The future of home entertainment software has arrived like a raging bull market, in spite of concerns about shrink.
In five years, digital video disc, known everywhere as DVD, has gone from not much more than a series of convention seminar panels to the hottest consumer electronics format of all time.
Sometime in the second half of the year, DVD content providers -- mostly the major movie studios -- will ship the 1 billionth DVD software unit, according to Ernst & Young numbers compiled for the DVD Entertainment Group, Los Angeles. It took VHS tape cartridges almost 10 years to reach the same benchmark, noted Adams Media Research, Carmel, Calif.
These are "shipment" numbers, but retailers report the DVD product is selling through and renting at an impressive rate. Nielsen VideoScan, Los Angeles, said DVD sales in the grocery channel are still very small, less than 2% of the total. But with 40 million hardware units shipped as of June 30, according to the DVD Entertainment Group, many selling at price points well under $100, and with DVD households buying about twice as many DVD software units as VHS-only households, DVD has arrived as a mass market product, and therefore as a supermarket product. It won't take long for those "shipped" units to sell off and for more of them to find their way into the food channel, industry observers said.
"There is a market for DVD, and we need to figure out how to supply it profitably," said Lanny Hoffmeyer, corporate director, wholesale general merchandise, Supervalu, Eden Prairie, Minn.
The time has come for DVDs in supermarkets, he said. "It's still early on the growth curve, but if you are going to be a player later on, you have to get started now. This is where the growth is going to be," Hoffmeyer said.
Retailers are experiencing DVD's growth in rental as well as in sell-through.
"In our video departments, we are renting more DVDs now than ever before and it continues to grow," said Richard King, director of category management, K-VA-T Food Stores, Abingdon, Va. "As the DVD prices come down, more and more people are buying the players," he said.
The percentage of DVD in the 120 rental stores and 300 sell-through stores serviced by Video Management Co., Tacoma, Wash., is constantly increasing, said Greg Rediske, president. "It's a work in progress trying to stay on top of who needs to bump it up this month. Buying is just a little more difficult because we are in a state of transition," he said.
Some stores are 50-50 VHS and DVD, but more of them are 80-20, he said, while some rural stores don't carry any DVD for rental at all. "It's all over the board," Rediske said.
It's the same story for sell-through. "It is still in a heavy growth mode. I don't have a crystal ball that tells me how far it is going to go, although I do know you are going to have to leave room for VHS for years to come. People that are abandoning VHS are being very premature." Rediske expects continued, moderate growth in DVD until Christmas and then a big change as people get players as gifts.
"We are riding that horse as we go and making changes as necessary, month by month," he said.
For a major Midwestern retailer that got into DVD almost immediately when it was introduced, the ratio of DVD to VHS has been steadily increasing to the point where it is now about one-and-a-half VHS units to one DVD unit, said a video executive who asked to not be identified. "We've been changing that ratio about every 45 days," he said.
Shrink remains a factor that keeps many supermarkets from taking full advantage of DVD, especially those that don't have security systems or that are in high-theft areas.
"There's a big concern about how you are going to get around that," said Supervalu's Hoffmeyer. "Retailers are asking suppliers for solutions. That is probably keeping it from expanding to some degree," he said. Ultimately, source-tagging is the answer, but the lack of a standard makes that difficult, he noted.
K-VA-T has found its solution. "We keep them in a pretty secure location inside the video center where there is one entrance and exit, so we have pretty good control over that," King said. He sees continued growth as the prices come down on the DVD players.
There's always going to be a concern about theft with any good product, said Scott Casler, procurement specialist, Carter's, Charlotte, Mich. "If they are not going to steal it, then it is not worth selling," he said.
With stores in rural northern Michigan, the DVD trend has been slower to catch on, "but we are starting to see about 50% of our video sell-through in DVD as opposed to VHS," Casler said.
Theft is one of many issues for the retailers served by a West Coast wholesaler, said a general merchandise executive who asked to not be identified. "It is going to be a struggle for independents for a long time just because of space, and pilferage is a secondary issue," he said. "It's never a question of whether it is the right thing to do; it's more an issue of overcoming the challenges that we have," he said.
"The Achilles' heel for that program right now, at least in our environment, is theft," said Steve Urgo, general merchandise buyer, category manager, Save Mart Supermarkets, Modesto, Calif. "It's something that we really need to keep our eyes on and try to manage. This usually requires us to be a little more strategic in how we do in-store merchandising, placing those displays up by the checkstands, or in high-visibility areas where our store personnel watch," he said.
Secondary packaging systems might be the solution for Save Mart, he said. "They make some packaging devices where the DVD goes in the larger pack, and they have to be key-opened up at the checkstand. It is a reusable system, and we are evaluating the cost of that," Urgo said.
