Supermarket video continued its meteoric rise last year, and it is projected to become a $3 billion category this year.
Although there are some signs that this expansion may be slowing, SN's fourth-annual State of the Industry Report on Supermarket Video found a robust category that may yet pack a few surprises for its skeptics.
Total video revenues for supermarkets in 1994 rose 20.2% to $2.68 billion, according to the report. Consumer demand for convenience -- and high-powered marketing by the big studios and video distributors -- are creating a dynamic force for traffic, profits and cross-merchandising in supermarkets. The survey that formed the basis for the report was conducted and tabulated for SN by the Market Research Department of Fairchild Publications, New York, which publishes SN. Information from retailers, suppliers and other research companies augmented the survey data. A questionnaire was mailed in December to supermarket chains, independents and wholesalers across the country. The results reflect video rentals at 2,090 supermarkets and ongoing sell-through activity at 3,215 stores. Survey respondents included 54 companies representing 6,663 stores in 1994. The survey results are based only on responses from companies now active in home video. Among the key trends revealed by this year's study:
Rental and sell-through volume grew smartly in supermarkets last year, easily outpacing the overall video industry.
While rental growth will slow to single digits in 1995, sell-through will continue to post strong increases, and the total supermarket video category will top $3 billion.
Retailers are putting more emphasis on new releases in both rental and sell-through. "We've had positive growth every single quarter on a same-store basis, although maybe not as high a percentage growth as the previous year," said Sharon Stagner, merchandising coordinator at Seaway Food Town, Maumee, Ohio. "Video is still very much a growing market for us," said Gary Schloss, vice president of general merchandise at Carr Gottstein Foods, Anchorage, Alaska. "We will take every opportunity to expand and grow our departments," he said. Glenn Andriano, a Brentwood, Tenn.-based consultant specializing in supermarket video, agreed. "Supermarkets are still growing at a slightly accelerated rate when compared to the rest of the video industry. Because you have so many two-income families, it's a matter of convenience. The store-within-a-store concept suits the needs of the marketplace," he said. "We still feel that the future is very, very bright," said Bill Glaseman, video specialist at Bashas' Markets, Chandler, Ariz. "We are opening additional stores with video and, where we remodel, we put video into those stores depending on the space that is available. From Bashas' standpoint, they are very, very high on the rental program," he said.
GROWTH TRENDS
Video revenues in 1994 met the numbers projected in last year's video survey. Total dollar volume increased 20.2% last year to $2.68 billion, up from $2.23 billion in 1993. Rental revenues went up 18.4% to $1.99 billion from $1.68 billion in 1993, while sell-through rose 25.8% to $696.3 million from $553.5 million. Last year, SN projected total video sales of $2.65 billion for 1994, with rental reaching $2 billion and sell-through going to $649 million. SN projects a lower growth rate overall this year, hindered by slowing rental expansion. Total sales should grow 13.1% to reach $3.03 billion, with sell-through increasing 23.6% to $860.6 million and rental rising only 9% to $2.17 billion. "We are still seeing some healthy expansion in supermarket video," said David Ingram, president of Ingram Entertainment, La Vergne, Tenn. "Video is one way that they can make an above-average return on their investment, and supermarkets have the good real estate. For those that know how to do video or are learning how to do video, it makes a lot of sense," he said. "The supermarket business is steadily increasing as a channel of distribution for the home video industry," said Dick Kelly, president of Cambridge Associates, Stamford, Conn., a consulting firm. "As the prices of video programs continue to erode, supermarkets will become an even greater percentage of the industry for sell-through," he said. The video industry is growing at a slower rate than supermarket video. The rental business has been maturing, growing 2.8% in 1994 to $9.52 billion, while sell-through advanced 16.8% to $5.5 billion, according to Adams Media Research, Carmel Valley, Calif. In 1995, Adams projects rental to grow only another 2.7% to $9.77 billion and sell-through to increase 14.7% to $6.3 billion. Based on Adams' industry numbers and SN's supermarket figures, the total share of the video market for supermarkets in 1994 