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RENTAL BLOOM

Video rental is getting bigger and better in supermarkets.Retailers are expanding the number of rental departments, rental inventory size and percentage of new releases, and are using shared-transaction-fee programs to boost selection and promotional opportunities, according to SN's sixth annual State of the Industry Report on Supermarket Video.New releases are the key to the video rental business

Video rental is getting bigger and better in supermarkets.

Retailers are expanding the number of rental departments, rental inventory size and percentage of new releases, and are using shared-transaction-fee programs to boost selection and promotional opportunities, according to SN's sixth annual State of the Industry Report on Supermarket Video.

New releases are the key to the video rental business and 46.8% of respondents to SN's survey said they are expanding the percentage of new releases in their departments.

In 1996, new releases were 36.8% of the retailers' inventories, up from 33.1% in 1995, and they were projected to grow to 39.8% in 1997. The definition of a "new release" is up to each retailer and SN asked how long they keep titles at new-release rental rates. For the past two years, the average response has been 5.9 months, but this year it went up to 6.5 months, indicating that supermarkets are following the specialty-store practice of keeping titles priced as new releases for longer periods, sometimes up to a year or more.

One big chain that has made a significant commitment to new releases and video rentals is Albertson's, Boise, Idaho. Sources report that spending on new releases has doubled, while the company also has increased budgeting for labor to service the departments.

Ron McMillin, vice president of sales for the Western region of Sight & Sound Distributors, St. Louis, declined comment, but acknowledged, "Albertson's business with us has doubled." Albertson's uses several video rackers to service its stores. Video Two, Sandy, Utah, buys from Sight & Sound.

The Boogaart Retail division of Fleming Cos., Concordia, Kan., increased the percentage of new releases in one of its stores to 90% on a test basis at the beginning of the year, said Matt Dillon, video director. Neither volume nor profits has declined so far at that store, while traffic has gone up, he said.

"I had all those catalog titles, but they weren't renting. It was just dead inventory. So far I haven't seen any problems caused by doing that. In some of the small-size stores we have, that approach sometimes makes a little more sense," Dillon said.

It's too early to say whether Boogaart will expand the test. "I'm going to watch this for a while and see how it does," said Dillon.

A year and a half ago, B&R Stores, Lincoln, Neb., went to a display system using laminated reduced-image cards of the video boxes to get more selection in a limited space, said Bob Gettner. "We have yet to see a decrease in any store that we have converted to this kind of system. In fact, we have more space to increase the number of movies we carry and that seems to be a plus," he said. One of the methods supermarkets use to increase their new-release selection is shared-transaction-fee programs like those from SuperComm, Dallas, and Rentrak Corp., Portland, Ore. With these programs, retailers pay a fee of $10 or less to acquire a tape, and then share roughly half the revenues with the supplier. Otherwise, retailers pay about $60 to $70 for a new- release tape they would own. "Shared-revenue is a very effective way of stretching a budget," said Randy Weddington, video specialist for Harps Food Stores, Springdale, Ark., which is using the Rentrak system. One promotional method that has gained many adherents recently is guaranteed-availability programs, where the retailer offers a free rental if the featured title is not in stock. Typically, retailers bring in three to four times as many copies as they would otherwise, either through the shared-fee programs, or on hit titles priced for sell-through upon video release, like "Twister" and "Independence Day."

These promotions have worked well for Harps. "In some situations, there was an increase of a quarter to a third in business. It's really been a good promotional tool," he said.

"Video rental category managers became more assertive last year in building their business with aggressive programs, such as multiple-day catalog rentals and 'guaranteed availability' of new releases," said Des Walsh, vice president and general manager at SuperComm.

But the percentage of retailers saying they would use or test such programs has remained steady for three years now. In 1997, 28.9% said they would use these programs, while in 1996 a total of 27.8% said they would use them, and 26.5% said that in 1995. This increase is not statistically significant given the size of SN's survey.

The preferred method of managing a video rental department continues to be ownership by the retailer, with 62.5% running in-house programs. Shared-revenue programs (with a rack jobber) were used by 17.5%, while 10% used leased programs (like Video Home Theater, Des Moines, Iowa), 5% had leased-space departments and 5% said they used a combination of approaches.

Rental margins slipped slightly last year, perhaps because of retailers' need to offer increased quantities of new-release titles to compete with the big specialty stores like Blockbuster Video and Hollywood Video. However, the average 37.5% margin reported by this year's respondents was still significantly higher than many other supermarket categories. It trailed last year's reported 40.3% margin, but retailers projected an increase to 38.6% in 1997.

The main competition for rental for most supermarkets is major specialty chains, as cited by 71.4% of the respondents. Other supermarkets were mentioned by 16.7% and small specialty stores by 11.9%.

Retailers also expressed a greater willingness to raise rental rates this year. With Blockbuster and other specialty stores asking and getting $3 for rentals, the 33.3% who said they would increase rates may be seeking to boost their margins. Last year, 23.5% said they would increase rates.

Average rental rates have gone up slightly from last year's survey, from $2.28 to $2.33 for new releases, and from $1.12 to $1.25 for catalog items. Video games remained steady at $1.96.

While the retailers discontinuing video rental programs have been in the news during the last year, the percentage of respondents saying they would cut back or eliminate video rental went down from 17.6% last year to 12.8% this year.

Among other findings of the survey: 29.8% said they were expanding inventory size, 46.8% said they were expanding the percentage of new releases, 31.9% said they were expanding the number of rental departments, 27.7% said they were expanding the number of live-inventory departments and 19.1% said they were buying more B-movies.

Chains and companies that own their own video rental programs experienced stronger growth in video rental than others. The survey also indicated that retailers who owned their own programs or those who used shared-transaction-fee programs were more likely to be moving forward with video rental, whether in terms of the number of departments or the size of inventory.