Big Y Foods, Springfield, Mass., had a theft problem with videotapes about two years ago. "But as a company, we decided to make space for videos, and now DVDs, on our front-end register racks. We have slots above the candy for them, and that has taken care of the theft issue," said Betsy Turgeon, category manager, general merchandise.
That has worked out "extremely well," she said. "The customers are used to seeing it there now. When they are standing in line, their children will see the videos and DVDs, and they buy on impulse," Turgeon said.
For the future, "I think DVDs are going to be it, and videotapes are going to fall by the wayside. The current price differentiation makes it worthwhile for most customers as they get a higher-quality video product that will last longer and comes with extra programming," she said.
Urgo agreed. "DVD is a very exciting change in prerecorded video. Every Christmas season as DVD players have peaked in consumer sales, we see a corresponding jump with prerecorded DVD," he said.
At one time, DVDs were as little as 10% of shippers, but now it is more like 50-50, Urgo said. "We might get to the point where we force the issue along and, by design, slow down our VHS purchasing and sell more DVDs to just try and stay ahead of that curve," he said.
DVD is a growing part of the sales mix for the Cub Foods division of Supervalu, based in Chanhassen, Minn., said Joe Meurer, director of general merchandise, corporate retail. "On new releases, we are experiencing about 30% sales in DVD units, so it is certainly nothing we can turn our backs on," he said.
"I believe that DVDs will be certainly in the future. They are growing for us all the time," said Charles Yahn, vice president, nonfoods division, Associated Wholesalers, York, Pa. "Right now, we are doing about five to one VHS tapes, but I think that is slowly changing," he said.
"It's a better product for the consumer to view, and there are more DVD players out there now," he said.
"We are seeing probably a 50-50 split now in what we are selling between VHS and DVD, which is a big step up from what we have seen in the past," said a general merchandise executive with a national wholesaler, who asked to not be identified. "It looks very good. I don't have any qualms about getting more deeply into it. We'll absolutely have to make room for it," he said.
For now, the wholesaler is just offering the big-hit titles in its corporate stores and those of its customers, the executive said. "We are bringing in DVD on every hit title as it is released. Or, many times, a title will come to rental on VHS but will be at a sell-through price on DVD, so we are going to start looking at some of those opportunities as well to try to take advantage of those sales a little bit early," he said.
More retailers are starting to bring in lower-priced -- generally under $10 -- DVD catalog programs.
"Sales are booming for me, especially catalog since I came up with a whole new catalog program," said the video executive with the Midwestern chain. He would not divulge any specifics about it. When asked about theft, he said, "It's under $10; nobody steals it."
Carter's is not into a budget DVD program yet, "but I assume that is going to happen very shortly," said Casler. "We do a pretty good job with budget VHS, so it's only a matter of time before the DVD trend takes that over."
DVD by the Numbers
The numbers show that DVD is an impressive force in entertainment software retailing.
"This is a format that has truly reinvigorated our industry on both the hardware and software ends of the business, and is changing the way Hollywood makes movies and the way people watch them at home," said Bob Chapek, president, Buena Vista Home Entertainment, Burbank, Calif. Chapek also serves as president of the DVD Entertainment Group.
DVD sell-through spending surpassed VHS for the first time last year, reported the Video Software Dealers Association, Encino, Calif. Total DVD software spending at retail was $5.4 billion in 2001 compared to $4.9 billion for VHS.
But VHS will remain a factor, particularly for children's product, industry sources told SN. While DVD had 30% penetration into U.S. households as of the first quarter of this year, VHS has a 96% penetration, said Paul Scott, senior vice president of worldwide sales for duplicator Technicolor Home Entertainment Services, Camarillo, Calif. Of studio film libraries, 30% are now available on DVD while 60% are available on VHS, he said. "VHS continues to be a very healthy format," Scott said.
In rental, VHS still dominates, but DVD is gaining ground, according to VSDA's VidTrac service. Consumer spending on DVD in rental units and rental spending surpassed the numbers for the entire year of 2001 on July 21 of this year. DVD rental spending is up 115% from $684.3 million to $1.47 billion, and rental transactions increased 111% from 218 million to 459 million, VSDA reported. During that period, VHS had 69% of the rental market spending, vs. a growing 31% for DVD.
"American consumers have embraced this format like no other because it provides a rich viewing experience," said Bo Andersen, president of VSDA. "With its variety of unique bonus features, it is an exceptional value for consumers." VSDA reported that the entire video industry reached an all-time high of $18.7 billion last year in this country. "It's a $19 billion-a-year industry and growing," Andersen said.