was 17.9%. Rental was 20.9% and sell-through 12.7%. In 1995, the total supermarket share will rise to 18.8%, with sell-through increasing to 13.7% and rental going to 22.1%. So far, the industry's rental volume for the year has been off slightly, said industry observers. If that trend continues, and if supermarkets continue to expand in video, supermarket share could be even higher, the observers said. Supermarket growth will come as supermarkets open and expand more video departments, said Tom Adams, president of Adams Media Research. "Given what is going on in specialty stores, where same-store revenues are essentially flat, it's not conceivable that supermarkets are going to get a lot of same-store revenue growth out of rentals. If they are going to grow their share of the market, it's got to be through opening up new doors," he said. "We have noticed an apparent flattening of video rental demand in most market segments, with the exception of the supermarket video rental business," said Des Walsh, vice president and general manager of SuperComm, Dallas, a shared-revenue, pay-per-rental distributor now owned by Disney. "Through larger video departments and greater new release availability, supermarkets are doing an excellent job of providing convenience and selection. Therefore, they are growing their video rental business," said Walsh. Supermarket video programs posted strong same-store revenues in 1994, but growth will drop off sharply in 1995, according to SN's study. Rental departments grew 26.1% from an annual average of $110,740 per store in 1993 to $139,677 in 1994, but are projected to only increase 4.3% to $145,690 in 1995. Sell-through rose 41% from $46,739 in 1993 to $66,200 in 1994, and will go up another 10.5% to $73,182 in 1995. Overall video margins dipped slightly from 34% in 1993 to 33.5% in 1994, but are projected to rise to 45.4% in 1995, according to this year's survey.
SELL-THROUGH TRENDS
Sell-through has the most promise for continued growth, said Adams. The number of direct-to-sell-through hits has increased from five in 1990 to 14 last year. "It appears that we are on track to have about that many again this year. That means, in most months, there will be something out in 24-, 48- and 64-packs that supermarkets can put near the checkouts or merchandise where appropriate. Instead of a once-a-year boomlet in sell-through, they have a chance to stay in the game on a year-round basis," he said. Retailers are responding to this potential, with 47.1% reporting that they are expanding their inventories of sell-through products and 27.5% expanding the number of sell-through sections. Not one retailer checked the survey option that read "Cutting back or eliminating video sell-through." Also, 70.6% of respondents sell video products in the main shopping area of their stores, 17.6% sell them only from secured areas or from a customer-service desk, 45.1% said they only offer hit products sold from shippers, and 33.3% are diversifying into other kinds of sell-through products, like video games, compact-disc read-only memories or computer software. "Sell-through has been better than ever," said Stagner of Seaway Food Town. The increased number of hits at sell-through prices has encouraged many customers to start collecting videos, she said. "Each time a hit comes out and somebody purchases it, that also helps your older titles to sell. We have seen a lot of growth in our sell-through," she said. There was a wide divergence in the lead time needed by retailers to mount a large-scale promotion on a big sell-through title. The survey average was 8.7 weeks, with chains needing an average of 9.8 weeks and independents an average of 5.8 weeks. The survey indicated that retailers keep shippers on the selling floor for an average of about five weeks, a longer period than widely believed. The decision to pull shippers off the main selling floor is mostly based on sales or space issues: 33.3% said it is because of a lack of sales activity, 8.3% said it is when it sells out and 8.3% said it was when another video comes out. Company policy determines this move for 12.5% of the respondents, while 16.7% said the decision is made by a headquarters-level executive and another 16.7% said it is made by the store manager. Some retailers are putting in permanent sell-through sections that can accommodate left-over inventory when the shippers sell down, said Ingram. Titles like "Snow White" and "Jurassic Park" "continue to sell throughout the year," he noted. Reflecting the increased number of hit titles last year, new releases as a percentage of revenue and inventory increased significantly. The new releases represented 55.4% of inventory last year, up from 37.6% the year before, and they were 59.4% of revenue, up from 