Rental business continues to roll in supermarkets. Although growth of the overall video rental business has long since plateaued, supermarkets, and the companies that supply them, saw strong increases last year, and they see more in the year ahead, according to participants in SN's video roundtable. "We still see a tremendous amount of growth potential in the supermarket industry," said Steve Jones, vice president of corporate marketing at Video Home Theater, Des Moines, Iowa. "Very few of our customers that are in rental now have opened a new store that didn't have a rental department," added David Ingram, president of Ingram Entertainment, La Vergne, Tenn. Retailers participating in the roundtable all reported expansion of their video rental programs. "All the stores that we are either buying or building will have video in them," said Sandy French, video coordinator at Thrifty Food Stores, Burlington, Wash., which has almost doubled its number of video departments in the last year. "We are still putting video in when we build new stores and they get larger every time we build one," said Clifford Feiock, video coordinator at Nash Finch Co., Minneapolis. "We are growing, and every new store will have a video department while remodeled stores will have larger departments than they had before," noted Bill Glaseman, video specialist at Bashas' Markets, Chandler, Ariz. The key to expanding this profitable area is commitment from top management, the roundtable panelists agreed. "I believe senior management focus at grocery is critical to the future success of this business," said Dennis Maguire, vice president of sales at Buena Vista Home Video, Burbank, Calif. Here's how the conversation went about rentals:
SN: What is the big picture of video rentals in supermarkets?
KAIREY: From a rental standpoint, the business in the overall industry has remained fairly flat. We see a very low single-digit increase from 1993 to 1994 and from 1994 to 1995. We do look for more of the supermarkets to enter into the business. Hopefully they will give up some space to make that happen and show some significant growth. The industry has built itself up to a position where it can now sustain making some very significant movies for a direct-to-video type of release. For example, we are building up some successful rental programs with programming such as "Dark Man" and "Land Before Time 2" on the sell-through side.
MAGUIRE: Our business at Buena Vista was up considerably this year, both rental and sell-through, with rental driving a lot of our growth because of the sheer number of titles. Supermarkets contributed greatly to our growth, and we believe that there's more growth to be had.
SN: What kind of progress is video rental making in supermarkets? Has there been any top management concern about video on demand and the information superhighway? JONES: The last few years have been particularly good for us. In 1993, we grew about 25%. This past year we grew 27%. A majority of that growth came from new business. About 40% of the new business was retailers with existing programs, either where they had owned their own or had revenue-share companies, and they wanted us to take it over. Right now, about 40% of supermarkets in this country don't have any rental departments at all. The number may be a little higher than that. So there is still a tremendous amount of potential. In the Southeast, particularly in Atlanta, a couple of big chains that have never been in video before are going head to head with each and are looking for services to offer that the others don't. Some of those chains are starting to get real interested in video. So we still see a tremendous amount of growth in the rental end. INGRAM: Our growth in supermarkets for 1994 was probably 15% to 17%, a lot of it coming from internal growth. I don't think the superhighway is going to have any noticeable effect on video rental departments within the next three to five years. It's a nonissue at this point. A message I'd like to send to supermarket senior management is that they should recognize that video rental is an important way that they can differentiate themselves from mass merchants and clubs. Supermarkets already have, in most cases, the best real estate and the best convenience factor. They ought to look at video rental as a way that they can be more competitive with these new formats.
SN: Sandy [French], can you talk a little about your expansion in video?
FRENCH: In the past year, our number of departments has almost doubled. It is obviously giving the company the profit that they want. They seem to be doing really well. The departments are getting larger in all the stores.
SN: Have the other retailers noticed any concerns about video on the part of top management?
FEIOCK: No more so than before. Certainly everybody's concerned [about the information highway], but we realize it's a long-term situation. It's not about to bite us yet. We are learning that those stores are the most profitable for us.
One problem is we've got a lot of small stores out there that just don't have the square footage available for video. As we remodel our stores, we are adding the room to put video in, so it's just a matter of time before it's feasible to make that change. Sometimes it doesn't happen all at once, but often depends on what's going on with each company. GLASEMAN: That's exactly our situation. We're switching over to live inventory wherever it's appropriate. There's no holding back as far as our management is concerned.
