2003 DVD OUTLOOK

JOHN KAROLEFSKI

It will be a Happy New Year for DVD.

Retailers predict that Christmas gifts of reasonably priced DVD players, combined with more titles available for sell-through, will ignite business in 2003. They will adjust their VHS-DVD mix as demand for the new format increases.

At the same time, however, retailers will have to monitor two issues brought on by DVD's increasing popularity: one, the effect that low-priced titles will have on rental, and two, the nettlesome problem of theft.

"We're optimistic," said Laura Fisher, video coordinator, Martin's Super Markets, South Bend, Ind. DVD demand will initially depend on how many players were given as Christmas gifts, she added.

"I expect to see a big spike in January. When people get their first machine, they tend to be very enthusiastic," said Greg Rediske, president, Video Management Co., Tacoma, Wash.

"This is probably going to be the best year yet for DVD," said Bob Gettner, video buyer/coordinator, B&R Stores, Lincoln, Neb. "It's going to explode."

Indeed, studios are shipping DVDs at about twice last year's pace. Domestic home video revenue, spearheaded by DVDs, is expected to climb to $23 billion in 2003, according to Salomon Smith Barney, New York.

Related research by Warner Home Video, Burbank, Calif., supports these projections. Fifty percent of U.S. households will have at least one DVD player by fall 2003. One in three will have two or more DVD players. As the second player goes into a home, the variety of genres purchased increases significantly. New player owners typically skew towards new releases, action/adventure and comedies. Upon the addition of the second player, video purchases broaden to include catalog thrillers, drama and family titles.

"The expanded and deeper household penetration is most positive for retailers of catalog as multi-player households average 50% more DVD movie purchases than single-player homes," said Rodney Satterwhite, vice president of business development, Warner Home Video. "These factors indicate that now is the perfect time to shore up the DVD catalog section to take advantage of these new business opportunities."

Meanwhile, the ground-swell of interest in the format continues and will gradually affect the DVD-VHS mix as the year progresses, according to retailers.

"In 2002, there was an eating away at VHS space," said Gettner. "That's just going to continue in 2003. DVD has breathed life back into video rental. It used to be on a downward spiral until DVD came along."

The mix is definitely going to change at Chandler, Ariz.-based Bashas', predicted Bill Glaseman, video specialist. But the percentage of change will be dictated by VHS rentals.

"We track them every month," he said. "If it looks like they're still holding up, we'll still keep them in. But I personally anticipate that the rentals will slow down and DVD will pick up. We will be changing our mix, but I think it will be gradual throughout the year."

"The relationship has been a constant change, depending on where the store is located," said Rediske of Video Management Co. "It's an evolving mix. We have some stores doing over 50% DVD. An average would be 20% DVD. It will be a challenge throughout the next year to continue to stay on top of that change."

Ironically, at a time when DVD is ready to advance dramatically in the marketplace, the executive who championed its creation suddenly resigned late last month as president of Warner Home Video. Warren Lieberfarb, who held the post for two decades, was also well known for advocating that DVDs be priced inexpensively to stimulate sales rather than rentals.

The issue of less DVD rental due to more low-priced sell-through titles was in the national spotlight last month. Blockbuster announced that its fourth-quarter revenues and earnings would not do as well as expected because consumers were buying DVDs at mass market stores rather than renting them. Wal-Mart and other retailers flooded the market with attractively priced DVDs for the holidays.

But a noticeable decrease in DVD rental has not played out in supermarkets yet, according to retailers interviewed by SN.

"So far I have not found that to be the case," said Glaseman of Bashas'. "When I put out a fairly large quantity of DVDs, I might reduce my rental copies because of potential sales. But it's not really enough to make an issue out of it."

Chuck Porter, director of entertainment, Giant Eagle, Pittsburgh, said, "DVD is going to change the mix, with more people purchasing videos and fewer people renting them. But I still think that video rental will do well for at least the next five years."

Gettner of B&R Stores said his shoppers are buying more DVDs than ever before. "But I can't say that it has really hurt [rental] that much. We rent a lot of DVDs," he said.

Video Management Co. is increasing its sell-through emphasis, according to Rediske, but it's not "incredibly dramatic. There's still a lot of interest in our market in rental as opposed to sell-through."

Meanwhile, he prefers a ratio of 50-50 for VHS and DVD in pre-pack shippers, but that's changing and sometimes depends on the genre. "For example, a movie like 'Signs' is more DVD and less VHS," he said. "With family films, it's still more VHS and less DVD."

Bill Bryant, vice president, sales, Ingram Entertainment, La Vergne, Tenn., explained that the popularity of VHS for family films comes from parents still having VCRs in the child's bedrooms and playrooms. "They will still prefer for their young children to handle VHS cassettes rather than DVDs, which can be easily damaged by a child," he said.

One thing that can easily damage DVD sell-through success in supermarkets is shrink. Retailers are balancing the need for visibility with the potential for theft.

"Do you put the DVDs out for sale where they are exposed to the most customers and exposed to the most theft? What is the value of higher sales against losing one or two copies?" asked Glaseman of Bashas'. "With the tiny profit we have, if we lose one or two, we've lost the profit on the whole project. It's scary. I don't see anything addressing it yet, and I hope something will."

Bashas' has security sensors to deter theft from its live store-within-a-store video departments. But placement there reduces exposure to customers and therefore sales.

"So we've made a conscious effort to put DVDs out where they are exposed, and grin and bear the fact that we're going to be losing some in shrinkage," he said. "But if [theft] continues, we might not put them out because it won't be worth it."

Getter admitted to having problems with theft in B&R Stores. "But it's stabilized," he said. "There's still theft, and it's a just matter of curbing it. We made some changes and put DVDs in security boxes to make it harder to steal them. But you can't put them out of sight. DVD has to be in a high-traffic area. That's the key."

Ingram is working with the studios to influence them to provide DVD long box combo shippers at no extra cost to supermarkets, according to Bryant. "In addition, many chains are in the process of installing Sensormatic or Checkpoint security systems for all of product types that are subject to potential theft."