A YEAR OF UPS AND DOWNS

DAN ALAIMO

It was a roller-coaster year for supermarket video.

Sell-through was up a lot and rental was down a little, resulting in higher video sales but lower video profit margins for retailers in 1995.

That was the core finding of SN's fifth-annual State of the Industry Report on Supermarket Video. In sell-through, supermarket sales increased at a faster rate than the overall video industry, while in rental they did not suffer as drastic a decline as the specialty store class of trade.

"Rentals were down in most of the stores in the last half of '95," said Clifford Feiock, video coordinator at Nash Finch Co., Minneapolis. "On the other side of that, our sell-through numbers were up quite a bit," he said.

Total video revenues for supermarkets in 1995 rose 6.3% to $2.36 billion. Sell-through was up 23% to $856 million, while rental dropped 1.3% to $1.5 billion.

For 1996, SN projects that sell-through will continue to expand in supermarkets, with a 19% increase to $1.02 billion. Rental, meanwhile, will see a modest increase of 4.8% to $1.02 billion. Total video revenues will increase 9.7% to $2.59 billion, according to SN estimates.

But at the same time, with high-profit rentals languishing behind sell-through increases, overall video margins are headed steadily downward, from 32% in 1994 to 29.4% in 1995 to an estimated 27.6% in 1996.

"When we first started in video, it was easy," said an executive with a Midwestern chain. "Whatever you put out, rented. Now with the studios' sell-through policies and the competition from cable and satellite, it is getting harder and harder to chase that buck."

"Overall, 1995 was down a little bit over previous years, but we were still pleased," said Denise Darnell, video supervisor at Southeast Foods, Monroe, La. "We still made money. We just didn't make as much as we had in prior years."

But some retailers reported strong rental business last year. "Video has been good for us," said Matt Dillon, video director at the Boogaart Retail Division of Fleming Cos., Scrivner Group, Concordia, Kan. "In 1995, sales were right in there and profits were hanging in there, too."

A video executive with a major chain reported double-digit increases for both rental and sell-through. As for 1996, "we think that we will still see some increase in the rental business and that sell-through growth will again be double-digit."

Some key trends revealed by SN's survey indicate that supermarket video departments are increasingly becoming mainstream video destinations. The results showed:

A steadily rising percentage of rental inventory devoted to new releases, from 34.2% in 1994 to 40.1% in 1995 to an estimated 43.1% in 1996.

A similar increase in the percentage of sell-through revenues coming from nonchildren's theatrical movies, such as "Forrest Gump," "Batman Forever" and "Apollo 13." This number rose from 25.2% of total sell-through sales in 1994 to 31.9% in 1995 to an estimated 34.3% in 1996.

A majority of retailers are not waiting for the new video game formats to become as widely accepted as the old 16-bit games are. More than two-thirds will carry the software for rent in 1996, while 20% will sell the software and 22.9% will rent the hardware units.

The survey was conducted and tabulated for SN by the Market Research Department of Fairchild Publications, New York, which publishes SN. Information from retailers, suppliers and other research companies augmented the survey data.

The questionnaire was faxed in December and January to supermarket chains, independents and wholesalers across the country. Survey respondents included 37 companies representing 5,871 stores in 1995. The survey results are based only on responses from companies now active in home video. The results reflect video rentals at 980 supermarkets and ongoing sell-through activity at 1,402 stores.

Total annual dollar volume for retailers responding to the survey was more than $65 billion in 1995. The average annual volume per store of supermarkets with a video rental program was $7 million, according to the survey.

"I think the whole video business is going through a change now," said Rick Ang, buyer at Video Mart, Sacramento, Calif., which racks the video departments in 17 Bel Air supermarkets in the Sacramento area.

Smaller video retailers are going out of business and the big video chains are still settling into their niche, he said. "Once all that passes, grocery rental will be right back up to, or even stronger than, where it was before," Ang said.

"We are excited about the coming year," said Dillon of Boogaart. "We still believe in video and think that there is a place for it in our communities. We are going to stay as aggressive as we have been in the past."

OVERALL TRENDS

Last year was the first time the video rental market saw a significant decline, dropping 4% to $9.1 billion, according to Adams Media Research, Carmel Valley, Calif. Supermarkets fared a little better, going down 1.3% to $1.5 billion, according to SN's study.

This has many people searching for reasons. Among the more popular ones with retailers and analysts:

There were a significantly smaller number of big hits available for rental last year than in 1994.

The increased number of sell-through titles cannibalized revenues while reducing the number of big hits available for rental.

The emergence of direct broadcast satellite systems, now up to about 1 million households.

Home computer use is up, while the revenue-producing video game business is in a prolonged transitional phase.

"It all adds up," said Tom Adams, president of Adams Media Research. Another part of the equation is the natural maturation of video as a consumer product category, he said.

"Consumers use their toys more heavily when they are new, and there are not many homes in which the VCR is a new toy," he said.

