STARTING STRONG

Supermarket video operators expect a year of transition in 2004.During the early months of 2003, the video business was driven by some exceptionally strong releases. This year, the release schedule has fewer hits, but retailers still expect a strong start and a continued evolution of the business.The linchpin of change, they say, will be DVD. Sales of low-priced players during the Christmas season

Supermarket video operators expect a year of transition in 2004.

During the early months of 2003, the video business was driven by some exceptionally strong releases. This year, the release schedule has fewer hits, but retailers still expect a strong start and a continued evolution of the business.

The linchpin of change, they say, will be DVD. Sales of low-priced players during the Christmas season will spark video business in the normally slow first quarter. Momentum will then increase throughout the year with the balance of power shifting from VHS to DVD. "DVD players have gotten so inexpensive that everybody is going to be owning one soon. That will be the most dominating factor next year. DVD rentals will go through the roof," predicted Bob Gettner, video buyer/coordinator, B&R Stores, Lincoln, Neb.

"DVD prices will definitely make a difference and will further put a nail in the coffin of VHS," agreed Chuck Lindner, video buyer, Doug's Supermarkets, Warroad, Minn.

One retail outlet in South Bend, Ind., was selling DVD players for $19.99. "I'm sure they were gone in the first few minutes," said Laura Fisher, video coordinator for nearby Martin's Super Markets. That kind of pricing on the hardware "will have a big impact on the first quarter."

Chuck Porter, director, Iggle entertainment and video at Pittsburgh-based Giant Eagle, said a key driver of business in the new year will be consumers buying a second DVD player, which might go into children's rooms. "I think we will see a shift in product," he said, "with people starting to buy more children's DVDs."

Video Management Co. in Tacoma, Wash., is preparing for a sales bump in January by bringing in a large assortment of low-priced DVDs for sell-through promotions. Greg Rediske, president, predicted a spike in rental business as the move to DVD continues in his markets. The average now for DVD is 35% of rentals.

"DVD rental and sell-through will steadily increase as supermarket retailers continue to transition their product mix from VHS to DVD," said Leslie Baker, vice president, sales, grocery and drug, Ingram Entertainment, La Vergne, Tenn. "With DVD as the predominant format, purchases average 70/30 DVD to VHS for sell-through pre-packs. Rental purchases are 4-to-1 DVD to VHS, depending on the title and content. For instance, children's titles have a higher VHS ratio than titles geared towards adults.

"The migration from VHS to DVD will continue through 2004 with purchases anticipated to reach 80/20 DVD to VHS by year-end," she said.

The ratio at Food City stores operated by K-VA-T, Abingdon, Va., is now about 50/50, according to Brenda Vanover, director of video operations. She predicted an increase to 60/40 and maybe even 70/30 with the demand rising for the DVD format.

"Rental will still be strong," she said. "I think most consumers are renting first, then purchasing. Since the DVD format will continue to increase, we should see higher profit margins on rentals. Sell-through margins are not as high as I would like to see, especially on Disney titles. Therefore, I am looking forward to a huge rental first quarter."

The product mix at Giant Eagle today is 60/40 in favor of DVD. Last year, the numbers were reversed, and Porter said he expects it to be 80/20 for DVD a year from now.

"DVD new releases -- the first 30 days of release -- are already 70% of the business. What's dragging it down in our chain is catalog, which right now is 50/50. As we get more DVD catalog in, it will drive that number up," he said.

"Next year, I really do see an opportunity to take advantage of the catalog product that's out there," he added. "With the increased number of DVD players -- and the second one in people's homes -- there's going to be a huge interest in buying DVDs."

Porter is enthusiastic about both DVD rental and sell-through, but will focus on the latter in 2004. He plans to develop catalog promotions and get the product in front of customers with special fixtures, including some outside the video department.

"I think there's a huge opportunity out there -- for the supermarket industry at least -- to get their fair share of the DVD sell-through business, which we have not done in the past as a whole," he said.

Perhaps theft is one of the reasons why. For supermarkets, feature sell-through titles fall into a targeted category that includes cosmetics and razor blades.

"But by utilizing security options such as long boxes and source tagging, shrinkage will be reduced," said Baker of Ingram. "The most effective way to reduce shrinkage for the video category is to merchandise the product in a high profile area, near the registers where store personnel can monitor the display. Moving forward, as retail pricing continues to decline, shrink should become less of an issue."

In terms of new releases, Porter of Giant Eagle expects the first quarter to stack up well against last year's slate. Meanwhile, Vanover of K-VA-T predicted strong rentals for the following releases: "Brother Bear," "American Wedding," "Good Boy," "Secondhand Lions," "Dr. Seuss' The Cat in the Hat," "School of Rock" and "Spy Kids 3-D." But with the 3-D movie, "I am concerned over how the glasses will go over on rental," she added.

Baker of Ingram added other titles: "Radio," "Open Range" and "The Matrix Revolutions."

"These are great titles that should perform well on home video and generate strong retail sales," she said.

Most retailers interviewed by SN were not anticipating a boost in promotional tie-ins with grocery manufacturers in 2004. They said there was more activity years ago.

"There's really not a lot. Mostly it's just the kid's movies that we've seen grocery tie-ins with," said Fisher of Martin's Super Markets. "We'd like to see more. I think there has been a slow down. I don't attribute it to anything except fewer marketing funds."

Rediske of Video Management Co. has given up on grocery tie-ins. "After years of trying to do it and working with various manufacturers and the brokers and so forth, it never works. It probably works for the big people, but for us, it never gets translated down to store level."

Baker of Ingram said grocery tie-ins are popular with retailers provided they are operationally easy to execute at store level. Tie-ins promoting a feature film and a free 12-pack of a national-brand soda are the most successful.

"Promotions that require a consumer to purchase three or more items can be confusing to the consumer unless the items are merchandised together," she said. "I do anticipate supermarket retailers continuing to embrace tie-ins as this gives them a way to compete with mass merchants."

Mass merchant loss leader pricing on feature sell-through titles will continue in 2004, according to Baker. Supermarkets can compete with mass merchants by working closely with their studio and distribution partners to develop aggressive cross promotions.

"Focusing the tie-ins on grocery items not available at mass merchant outlets provides the supermarket retailer a distinct advantage," she said. "In addition, supermarkets supporting dedicated sell-through sections in their stores can capitalize on existing foot traffic that drives high margin sales. Having a good complement of catalog product with retail price points of $14.99 and below will increase the overall margin of the entire video category. Video product is exciting and consumers thirst for this product. Supermarket retailers that are aggressive in the video category, focus on reducing shrink and capitalize on existing foot traffic by offering strong cross promotions will be very successful in 2004."