41% the year before. This percentage increase came at the expense of other segments, such as catalog, children's/family and special interest. Video games grew slightly as a part of sell-through inventory -- from 5.5% in 1994 to 6.1% in 1995 -- and revenues -- from 5.1% to 5.3%. The growth in non-children's direct-to-sell-through titles -- like "Mrs. Doubtfire," "The Mask" and "Forrest Gump" -- is the most significant change in the video industry in the past year, said Ingram. "When the supermarkets discover that they can be successful with the sell-through of these titles, it often makes them curious about how well they can do in rental. That is an opportunity," he said. The number of retailers cross-merchandising sell-through videos with other related products was up from 37.1% in 1994 to 41.2% last year, but the number of titles cross-merchandised was about the same, four, up from 3.8 the year before. D&W Food Centers, Grand Rapids, Mich., is stepping up the cross-promotional activity between video and other departments, said Glen Fischer, video/ photo coordinator. "We used to do more of it, but we got away from it for a little while," he said. Now Fischer meets weekly with other buyers to discuss promotional planning. A late January diet-fitness promotion tying-in Slim Fast and Weight Watcher foods with recent tapes by Kathy Ireland and Elle McPherson resulted from the meetings, he noted. So did displays combining "The Lion King" with the Pillsbury products linked to the movie by a $5 rebate offer. "We will sell more tapes because of the rebate and sell more food product because the consumer has to perform. We sell more on both sides, video and grocery," said Fischer. The cross-promotions also work well for Bel Air Markets, Sacramento, Calif., said Rick Ang, director of video operations. "They give us an opportunity to present our items in other areas of the store and they increase our sales," he said. Margins on sell-through products were 19.3%, up slightly from 1993's 18.9%. Margins for 1995 were projected to be 19.3%. Despite reports that major studios are now interested in selling direct to supermarkets, the percentage of survey respondents intending to buy direct in 1995 did not go up significantly from past years. Only 15.4% said they would buy direct, up from 13.6% last year and 12.8% the year before. The majority will continue to get most rental and sell-through products from traditional video distributors. The No. 1 competitor in sell-through, as in past years, was "other class of trade," referring mainly to mass merchants and drug stores. This year 78.7% choose this option, as opposed to 62.9% last year and 63.8% the year before. Other supermarkets declined to 12.8% from 17.8% last year and 24.1% the year before. Major video specialty stores also declined, to 8.5% from 14.5% last year and 10.4% the year before. Not one respondent selected small video specialty stores this year, where 4.8% had picked them last year.
RENTAL TRENDS
The rising cost of rental-priced tapes is becoming more of a pressing issue for supermarket video executives, according to SN's study.
While the cost of tapes was rated as the top challenge or problem facing the video business last year, retailers feel even more strongly about it this year. Ranked on a scale of one to five, with five indicating the greatest effect, "Cost of acquiring videos" averaged 4.15, up from 3.65 last year, and well ahead of another rental-related item, "Selecting and managing inventory," which was second with 3.46.
This cost-consciousness is reflected in four other industry trends:
A growing acceptance of shared-revenue, pay-per-transaction programs like those from SuperComm and Rentrak Corp., Portland, Ore.
A dramatically reduced interest in expanding inventories of B movies.
A strong inclination to increase rental rates.
The use of sell-through priced titles to create massive new release displays in the rental area.
"Sell-through pricing allows us the opportunity to rent a lot more copies than we would have ordinarily," said Clifford Feiock, video coordinator at Nash Finch Co., Minneapolis. As a result, "we have to devote more space to new releases than we ever have in the past," he said. At a $13 cost, retailers can bring in 50 to 75 copies of a title for much less than 20 to 30 copies of a tape costing $60 to $70, said Schloss of Carr Gottstein. "The rental potential is just so much greater when you can bring in a title at a sell-through price," he said. While the survey did not directly address the effect of sell-through tapes on the rental market, it did show that new releases increased as a percentage of rental inventory from 28.8% last year to 32.2%. However, new releases barely changed as a percentage of rental revenue, going from 57.9% to 58.1%.