SN: What else do the retailers feel that senior management thinks about video?
FRENCH: I wish that they understood video a little bit more than they do.
SN: How so?
FRENCH: They're getting better [in their understanding]. Management is realizing that there is a lot of profit in the video department. I see some expansion ahead. SN: How do you get that message across to them?
SN: Clifford [Feiock], how about you?
FEIOCK: I feel that as a company we are really going through a change right now, and everybody is starting to realize the importance of video. The most drastic changes have been on the sell-through side. The supermarket industry as a whole is struggling to show growth in grocery sales, so we are looking at other methods to cross-promote better and add to the bottom line. Video is definitely one of the best ways to do that.
SN: Bill [Glaseman], how is senior-level management support at Bashas'?
GLASEMAN: I guess I'm fortunate. They are extremely supportive.
SN: And committed?
GLASEMAN: Absolutely. They're pretty well committed from the very top down. They are absolutely committed to growing and increasing departments, and pushing it as far as I want to go with it. They are just extremely, extremely cooperative. They're into video personally and they think it's going to be a good added attraction to their stores.
SN: Steve [Jones], with your leased operations, you have a slightly different perspective. What is you're feeling about support from upper management for video?
JONES: We always start our sales drive with the senior management of the companies. Generally what will happen is we'll get a number of test stores and go from there, and it depends on the numbers. How well does it perform? How well does it work in stores with different demographics? How productive can it be? How well accepted is it by the customer? If we get our foot in the door, we're generally successful.
SN: What happens when it comes to renewing contracts?
JONES: Overall, since we began the company, we have about a 94% contract renewal rate. We are very proud of that.
SN: There are numerous financial arrangements that supermarkets have for their video departments. What is the best arrangement for a retailer?
INGRAM: It depends on the retailer's commitment to video. If they have a video coordinator, if they're totally committed and want to have a decent-sized space, hands-on ownership is the best and most profitable way to go. But if a retailer doesn't want to go that way, then I think it makes sense to look at some of these other types of programs. SN: Bill [Glaseman], before you ran Bashas' rental program from the inside, you ran it as a shared-revenue racker. So you've seen it from both sides. What do you think? GLASEMAN: The side I'm on now is better, at least as far as the company is concerned. Management seems to be very happy with it.
SN: Steve [Jones], your company offers something a little bit different.
JONES: I obviously think leasing [of the program] is the best way to do it. We have looked at revenue sharing in the past and one problem we saw was that the retailer never was assured of the long-term quality of the program. With revenue-share programs, if you get a weak rental period, like September to October, the revenue-share company makes less of an investment in new releases. Then when they go to a better period of the year, they don't have any hot catalog titles to draw from, and the revenue gets worse, and they get caught in a downward spiral. Pretty soon it becomes an unprofitable program all the way around. There are without question some uncertainties in the industry right now. By leasing the video rental program, the customer gets the benefit of not making a huge financial investment up front. We supply all the services that they need. We give them marketing support, premium promotions, price promotions, and on-site marketing people who come in and show them how to run the department. With the staff turnover in supermarkets, you need that retraining on a regular basis. Many of our customers rely on that part of our service. We do marketing and promotions, we print their monthly magazine, and give them all of those things they need to keep the excitement up in the department. We found a tremendous amount of our business coming from stores that have owned their own video rental programs in the past. In many cases, the blush is off the rose; it's not as exciting, it's just a business, they've lost sight of video, and that's why they bring us in.
SN: But a lot of companies have revenue sharing programs.
JONES: There are some unique problems there, because the supermarket always is going to want as many new releases as they can get. But because they are sharing the revenue with this other company, video becomes something of a stepchild. With the revenue-share companies, I don't think it's a matter of finance, I think it's a matter of discipline. They must have the discipline to take the risks that are necessary to continue to buy good quality products throughout the year.