house. They mail a DVD to you and you send it back in a prepaid envelope, then they send you another. With programs like that, I don't see video rental making a big comeback."

"We're still in rental for the long haul," said Bob Gettner, video buyer/coordinator for 20-unit B&R Stores in Lincoln, Neb. "As long as video is profitable we're going to try to remain in it and do what we can to turn a profit. I believe our company's mentality is that video rental is still a viable offering that our shoppers want to see in our stores." Thirteen of the chain's stores, which operate under the Super Saver and Russ's Market banners, currently rent videos.

Like the others, Gettner said he plans to order "less and less VHS and more and more DVD because that's what has more demand. DVD will continue to take more space from VHS in B&R's stores." He said it is "tough to tell" whether rental may stage a comeback in supermarkets. DVD pricing certainly gives retailers the option to sell or rent, "and from what I've read people say nobody needs to buy everything." Indeed, the movie "Collateral" "really wasn't a good seller," he noted, but did strong rental business. He is quick to add, however, that rental revenue continues to decline despite "a good week here or there, and I don't see that changing much."

B&R bought no titles for sell-through in January, he said. "I felt everything would be more of a rental title, which may be proof positive that people are starting to rent more. I just didn't foresee anything that people were going to be beating doors down for." For rental, the chain picked up "Troy" and "Little Black Book."

Differing Viewpoints

On the state of video rental in supermarkets today, Rentrak's Miller said, "there is not much left" as far as supermarkets' share of the rental business. He estimated that there is only a relative handful of players in the nation today who are "meaningful players in the rental category." For the vast majority, "whatever rental sentiment might have been around has been replaced by the hot action of sell-through, even though nobody makes any money on it."

Others are more optimistic. Sean Bersell, vice president of public affairs for the Video Software Dealers Association in Encino, Calif., sees the future of supermarket rentals as "bright." "What tells us that is the number of supermarkets that engage in video rental," he said. "The people who had gotten out of it in the late '80s and early '90s are getting back into it. In talking to people in the supermarket industry, we know that it's a sector that is performing very well."

"DVD rental appears to be holding steady in the grocery class of trade," said Leslie Baker, vice president of sales, grocery and drug for video distributor Ingram Entertainment, La Vergne, Tenn. "The grocery retailers who support video rental show no signs of scaling back. The availability of video products and the one-stop-shopping concept provided by supermarkets saves consumers valuable time."

Ingram executives have faith that the rental market will steadily rebound as consumers become more selective with their DVD purchases. "DVD libraries have grown over the past few years," Baker said, "and consumers are realizing they haven't actually watched all the movies they've purchased."

The health of supermarket video rentals for the long term may well be more erratic than in the past, according to Martin's Fisher. "In the supermarket, it's obviously not what a customer is coming in there for. It's more of a service that we provide for them. So as long they keep using the service, it will still be there for them."

Rental and Food: The Big Picture

Before the rise of specialty retailers like Blockbuster and Hollywood Video, supermarkets were dominant in the video rental arena. They garnered as much as 15% of the market share. Through the '90s, however, many chains exited the rental business. As a result, their market share dropped to 5% to 6%, where it has remained.

"The growth of video stores eroded the business, and many grocers got out of it," said Andrew Miller, director of the supermarket division of Rentrak Corp., Portland, Ore. "Those who stayed and operated their departments professionally mostly did well. The rest are all done, and they're not coming back."

Miller pointed to Giant Eagle as perhaps the pre-eminent supermarket video rental success story. "They maintain 5,000- to 6,000-square-feet rental departments at many locations," he said. Regarding the large overhead involved in running big video specialty stores and the economic difficulties they face, he stated, "The last movie ever rented is probably going to be rented at a Giant Eagle store."

"Supermarkets have had kind of an on-again, off-again relationship with the whole video industry -- whether it's rental or sales," noted Bob Alexander, president of Alexander & Associates, New York. He claimed that rental and sell-through transactions are so different that "stores that are good at one aren't that good at another. It sounds really dumb, but it's all in the administration and operation. It's a really difficult combination to make work."

Supermarkets "ought to be one of the best places in the country for rental as far as I'm concerned, what with their store traffic and display capability," Alexander said. "It doesn't seem that hard to train your clerks on the supermarket side to do one thing and on the rental side to do another. Yet it doesn't seem to fit inside the same organization."

Partnering with a third-party operator in store -- he cited Blockbuster and Pueblo Markets in Puerto Rico as examples -- "seems to work best for rental," Alexander said. [Pueblo owns the Blockbuster franchise for Puerto Rico.] "What you're doing then is asking, 'Is this a floor space trade-off that I can live with?"'

"I've been in the supermarket video rental industry since 1982, and it's gone full cycle," explained Rentrak's Miller. "At one time, it was a gigantic business, but there has been a tremendous fallout over the years. Where is it right now? It probably has reached its low point. It's probably not going to get any worse than it is. However, it probably will get better."

Revenue sharing programs, such as Rentrak's, have made a big difference for many supermarkets with rental programs, he said. Even if sales remain flat, he added, operators are seeing greatly improved gross operating margins in the 50% to 60% range.

A possible indication that rental may remain strong is the mature penetration of DVD players. Some estimate two-thirds of Americans who will buy one already have. Those who comprise that final third, some reasoned, are by definition late adopters and are more price-sensitive. Therefore, they're more likely to rent than buy.

DEG estimated more than 80% of U.S. households will have at least one DVD player by year-end 2005. According to figures compiled by DEG based on data from the Consumer Electronics Association, Arlington, Va., retailers and manufacturers, 37 million DVD players were sold to U.S. consumers in 2004. That's a 10% increase over the previous year.

Supermarket rental could also gain should Blockbuster stumble, as some are predicting. The video specialist was expected to continue its efforts to purchase competitor Hollywood Entertainment, Portland, Ore. However, third-ranked Movie Gallery, Dothan, Ala., reached an agreement to buy Hollywood earlier this month. Meanwhile, Blockbuster has been trumpeting the elimination of late fees in most markets beginning Jan. 1, a decision one industry insider called a "$300-million crap shoot." According to estimates in media reports, late fees would have contributed $250 million to $300 million to Blockbuster's coffers in 2005.