LOS ANGELES -- Supermarkets could be a dominant player in the $18 billion video business and are feared for this potential by other classes of trade, said Mike Saksa, vice president of marketing at Warner Home Video, Burbank, Calif.
Saksa and two other Warner executives, Trevor Drinkwater, vice president for rental product sales, and Dan Miron, vice president for sell-through product sales, spoke during the fourth annual supermarket breakfast at the convention of the Video Software Dealers Association, Encino, Calif., during National Video Week in Los Angeles, July 8 to 10. Pam Kelley, vice president for sales at New Line Home Video, Los Angeles, was also on hand to answer questions. The Warner presentation covered sell-through, rental and DVD opportunities in supermarkets, underscoring at regular intervals the importance of the supermarket class of trade to studios.
"You are the big dog, but right now you are a sleeping dog, because video specialty and the mass merchants are taking more of your share of the business," said Saksa. "But what they fear is that you have the essentials to be successful in the video business. You've got the store traffic, you've got loyal consumer buying habits, and they are in your store a couple of times a week," he said.
Supermarkets represent 10% to 15% of Warner's video revenues, with precise numbers hard to determine because most supermarkets buy from distributors, said Trevor Drinkwater, vice president for rental product sales. "Supermarkets are important because we feel that it is an incremental business for us. If you don't have rental in your stores, shoppers are not necessarily going down the street to rent from a video retailer," he said.
While new technologies get heavy news coverage, "video is a very strong business," totaling $18 billion, said Saksa. "Half of it is sell-through and half of it is rental, and it is going to continue that way for quite a long time. There was a good increase last year and we expect a good increase this year, as well. There is a lot of consumer interest in viewing movies," he said.
Catalog Profits
While many supermarkets only stock children's and family sell-through hits and complain about the lack of margin, the real profit is in non-family catalog titles, Saksa said. "A lot of grocery accounts just use video as a traffic builder, but you can't do that and maintain profitability." Saksa noted that non-family films accounted for 56% of the sell-through market in 1998, up from 50% in 1997 and 46% in 1996.
"The $10 to $15 price points have grown tremendously, and that is primarily catalog," Saksa said, claiming supermarkets could be missing two-thirds of the business. Typically, the new-release family hits are priced well above $15.
Citing numbers from mass merchandisers, Saksa said catalog videos represented 64% of the units sold in 1998, 53% of the dollars spent, and 75% of the profits made by retailers. "The true story in managing catalog is profitability. You will make more money selling five pieces of your catalog compared to 20 pieces of your new release hit," said Saksa.
"In analyzing the sell-through business, you can't depend on new release hits," he said, pointing out that 82% of sales for an average new video title occur in the the first eight weeks of release. "You've got to have a product flow strategy. Once your new release hit starts to sell down and your corrugated is half to a third full, it has to go on the shelf, but you just can't do it on an ad hoc basis. You've got to have a day-in, day-out plan of how you are going to get that product flow off the corrugated and into your in-line section," he said.
A catalog strategy will be especially important this fourth quarter when there will be fewer sell-through priced hits released into the market than in past years, Saksa noted. Including major catalog re-promotions, the total number of new release hits will drop from 64 in 1998 to 45 in 1999, he said.
One big reason for this is the lack of strong titles released theatrically during the early summer. "All the other studios theatrically got out of the way of 'Star Wars,"' said Saksa. But "Star Wars" won't be released in the fourth quarter, he said. "So you don't have a lot of theatrical product coming out this year. How are you going to make your comp numbers vs. a year ago? You are going to do it with catalog," he said.
"In the video divisions of studios, we gnash our teeth because we are somewhat dependent on the theatrical side. When they come out with hits, it is easy for us. When they don't come out with hits, it is a tough year. We get around that by merchandising our catalog. That's our way of adjusting our business and being able to maintain our profitability, and our profit goals to our corporation, and you can do the same thing because the margin is in the catalog product," said Saksa.
