LAS VEGAS -- Consumer behavior in rental and sell-through is headed in different directions, with rental customers demanding more new releases, while more catalog titles are selling than ever before.
Those were two of the provocative points made during the third annual Supermarket Video Issues Breakfast during the Video Software Dealers Association show here last month by executives of Warner Home Video, Burbank, Calif. Warner sponsored the breakfast, which was co-hosted by VSDA, Encino, Calif., and Supermarket News, New York.
Following presentations by John Quinn, Warner's senior vice president, sales, and Mark Horak, vice president, marketing, the executives fielded questions from retailers that included many tough ones about the industry's fast- changing trade policies. Quinn and Horak were joined for the question-and-answer session by Henry McGee, president, HBO Home Video, New York, and Pam Kelley, vice president, sales, New Line Home Video, Los Angeles.
Quoting an old Chinese proverb, Quinn noted that these are "interesting times" for the home-video industry. "What that means is we have more challenges now in growing this business. It's not just riding the wave of the VCR introduction. It's how do we market a category in both rental and sell-through in a way that keeps consumers interested and has a profit piece for everybody in the stream," he said
The breakfast attracted 120 attendees, an estimated 20% more than in the past in a year when attendance at the overall VSDA convention was down 15%. In less than two hours, the program covered a wide agenda. Among the presentations and topics were:
Gary Rautenberg, VSDA's director of membership, spoke on the benefits of membership in the association.
David Merrefield, vice president, executive editor and associate publisher of Supermarket News, provided an overview of the size and scope of video in supermarkets.
The top 10 supermarkets in video rental were honored. The 10, ranked according to revenues and merchandising aggressiveness, were profiled in the May 4, 1998 issue in a story titled, "SN's Video All Stars." They are Kroger Co., Cincinnati, Giant Eagle, Pittsburgh, Albertson's, Boise, Idaho, Schnuck Markets, St. Louis, Wegmans Food Markets, Rochester, N.Y., Randall's Food Markets, Houston, Safeway, Pleasanton, Calif., Hy-Vee, West Des Moines, Iowa, Smith's Food & Drug Centers, Salt Lake City, and Pathmark, Woodbridge, N.J.
Quinn put the present challenges facing the video industry in a historical perspective and later fielded some of the thorniest queries posed to the panel by the retailers about copy depth and revenue sharing programs.
Horak provided a comprehensive overview of the opportunities facing supermarket retailers in the areas of rental, sell-through and DVD.
One of the more surprising statistics presented by Horak showed that most of the growth on the sell-through side of the business is coming from catalog products. While overall sell-through revenues were up 3% in 1997, catalog revenues rose 10.1%, with units rising 16.3%, according to A.C. Nielsen, Schaumburg, Ill.
The reason for the disparity is the rapid growth in sell-through priced under $10. To demonstrate this point, Horak presented numbers from Alexander & Associates, New York, that showed that after four years hovering in the $14 range, the average sell-through price per unit dropped to $13.42 in 1997.
"The budget priced segment has grown dramatically," he noted. "As more and more of live action films are put out at lower prices, we are seeing that consumers are accepting them. We are seeing a general shift in the category on price point and the type of film by genre."
As the category grows, all genres are picking up share from children's and family titles that were the bedrock of the sell-through business until recently, he said. "Consumers have shifted their thinking about what is the appropriate movie to bring home and they have opened up a world of possibility in the non-family genres. Our research indicates that the non-family genre is actually about two-thirds of all the videos purchased recently, which is probably surprising to a lot of people," said Horak.
Using an example from his days in the tuna packaged goods business, he said certain items were sold at little or no profit to attract customers, while other products had higher margins. "It's amazing that the video category is very similar. You've got your new release hits, which are direct to sell-through with huge unit volume and a lot of traffic, but little margin," he said. Titles repriced from the rental market and other catalog earn varying amounts of profit for the retailers.
This has created a need for category management in maintaining the catalog inventories in stores. "As you think about your future participation in the category, if you are not recognizing this, then you are going to miss an opportunity. You are not going to be on a level playing field with those retailers that are understanding this and that are maximizing sales and profitability in this category."
Changes in the rental market received most of the attention at this year's VSDA show, and Horak's presentation underscored the need for supermarkets to increase copy depth on new releases. He noted that after "a small decline" in 1997, the rental business is recovering "primarily due to the strength of titles." Rental is up 2.6% year to date in 1998, he said.
"As consumers are faced with the option of what they are going to do for their entertainment, if a title is out and available that has their interest, they are coming in and renting it and we are seeing the performance reflected in the marketplace," he said.
But studies have shown that 23% of consumers that come into a store looking for a particular title and don't find it, leave unsatisfied. "That is not a good situation for anyone," he said. As a result, Warner created the copy depth and shared revenue programs for retailers, and will support them with additional marketing dollars.
"As the strength of titles improves, studios and retailers are starting to create consumer awareness advertising that the title is available for rent. That helps drive overall category transactions," he said. Post-street date advertising after the first couple of weeks of a big title's release date helps build the retailer's return on investment for additional copies brought in, he said.
"We don't want those consumers to go home unhappy. We want those consumers to be satisfied in some way with the rental experience. We want them to keep coming back to your stores, looking for product and having a positive relationship," he said. At the same time, "we want to make sure that if we convince you to buy a particular level of a particular title that it will be a good experience for you, because we feel we have a long-term relationship with you," he told the retailers.
In his introductory talk, Quinn mentioned Time Warner's interests in the cable industry and stressed that home video remains a core profit center representing over $2 billion a year to the company. "So when you look at us as being invested in cable, I also ask that you look at us as being heavily invested in the video business. Because of that, our view on the business is that we want to run it for the long-term perspective. We want to make sure that we are doing the things that will ensure that we have a business in three, five, eight and 10, and even 20 years from now," he said.
That is one of the reasons Warner has been so fervent in its advocacy of DVD, he said. "There is a strategy behind that to make sure there is a packaged media future for all of the retailers and the studios that are in this business today," said Quinn.
New in-home delivery systems have been slow to evolve, but they are coming. DVD provides a way for video retailing in supermarkets and elsewhere to survive, said Horak. "We see DVD as an opportunity to protect the packaged movie vehicle that is going to be available to consumers in your stores for a number of years to come. If we are not successful in establishing the DVD format, then as near video on demand and digital cable expands, we see that the packaged opportunity may in fact go away, and that wouldn't be good for you or for me," he said.
Warner projects that as many as 15 million hardware units will be in installed by 2002, with software sales approaching $6 billion. "As hardware and software prices decline, we see DVD becoming more and more of a mainstream product category," said Horak.
On the sell-through side, this presents new sales opportunities as customers build new libraries. For rental, "DVD offers retailers a greater profit potential than VHS because of its sell-through pricing," he said.
Horak encouraged the supermarkets with rental programs to begin renting DVDs. "We will have a national advertising campaign beginning later this summer that will tell consumers that DVD is now available to rent," he said. "We will do everything we can to get the rental community behind DVD."