The survey average for new release rental rates went up slightly from $2.20 last year to $2.32. Catalog rental rates nudged downward from $1.28 to $1.26, while video game rental rates rose from $1.95 to $2.10. Audio books were listed for the first time, and averaged $1.33 a night. Multinight rentals on videos averaged 2.4 nights for $2.92. Asked about anticipated changes in rental rates, 23.8% said they would increase, 4.8% said they would decrease and 71.4% said they would stay the same. Rental rate changes are handled on a store-by-store basis, said Glaseman of Bashas', depending on factors such as competition. But he is keeping an eye on prices in light of the rising cost of tapes. "So far it is not anything that we are planning on, but it is something we have to keep thinking of." Mostly, the higher costs affect the quantities Glaseman buys. "We have to work within a budget and we have to make sure that it is sensible in terms of our return on investment," he said.
Last year, when SN asked retailers if they planned to buy more B movies, 41.9% said yes. But this year only 9.8% said they would buy more, with 33.3% saying they would buy less and 56.9% saying they would buy the same. Many retailers are cutting back on B titles to buy video games and other new technology products, while increasing their focus on A titles, noted Ingram. "If you concentrate too much on the A's, you satisfy your short-term customer demand, but long-term you are reducing the variety in your video section. That is potentially damaging to your business because you make it more comparable to other competing technologies, such as cable and pay-per-view, which feature the hits," he said. One retailer that is still bringing in more B movies is Carr Gottstein. "Our customers want more of a selection. We increased our B titles last year, but the real growth and demand is for the new releases," said Schloss. The biggest obstacle to stocking B titles is their high prices -- most cost as much as the A movies. "If they would bring the cost down to $20 to $30, there would be a great potential to increase the business for B titles. But because of the high prices, the value isn't there and the rental potential isn't there," said Schloss. One way many retailers are coping with the high costs of rental tapes is to acquire them through shared-revenue, pay-per-transaction (also known as pay-per-rental) companies. Under this concept, retailers get the tapes for a low upfront cost and then share the revenues 50-50 with the supplier, allowing for greater depth. The credibility of this concept got a big boost late last year when Walt Disney Co., Burbank, Calif., acquired shared- revenue distributor SuperComm.
This year's survey showed that retailer interest in the shared-revenue concept rebounded sharply, with 26.5% saying they will use or test it in 1995, up from 12.7% last year. The year before -- when the concept was relatively new to supermarket retailers -- 33.3% said they would use or test it. "It's looking better all the time," said Feiock of Nash Finch, which is testing both Rentrak and SuperComm. "I am waiting to see what SuperComm is going to do now that Disney has stepped into the picture." Feiock has noticed a clear difference in the performance of B movies acquired through revenue sharing. "The gross margins are substantially higher," he said. "When we bring in three or four copies, it must present a better image to our customers, because they are renting very, very well." "Pay-per-transaction has always been a good way to increase the availability of popular rental titles because it allows the retailer to obtain more copies at a reasonable price," said Kelly of Cambridge Associates. "That is good news." But Fischer of D&W said, "I have mixed feelings about pay-per- transaction. If I'm going to hit a home run, I don't want to share the results with anybody. I'd rather learn how to buy myself and then take the glory, and then if I bomb, I'll take the blame." Large traditional video distributors like Ingram continue to be very cautious about revenue sharing. "There is a possibility that some information might come out during 1995 that could indicate that revenue sharing may not be all that it is cracked up to be," said Ingram. Another controversial program that has developed in the last few years is the seal-of-approval program of the Dove Foundation, Grand Rapids, Mich. The Dove Seal is given to videos that meet the foundation's family-oriented criteria. The number of retailers who will use or test the Dove program slipped this year to 26.5% from 34% last year and the year before. Retailers who are using the Dove Seal report that while they cannot measure the benefits in terms of sales, it is good for their community image and helps parents make rental decisions on movies for their children.
