Many opportunities are ahead for supermarket video departments as consumer demand for entertainment and information products increases. Participants in SN's second annual video roundtable said products like compact-disc read-only memory, computer software, audio books and new generations of video games will enable retailers to broaden their offerings. "We will move in that direction as consumer demand grows," said Kirk Mueldener, video distribution manager at Hy-Vee Food Stores, Chariton, Iowa. "Slowly we will get into computer software, as more and more homes get computers. The same with CD-ROM."
ins have begun to think about putting in full entertainment centers, combining movies, games, audio books, computer software and other related products. Where do your companies stand on this? STAGNER: We have broadened our base a little on games and audio books. We are taking small baby steps into that area, but nothing major at this point in time. SN: Is senior management reluctant to devote the space to it? STAGNER: No. I don't think so. I think they will back that. They are progressive. MUELDENER: We will move in that direction as consumer demand grows. Slowly we will get into computer software, as more and more homes get computers. The same with CD-ROM.
PIERCE: This is initially a move to an entertainment center, but ultimately it's a move to an information center. The key term in information superhighway is not highway and it's not super. It is about delivering information. This is not to say that you should invest hundreds of thousands of dollars in productivity software inventory right now, but you need to think about what that person comes to the store for. There are information services that you can offer now. FINCHER: I can't say that's going to be a huge trend, but I see some market niche opportunities. BERNS: It is not that far-fetched to think that some leading supermarket chain out there on the cutting edge takes the 1,500 or so square feet that they are giving video and, in a new or remodeled and expanded store, says: "Let's double the square footage. Let's try to add CD-ROM product. " Often supermarkets -- like a lot of other industries -- are like sheep. If a retailer is in a market where something like that is working for a competitor, they will fall in line quickly. It may take just one leading, high-profile chain out there to start the experimentation. INGRAM: We've had a number of customers come to us who are looking for a better way to handle their books and periodicals. They want to better coordinate that department with video. We have about four significant customers we are talking to, who are looking at their book and magazine operations and asking: "Is this the best way to do it? Are we getting the best selection? Is this the cheapest way to do it in the long run?" There's lots of interest. The last FMI GM/HBC show, by putting the books and related products together, did get a lot of people to at least question how they are merchandising product. I see some changes coming. PIERCE: There is going to be an explosion in software products long before there is a video autobahn. At some point this is going to become the infobahn. Look at the development of the various components of entertainment technology. With the advent of television, they thought the theaters would go away, but they didn't. Then they thought cable was going to kill theatrical, but it didn't. Then video was supposed to kill theatrical, but it didn't. Video grows, the windows change. Every time you look at a transition technology, there has been this level of coexistence. Retailers are going to have an opportunity to merchandise a lot of exciting products over the next 10 years. In the process, as the infobahn is created and the structure is put in place, I see a coexistence between that mechanism and the retail mechanism. Retailers will not disappear. They will be able to find a level playing field. SN: There has been an explosion in the number of home computers out there. Where is computer software going in supermarkets, and what has the most potential for sales: standard software, budget software or shareware? MUELDENER: We've had shareware, and it's been in and out. I don't know what the big fuss is all about. Everybody and their brother has got it in one form or another. As the computer penetration starts to increase, you are going to see more and more movement into carrying software. Right now I don't have a product line that I can compete with. In our area, Best Buy is where everybody goes.
FINCHER: We've been real successful with products that have licensed value, but not very successful with products that don't. We tested about 400 supermarket outlets with software. We're getting a lot of information. There is nothing that is absolutely going to change the world, but there's an opportunity. If it is properly presented and if all the other elements fall in line, there's an opportunity to sell mom and the family some software. But it hasn't been a huge success story. We have some limited test license agreements out on CD-ROM rental. They have been real positive. But there are still not enough hardware units out there. There's not enough clarity yet in the consumer's mind of how to respond to this offer. CD-ROM is still in its infancy.
INGRAM: We have been going after the CD-ROM rental market aggressively.
We've got a package that includes a hardware unit that plugs into the computer relatively easily. It has software built in, so when the drive is installed in the computer, it doesn't mess up all your files. We've licensed a proprietary system so after you unplug it everything comes out of your computer, and there's nothing left over. It's a way for the consumer to try to a CD-ROM drive and see if it is something that even interests them to buy as an add-on, or maybe they have to upgrade their computer. Speaking for Ingram Micro and for Ingram Entertainment, we are seeing just phenomenal growth in hardware of CD-ROM drives. I read recently there will be in the neighborhood of 6 million CD-ROM drive units by the end of this year. That is an enormous penetration. There's got to be something from the software side that will be an opportunity for supermarkets. We are aggressively going after it. We are trying to provide no-brainer packages that will get supermarkets and video specialty stores into it, and then have a monthly ship program where they get the hot titles. What it's all about is, what do consumers have at home? Well, they've got 6 million CD-ROM drives. I would call that a market. SEVERINSEN: What you are seeing now is, if you go out and buy a computer, more than likely it includes CD-ROM, but you are getting a lot of software with it. It is going to take the consumer time to sort through all that software and educate themselves on what they have before they are ready to go out and make additional purchases. PIERCE: Right. It does fill up some time, especially for a new user. But ultimately you will start to see software developers becoming more sensitive to how and what they're selling for $9 to $10 and how it is impacting their $34 to $39 sales. There is a big business in bundling CD-ROMs with hardware right now. The good thing is it is going to drive hardware. Eventually, as that hardware penetration becomes substantial, they will start to back off from bundling CD-ROMs.
INGRAM: A new way of buying software is through a CD-ROM program that we are involved with through Ingram Micro. The original equipment supplier, like Apple, provides a sampling disk that has virtually all the software that Apple makes. After the consumer samples it and plays with it, they call up Ingram in Des Moines, and give us a number from that disk. After the consumers pay for it with their credit card, our people give them a code that unlocks the software. Then they pull it off the disk and download it onto their hard drives. We pay a royalty fee to the retailers in whatever area that offer was sold in. That keeps the retailer interested in providing the free disk with all the software on it, along with the updates to the disks.
It's a real interesting way of selling software, and it is directed at the home computer user, not the business user.
MUELDENER: Has anybody encountered problems with damaged CDs? Is that becoming a big issue?
INGRAM: On cartridge games, "dead-on-arrival" type damage is pretty unusual.
MUELDENER: But the disks are more susceptible to being damaged, and you are putting them in the hands of nine- and 10-year-olds who may not be too careful with them. INGRAM: I don't doubt that may become an issue. In our case, we don't have enough of that type of product going through our entertainment company system that it has become a huge issue. But certainly as the industry switches over to CD that could become an issue.
PIERCE: You're going to see a greater percentage of defective product with the CDs. It's almost nil with cartridges at this point. CDs are mass-produced, but even with that, you are going to have a defective rate much lower than with a tape product where you have a lengthy duplication process. So it is still ultimately a win-win.
In terms of a younger person dealing with the product, I'd still want to have a CD rather than a video tape with X number of working components and tape that can be pulled out. INGRAM: From a defective replacement standpoint, CDs are going to cost the manufacturers maybe 75 cents in material costs; they are going to be lighter and cheaper to ship back. There are a lot of advantages.
FINCHER: It will be very interesting to see how the format battle will be played out. Is it going to be IBM or Macintosh or what? It could very well end up being Sega-Genesis. All the 5- to 10-year-olds know Sega. They know that word, and they know how to plug it in and make it work.