SELL-THROUGH PROFITS TAKING HITS

The lack of margin on hit titles remains the biggest obstacle to sell-through growth, said participants in SN's video roundtable.d Sharon Stagner, merchandising coordinator at Seaway Food Town, Maumee, Ohio.This will become a bigger issue later in the year as the number of major titles going direct from theatrical to the sell-through market increases, said David Ingram, vice president of major accounts/special

The lack of margin on hit titles remains the biggest obstacle to sell-through growth, said participants in SN's video roundtable.

d Sharon Stagner, merchandising coordinator at Seaway Food Town, Maumee, Ohio.

This will become a bigger issue later in the year as the number of major titles going direct from theatrical to the sell-through market increases, said David Ingram, vice president of major accounts/special markets at Ingram Entertainment, La Vergne, Tenn.

"We're going to have twice as many hits this year as we did in 1993," said Ingram. "That's a huge concern to us because of returns. It should be a big concern to you retailers as well, because those hits are going to be a much bigger percentage of your sell-through, and they are going to bring down the overall margins."

Minimum advertised pricing, or MAP, does not discourage discount stores from selling the hit titles as loss leaders, roundtable participants agreed.

"It's like anything else. You can find a way around it," said Teri Severinsen, manager of video services at Roundy's, Pewaukee, Wis. However, minimum advertised pricing "creates a consistency in the customer's mind because they see that one price point," she noted.

Pricing on the top titles is a good-news-bad-news situation, said David Pierce, senior vice president of sales at Columbia TriStar Home Video, Burbank, Calif. "The good news is that video is still a very hot commodity at this point, and that's why it is being priced so aggressively," he said. "The bad news is that it is being used as a loss-leader."

In this segment of the SN roundtable, participants also addressed product returns, the use of sell-through-priced titles to bolster rental offerings and the fitness category:

SN: Which has the greatest growth potential for supermarkets: rental or sell-through?

SEVERINSEN: Sell-through.

INGRAM: Let's define growth. Is it growth in sales or growth in profitability?

FINCHER: That's very important.

SN: We're talking sales.

STAGNER: Well, we like profitability.

SN: Is profitability improving on sell-through?

STAGNER: No. Profitability is not there with sell-through because of the pricing on the hits by the discounters. You can't make money.

SEVERINSEN: It is unfortunate because in most cases, we have a very limited area to work with. There is so much sell-through out there, and we try to satisfy the customer as best we can.

We're mainly bringing in the top titles, which we don't make any money on. It would be very nice to have an area in the stores dedicated to sell-through, and I'd love to do it in my stores. Our customers should be able to come in at any time and know that we've got sell-through products available. I know you can make a profit on some of those other titles.

STAGNER: We have regular sell-through sections in most of our stores. In fact, we have them in more stores than the 40 that have rental departments. It's been growing, but it's slow. It helps to reinforce the library concept in the customer's mind.

PIERCE: Consumers are going into your locations to spend money. They actually bring cash out of their pocket, or they're writing a check. Psychologically they are there to make a purchase. Just from that psychological standpoint, there's a huge opportunity to be that much further ahead in the sell-through business.

INGRAM: We're going to have twice as many hits this year as we did in 1993. That's a huge concern to us because of returns.

It should be a big concern to you retailers as well because those hits are going to be a much bigger percentage of your sell-through, and they are going to bring down the overall margins. It's going to be tough for retailers, and it is going to be tough for distributors.

MUELDENER: We need to get cooperation amongst the three of us: the distributor, the retailer and the studio. We need to keep the distributor healthy by increasing the number of tapes they are allowed to return [back to the studios] on particular A titles. This will in turn enable retailers to put in greater quantities and make events out of those releases and establish them as extra-special titles in the store.

INGRAM: There are two huge positives. One is when you rent them, you pay such a low price that you are sure to get your money back quickly. The other positive is that the big hits are going to make the whole video idea more exciting. There's lots of advertising on television. It gets people focused on video and gets them thinking about going back to the video department and renting tapes.

PIERCE: It is good news, bad news. The good news is that video is still a very hot commodity at this point. That's why it's being priced so aggressively. The retailers are saying, "We're going to drive consumers in with this videocassette."

It's fantastic for our industry that interest in the product is that high.

The bad news is that it's being used as a loss-leader.

The studios are looking at family-oriented product and how they can push the window of producing a family title and then the opportunity for sell-through. That's why you're seeing the proliferation of these titles this year.

Companies are starting to look at a model where they can produce a title for X amount, and then get X amount from box office and X amount from sell-through video. The good news is there's an evolution to a greater number of sell-through titles. It is not only going to impact supermarkets but also video specialists, mass merchants and deep discounters.

Ultimately, a greater number of these titles could impact the profitability of the discounter. They are going to say, "Look at how much volume is happening with X number of titles. Can we still afford to do this?" It could be several years down the road before that evolution takes hold, but the product flow is going to be there. There's no mystery to it. The studios are looking to produce for that segment of the market.

INGRAM: That's scary for distribution because you've got four times the amount of product for sell-through going through at virtually no margin. We've got to make margin somewhere.

SEVERINSEN: My stores are being more conservative with their purchases.

Have you noticed if the smaller independent video stores are purchasing less now? It seems like the market is going to be eventually narrowed down to the mass merchants on those titles, because none of us are making money on them.