"We've had favorable comments about Dove," said Fischer of D&W. Many parents are concerned about the content of videos, he said. "They want to be able to put the movie on, go about their business and let the video keep the kids out of their hair for a while," he said. Nash Finch is looking at rolling the program out to all its stores, said Feiock. "It is a valuable tool that we can offer our customers to help them select video titles that they know will be suitable for the entire family," he said. Retailers are continuing to expand their rental programs, although there is some evidence this may be slowing. The survey showed that 51.2% would expand inventory size this year, down significantly from 69% last year, but 55.8% would expand the number of their departments, up strongly from 43.1% last year. Live inventory departments, where the actual tapes are displayed on the racks protected by a security system, are increasing, with 53.5% of respondents saying that they have live inventory in some stores, up from 46.6% last year, and 37.2% saying that they are expanding the number of live departments, up from 32.8% last year. About 12% said they are cutting back or eliminating video rental, which is about the same as last year. Rental margins for 1994 were an average of 39.4%, down slightly from 1993's 40.4%, and are projected to jump to 45.4% in 1995. The average video rental department in SN's sample was 2,105 tapes. The number of retailers running their own video programs, as opposed to using a rack jobber or leased-space operator, continued to rise, reaching 68% this year, from 66.2% last year and 59.4% the year before. Most retailers, 87.5%, dispose of old video products by selling them as previously viewed, with 10% selling to a used tape broker and 2.5% using them to build inventory. The percentage of video customers who make another purchase when in the store was 70.9%, while the percentage of active video card members was 52.2%. "The average supermarket renter spends $6 on video and $4 on additional purchases outside the video department," noted Andriano. Major video specialty chains are regarded as the No. 1 competitor in video rental by 66.7% of the respondents, up from 59% last year. Small video specialty stores declined to 17.8% from 24.6% last year, and other supermarkets held steady at a little over 13%.
NEW TECHNOLOGIES
The video and video game industries are at a time when new formats and technologies are on the horizon. It is not entirely clear which ones will prevail and become mass market products, but supermarket video executives are watching these trends very closely. CD-ROM for personal computers is one of the most promising of the new formats. The number of retailers who will carry CD-ROM in 1995 is 36.5%, up from 19.4% last year. Another 36.5% said they will carry computer software, up from 25.4%, and 7.7% said they will carry movies if they are made available on compact disk.
"Last year we tried budget software and were pretty successful with it," said Ang of Bel Air. "So this year we're looking into CD-ROM products. The budget software gave us a taste of what is out there. Right now it seems like anything with computer applications is the next step toward the future." "I don't think CD-ROM rental is right for every supermarket, but we are seeing a lot of our customers experiment with CD-ROM rental programs in some of their better stores in better locations," said Ingram.
CD-ROM is growing among supermarkets, said Andriano. "But there is still
a lot of concern about the multitude of game formats out there. Because of this, retailers are in a bit of a quandary on where to invest their dollars," he said.
Although sales of video games have slipped overall, they have remained steady in the supermarket trade, noted Andriano. SN's study confirmed this. The average percentage of video sales in games increased slightly to 12.6% this year from 11.2% last year.
Retailers are cutting back on the old 8-bit Nintendo system, with 71.7% now carrying it, down from 91.8% last year. The percentage of retailers carrying 16-bit systems is up, with 95.7% carrying Super Nintendo as opposed to 93.4% last year, and 95.7% carrying Sega Genesis, compared with 85.2% last year.
Retailers offering game software for portables also increased, with Nintendo Game Boy rising from 19.7% last year to 28.3%, and Sega Game Gear going from 9.8% last year to 17.4% this year. The Sega CD product is now carried by 23.9% of the respondents, compared with 13.1% last year.
Most supermarkets primarily rent video games, but an increasing number are selling them, too. Retailers who only rent games dropped from 65.6% last year to 45.7% this year, while those who only sell games rose slightly from 3.3% last year to 4.3% this year. The survey showed 13% rent and sell new games while 37% rent and sell off their used games. "We are expanding in games," said Stagner of Seaway Food Town.
But Ang at Bel Air has seen rental activity of 16-bit games decline so far in the first quarter. "It looks like both Sega and Nintendo are gearing up for their new platforms. We're going to see who responds to these new systems and judge our buying accordingly. We started bringing in Sega's new 32-bit system around Christmas, but sales have been slow," he said.
An older technology product that is still relatively new to supermarket video sections is audio books. Growth of audio books appears to be leveling off with 73.1% of retailers planning to carry them in 1995, up from 70.1% in 1994 and 43.3% the year before.
Concern over future in-home delivery systems, like video-on-demand, is slight. These new technologies ranked near the bottom on the survey's list of challenges and problems, and 68% said this potential competitive threat has not slowed the growth of their video programs. Sixteen percent said it did slow their growth and another 16% said they didn't know.
