Many supermarkets hit the "eject" button on their video rental departments last year, and others are poised to do the same. Fast-forwarding into 2002 and beyond, however, unveils a potentially brighter picture for video rental.
This year several trends are emerging that could make the category more profitable, including a potential return to a flat pricing structure for purchasing rental VHS and the increasing consumer adoption of DVD.
Supermarkets' video departments remain in limbo, however. Certainly supermarkets are committed to sell-through, at least of children's titles. But many supermarket operators seem to be questioning the viability of the rental department.
"Our rentals are down considerably," said Ernie Gempeler, owner, Gempeler's, Monticello, Wis. "If it falls off much more, I'm considering abandoning it."
While many supermarkets have cited competition from video superstores like Blockbuster and Hollywood Video that offer thousands of titles, Gempeler said satellite and cable television also are offering entertainment alternatives.
"More and more people are on the [satellite] dish, they get 300 or 400 channels, so they don't have as much need for video anymore," said Gempeler.
He said his video department now stocks only about 600 to 700 titles, down from 1,000 in recent years. Revenues also have fallen sharply, he said.
"We need bad weather," he joked during a warm spell last month.
Other independent supermarkets polled by SN offered similar assessments of the category.
"Actually, video's not doing that well," said Ralph Larrabee, store manager, Hansen's IGA, Bangor, Wis. "I think the only reason we keep it in the store is that we're the only video rental place around, so it's a convenience for our customers."
He said his store, one of five Hansen's IGAs in the area that offer video rental, has a 24-foot section, about one fourth of which is now occupied by DVD titles.
"There's a lot more maintenance to video than some people realize," he said. "You have to continually update your selections. You have to call people to return movies that are late."
Several chains scaled back their video rental operations in 2001, including Kroger, Cincinnati; Genuardi's, Norristown, Pa., and Foodarama, a ShopRite operator in Freehold, N.J.
But some people in the industry said those closings just receive an inordinate amount of publicity, while in other supermarket chains video rental is growing.
"Actually, the number of supermarket rental departments removed during the 2001 calendar year is low, compared to the number opened by other chains," said Bill Bryant, vice president, grocery and drug, Ingram Entertainment, La Vergne, Tenn. "When a company announces it is removing some or all of its rental departments, it always seems to make front page news."
One initiative that should boost supermarkets' video rental operations in 2002 is the increasing adoption by studios of flat pricing for VHS rental. MGM's August experiment, in which theatrical hit "Hannibal" was priced at a flat rate of $45, was embraced by retailers, and the Santa Monica, Calif.-based studio began applying the single-price structure to additional titles, including the moderate hit "Heartbreakers," at $40.
Since that time, other studios have started edging toward flat pricing, including Columbia Tri-Star, Culver City, Calif., which said last month that it would use the flat-pricing structure for all of its B-titles, rather than the tiered-pricing programs that offer complicated discount schemes based on the number of copies acquired.
Paul Richardville, director of video, Reasor's, Tahlequah, Okla., said he despises the tiered pricing system.
"I hope the programs go away," he said. "As far as I'm concerned, I'm with every other retailer on the planet. They're nothing but a headache, and I'd love to see them go away."
Jenny Maddox, director of advertising and marketing, WaxWorks, Owensboro, Ky., said the retailers her distribution firm supplies are showing their support of flat pricing by buying more copies of titles.
"They are tired of the programs, and [of the studios] pushing the product down," she said. "They want to get back to buying the product that works for their store."
One of the benefits of flat pricing is that it allows retailers to be more diversified in their selections, Maddox said. Rather than having to blow their entire budgets on a few hit movies to meet the minimum purchase requirements, retailers can spread their purchases out over a broader selection.
In addition, flat pricing allows retailers to tailor their copy depth to individual store demographics.
"It's less complicated, pure and simple," said Dennis Shaver, president, Shaver's, a three-unit supermarket chain based in Boise, Idaho. "We're buying the titles based on what we think the rental standing is going to be rather than meeting certain goals to meet the deal pricing."
Bryant of Ingram said it will take time for the industry to revert back to flat pricing.
"Five years ago, flat pricing was offered by all the studios," he said. "Retailers were profitable, distribution was profitable and studios were profitable. A return to flat pricing would put all parties back on solid ground, and retailers will purchase product to satisfy their customers, based on demand."
The growing acceptance of the DVD format also promises to improve the profitability of rental.
Bryant said DVD currently provides about 15% to 25% of video rental revenue in supermarkets, and he expects the percentage to grow as DVD hardware increases its penetration in the marketplace. He said 30% of households are expected to have DVD players by this month, including those that were incorporated into game players like Microsoft's Xbox and Sony's PlayStation 2.
Maddox of WaxWorks said she expects to see DVDs grow to 50% of revenues before long.
"Once we get those new DVD players for Christmas, we're going to look for things to watch," she said. "Not just the new releases. People are going to be looking for catalog as well. People are going to look for a title like 'Jaws,' and say, 'That would be great on DVD."'
She also pointed out that the format had begun to trickle into children's titles, and said she expected that trend to continue as more and more classic family titles get released on DVD.
The increasing popularity of DVD is good news for rental, she said, because supermarkets can purchase the titles much cheaper than they can buy VHS titles, and rent them at the same price, thus increasing margins.
"We're hoping for a growth spurt after the holiday," said Shaver in an interview shortly before Christmas. "That's what happened a year ago."
He noted, however, that the increase in demand for DVD at his stores stayed about the same throughout 2001 after the January bump. His stores participated with the local Video Software Dealers Association to conduct some promotions to drive interest in the DVD format.
The downside of DVD's increasing popularity, he pointed out, is the fact that retailers must double-stock many titles in both DVD and VHS.
Some retailers said that might not be a problem for long, however.
"Video cassettes are going to be like the old eight-tracks," said Larrabee of Hansen's IGA, which, for now, stocks about 25% of its movie rental inventory with DVD titles.