In reviewing anticipated release schedules for the various studios, Saksa noted that there will be no "Titanic" or "Lion King 2," but the total number of units for the October to December period might come close if Disney releases "Tarzan" in December. If that happens, Warner projects that 69.9 million units of big titles will be sold in that time period vs. 71.3 million last year. "So the fourth quarter isn't all doom and gloom," he said. ("Titanic" was released in September last year, so it was not included in Warner's fourth-quarter numbers.)
By focusing on the new release hits, supermarkets miss out on the heaviest purchasers of videos, who represent 87% of total sales, he noted. The heavy purchasers, who buy six or more videos per year, are motivated more by the appeal of certain titles, and less by price. The light user is more interested in what's new and popular, and price is also more important.
"If you want that heavy video purchaser, you have to offer catalog," said Saksa. "Right now, that person is not in the habit of going to the grocery store to buy videos. They are going to the video specialty store or mass merchant. They know that the mass merchants merchandise catalog titles better than grocery does. Grocery is a hit-driven business, but you can't live by that," he said.
Rental Revival
Catalog also represents a big opportunity on the rental side of the video business, although managing new releases and taking advantage of supermarket rental locations also are great challenges, said Trevor Drinkwater.
"There are a lot of very simple things we can do inside your store to get people to rent more videos. The exciting thing is, you don't have to get them to come into your store like the video specialty stores do, they are already there. Consumers walk into your stores every week, we just have to bring them over," he said.
Drinkwater highlighted the strength of the rental business, with 86 million VCR households currently, projected to grow to 90 million by 2001. "The VCR is right behind TV as the most prevalent home-entertainment vehicle inside the home," he said.
Video-on-demand, on the other hand, is projected to reach 25% of homes within 10 years, Drinkwater noted. "But that's 10 years away. Right now we are looking at $11 billion in revenues with the availability of 90% of households," he said.
"If you look at the size of the rental business, there are a lot of dollars going to this industry that you can go out and capture." On average, 31% of of those households use their VCRs on a weekly basis. "The VCRs are there. Our objective is to get more people to use them," he said.
For supermarkets, this means the customers in the stores have the hardware in their homes. "If we can just get them to walk another 15 feet and get excited about going into the rental section, we have a great opportunity to really drive this forward," said Drinkwater.
Rental customers demand availability of new releases, want to keep the tapes longer, desire a fun shopping experience and have a low interest in catalog, he said. Warner believes the catalog part of the rental business can be stimulated.
"There is a big opportunity in my view to focus on catalog and get it renting again," he said. For example, he noted that the American Film Institute's Top 100 movies promotion resulted in a dramatic increase in rentals of some titles. "We are trying to do a better job of helping the retailers merchandise the catalog section, with the right type of catalog titles, and start to do some exciting things to drive consumers toward the catalog business. That is where we are going to drive some profitability back into this business," said Drinkwater.
Retailers can do more to create a fun shopping experience around video, he added. "This is what we do. We are peddling fun. We are peddling enjoyment in the home."
Consumers are looking for longer rental periods because many find that returning videos can be a stressful event. Customers come to the supermarket over two times a week, on average, "so you should be looking at ways to allow them to come back with the video on that return trip to your store. It has proven to have a significant effect on consumer satisfaction," said Drinkwater.
Copy depth of new releases is essential, he noted. "You have to have new releases and you have to do it with copy depth. There are a lot of programs out there and they are not all created equal," he said.
Warner has been talking to supermarkets about these programs."We want to help retailers understand the economics so we can understand the economics and design programs that make this profitable for everybody involved," he said.
The studio also is presenting retailers with ideas to make better use of their limited space for new releases. For example, putting up key art to let consumers know that empty rental space is dedicated to certain titles, or stocking multiple copies of tapes deeper. Additionally, "you are going to need space for DVD, so it really forces us to look hard at the section and the space that we have in the stores and to manage that space better," he said.