Total Supermarket Video Revenue 1993: $2.23 BILLION
Total Supermarket Video Revenue 1994: $2.68 BILLION
Total Supermarket Video Revenue 1995: Projected $3.03 BILLION
Revenues on the Rise
Supermarket video continued its upward growth last year, increasing 20.2%. Rental growth should slow this year, but the category is still expected to top $3 billion.
SUPERMARKET VIDEO REVENUE
TOTAL RENTAL SELL-THROUGH
1993 $2.23 billion $1.68 billion $554 million
1994 $2.68 billion $1.99 billion $696 million
1995 $3.03 billion $2.17 billion $861 million
Rental Department Profile
Separate video store locations, whether freestanding or adjacent, represented a smaller percentage for this year's sample than last year's 5.5%, but 13.6% reported having them.
Rental Department Locations
Separate Store 1.4%
Store-within-a-Store 38.4%
Service Desk 14.9%
Department 45.3%
Supermarket Share of Revenue
Supermarkets now account for more than 20% of all video rentals and almost 18% of the entire video business.
Share of Total Video Industry Sales
TOTAL RENTAL SELL-THROUGH
1993 15.9% 18.1% 11.8%
1994 17.9% 20.9% 12.7%
1995 18.8% 22.1% 13.7%
Store-Within-a-Store Growth
Retailers continued to add live inventory store-within-a-store video rental departments at a significant pace, almost doubling last year's percentage. This is evidence of retailers' strong commitment to video.
Percentage of Rental Departments Using Store-Within-a-Store Format:
1992 11%
1993 19.7%
1994 38.4%
Overall Industry Revenue
Sell-through is seeing double-digit growth while rental is posting only small incremental gains.
Numbers for the Entire Category
TOTAL RENTAL SELL-THROUGH
1993 $14 billion $9.3 billion $4.7 billion
1994 $15 billion $9.5 billion $5.5 billion
1995 $16.1 billion $9.8 billion $6.3 billion
Sizing Up Rental Inventory
An additional category for "super" departments, added to this year's survey, reflects the growing size of supermarket rental sections.
Percentage of Rental Departments by Size
SMALL MEDIUM LARGE SUPER
1992 31% 46% 23%
1993 31% 45% 24%
1994 29% 45% 22% 4%
SMALL=<<1000 tapes; MEDIUM=1000-2500 tapes;LARGE=2500-5000 tapes;SUPER=>5000 tapes
Margins of Difference
Sell-through margins are about half of those for rental. Retailers project a significant jump in rental margins for 1995, but no such increase for sell-through.
Percentage Gross Margins
SELL-THROUGH RENTAL ALL VIDEO AVERAGE
1993 18.9% 40.4% 34%
1994 19.3% 39.4% 31.5%
1995 19.3% 45.4% 36.7%
More Nights
Multinight rentals are an effective marketing tool for most supermarkets.
RETAILERS OFFERING MULTINIGHT RENTALS
1993 52.5%
1994 53.5%
Turn, Turn, Turn
New releases continue to dominate. The breakdown of rental revenues remains essentially unchanged.
RENTAL REVENUE BY TAPE CATEGORY
1993 1994
Special Interest 1% 1%
Video Games 11% 10%
Children's/Family 10% 10%
Catalog 20% 21%
New Releases 58% 58%
Taking Stock of Rentals
New releases as a percentage of inventory picked up a few points in 1994 at the expense of other areas.
TYPICAL RENTAL INVENTORY
1993 1994
Special Interest 3% 2%
Video Games 11% 10%
Children's/Family 13% 13%
Catalog 44% 43%
New Releases 29% 32%
The Pricing Is Tight
Supermarkets are among the most aggressive in the video industry at pricing their rental rates. Pricing is for one-night rentals, except multi-night, which is based on an average of 2.4 nights.
AVERAGE RENTAL RATES
New Releases $2.32
Catalog Titles $1.26
Video Games $2.10
Audio Books $1.33
Multi Night $2.92
An In-House Business
The trend toward video programs owned and operated by the retailers continued to grow at the expense of other options.