INGRAM: Generally, although a lot of small video stores are dedicating more space to sell-through, most of them are just using these feature titles to enhance their rental margins.

FINCHER: We're on a roller coaster, as a culture focused on price. As good business people, we have to refocus from price to value, and there isn't a greater opportunity to do this than in supermarkets. This is especially true for retailers in both the rental and sell-through businesses.

We are trying to help our retailers grab the momentum and excitement that comes with sell-through features and then use that momentum to promote the rental department, or another department in the general merchandise category. That's where the focus has to be.

The truth is we cannot control what the market will bear price-wise. But we do have control over how we steer our customers. That's number one.

Number two, it demands that we have good managers. The three managers of different style retailers here are an excellent example. Senior management has put a commitment in place to support them and each one has been really successful.

You have to put a full focus on video. It still amazes how many retailers are still doing it as a sideline -- it's the last file in their file drawer.

Look at Best Buy, which is a tremendous retailer of electronics goods. They will use the momentum from a feature sell-through piece to drive traffic and pick up the add-on sales. The opportunities are great. But it is a dangerous time for a distributor because it's so expensive to do business this way.

SN: Do minimum advertised prices work?

STAGNER: Obviously not.

SEVERINSEN: Kirk [Mueldener] made a point that it creates consistency so that consumers see one price point. But there are ways to get around everything. On a recent major animated title, Best Buy totally violated it -- they violated the MAP and they violated the street date.

INGRAM: But they don't care.

SEVERINSEN: That's right. They don't care. That's what I'm saying.

There's two ways around it. Either you have an attitude of, "Forget it, we don't care," or do like Wal-Mart does and stick by the guidelines in the advertised price, but that's not your price in the store.

But I agree with Kirk that, it creates a consistency in the customer's mind because they see that one price point.

I wonder why we bother with suggested retail anymore? Let's just come out with whatever the MAP is and be done with it. What does suggested retail mean now? It's $24.99, but MAP is $15.75.

PIERCE: On "Teenage Mutant Ninja Turtles 3," we avoided suggested retail. We went out with one wholesale price to the marketplace. Suggested retail pricing really becomes unnecessary -- pricing is a function of where you plant your wholesale.

SEVERINSEN: I agree. It's probably unnecessary. It's confusing for the customer to see a product with a suggested retail of $24.99, yet most people are selling it for $13, $14, $15. But what about the poor guys who are trying to sell it for $19 or $20?

INGRAM: A lot of people don't like to buy something that doesn't have a price on it.

SEVERINSEN: That's true. They are not aware of what the value is. But that's what I'm trying to say: What is the value?

FINCHER: Look at movies that come out with the expectation of selling between 2.5 million and 4.5 million units. That's where the profitability lies in the sell-through business for merchants, because that's the stuff that's not going to be sold below cost. You can still make a couple of bucks on those titles.

INGRAM: To me, 4 million units is still in the realm of the features. If you look at a list of the top 10 Disney titles, the lowest one is probably around 4 million.

FINCHER: I was thinking about a title like "Once Upon a Forest." That's one that I saw retailers make a couple of bucks on.

INGRAM: It was at the lower end -- around 2 million.

PIERCE: If you get below 2 million units, you have that opportunity. But if you start to get up to 2.5 million to 3.5 million units, those are great numbers.

SN: How are special-interest videos, including health and fitness, doing in the stores? Are you making more of a commitment to that type of product?

STAGNER: We make a concerted effort to bring in fitness titles. We try to hit different segments so that we can get a higher price point and not just the $15 price point on the hits.

BERNS: We do a lot of in and outs, and then the products that sell 52 weeks a year. Those titles fall into two categories: children's/family and fitness.

We talked about the problems with the hits and how we don't make money on them. But we've seen the hits drive the consumer in and then we can get the suggested retail price, or very close to it, on the children's/family or fitness titles. It's a 52-week-a-year commitment for us.

FINCHER: When you look at a title like "The Fugitive," the return on investment on the rental side is 500% to 600%. Phenomenal. I remember some numbers on "Honey, I Shrunk the Kids." The investment for the store for 20 copies was something like $300 and the gross was $4,600. That is very difficult to even imagine.

BERNS: You may find that over time, "Mrs. Doubtfire" on the rental side has the greatest ROI of any title in history.

FINCHER: The supermarkets are able to manage those sell-through titles on both sides of those opportunities -- rental and sell-through. The mass merchants are only able to lose money on one side.

SN: How are the fitness and other special-interest videos doing?

FINCHER: How did Susan Powter's tape do for your company, Suzanne?

SCHAFER: Her infomercials on "Stop the Insanity" were so strong, they really pushed it through at retail. Consumers could buy the whole package for $100, or just purchase her video for $19.95 or under. We are expecting some very large sales on her new title. I'd like to know, what times of the year retailers promote fitness videos?

STAGNER: Generally in January and then in early September.

SCHAFER: After our heavy fitness promotions in January, we saw some returns from the grocery channel. So I'm wondering if January is still the best time to promote fitness titles. Retail in general is at a lower point in January, but March-April is a time when these titles sell better. After promoting fitness in January, the stores are just starting to pull the product out in March when it is starting to sell. If the products had been left in there a bit longer, you would have seen more sales generated.

INGRAM: But you need to hit that open window, though, and January is a very open window. We all know what happens in March.