SN's research showed how the growth of sell-through has cut into margins. While rental margins have stayed strong, at 39.7% in 1994, 40.3% in 1995 and an estimated 36.8% in 1996, sell-through margins are less than half that. In 1994, sell-through margins were 16.2%, going to 16.1% in 1995 and then to an estimated 17.8% in 1996. When weighted for the different sizes of the two markets, the overall average margin is sinking from 32% in 1994 to 29.4% in 1995 to 27.6% in 1996.

No retailers would talk specifics when it comes to margins, but it is clear that they are concerned about this trend. "I don't know what the studios' margins are, but I know what mine are, and they are marginal," said the Midwestern chain executive.

"With our rental revenues down in '95, that certainly hurt overall profits," said Feiock of Nash Finch.

As to the biggest challenges facing the supermarket video business in the year ahead, "the cost of acquiring videos" was the clear No. 1, as it has been all three years that SN has asked the question. But following that, internal issues, like "selecting and managing inventory," "upper management support," "shrinkage," "lack of space" and "labor" are dominant concerns on video executive's minds. Competitive worries, like "competition from video specialty stores" and "new technologies, like video-on-demand and satellite delivery," placed well down the list.

Shrink is a big concern at Southeast Foods, Darnell said. A new point-of-sale software system will help the retailer track nonreturned tapes, unpaid late fees and questionable actions by cashiers. The program will print out letters to delinquent customers and track exceptions at the register, she said.

"It will give us much more control over what goes on and will free our time up so we can do other important things," she said. Because of the shrink problem, Southeast Foods has had to stock sell-through tapes behind the service counter in stores where it does not have a secured video department, Darnell said. "We may lose impulse sales, but we are not losing our videos," she said.

In rural areas of Kansas, satellite delivery systems are starting to become a factor, said Dillon of Boogaart. "A lot of people are putting them in and it is really starting to take hold out here."

RENTAL TRENDS

SN expects rentals in supermarkets to rebound 4.8% this year to $1.57 billion for three reasons:

More stores will move from testing to rollout of shared transaction fee programs like those from SuperComm, Dallas, and Rentrak Corp., Portland, Ore. This will drive traffic, transactions and profits.

There are more major chains with a big commitment to video expanding, including Albertson's, Kroger Co. and Hannaford Bros., than there are chains planning to cut back on video, such as Dominick's Finer Foods and Stop & Shop.

The first quarter of 1996 has been a good one for the rental market, making retailers hopeful about the rest of year.

"So far in '96, we've been doing very well. The numbers have been up mostly every week over the last year," said Feiock of Nash Finch.

Cold weather has helped boost video rentals all over the country, even for Southeast Foods in Louisiana, Darnell said. "We've had some rain and some ice. That brought a lot of people out to rent, so right now things are going very well," she said.

"Our video departments have been doing pretty well," said Bob Glisch, vice president of operations at NDC/Mega Marts, Oak Creek, Wis. Supermarket video departments have a natural advantage over other video retailers, he noted. "The traffic is there already. We are convenient. We are reasonably priced and we have a good selection," he said.

The rapid expansion of video rental departments has slowed to only include new stores and remodels for most retailers. According to the study, the number of rental departments increased just 1.5% from 1994 to 1995, and retailers projected a 6.1% rise in 1996.

There was little change in the size breakdown of these departments from last year's survey to this year's. Small departments under 1,000 tapes were 27.7% of the stores measured by the survey, while medium-sized 1,000- to 2,499-tape sections were 47.5%. Large 2,500- to 5,000-tape departments were 17.6% and supersized video shops of more than 5,000 tapes were 7.2%.

More than two-thirds, 67.6%, of the survey respondents said they were expanding the percentage of new releases in their video departments. The retailers said new releases increased 17.3% from 1994 as a percentage of inventory, going from 34.2% to 40.1%. They see another 7.5% increase in the year ahead as new releases climb to 43.1% of inventories. This trend has been confirmed by store visits SN has conducted in the last year, and also reflects the trend to shared transaction fee programs, which allow retailers to buy rental titles in greater depth.

The number of retailers using shared transaction fee programs will not change much, according to the survey, going from 26% last year to 27.8% this year. But industry sources have told SN that more larger chains are getting involved, and the ones who are involved are rolling the programs out to more stores.

The SuperComm shared transaction fee program "makes it very easy for us to expand the number of new release titles we are offering without raising our investment," said Feiock of Nash Finch. Guaranteed availability promotions, in which the stores guarantee that a new release title will be in stock or offer customers a free rental, have helped to boost business, he said.

Nash Finch is upgrading the space given to new releases from the 5% to 10% range to the 25% to 35% range, he said. "We are expanding slowly, being careful not to hurt our catalog rental business," he said.

Many of the other retailers SN polled said they also are increasing their commitment to new releases. "We have increased the number of new releases that we are buying," noted Bill Glaseman, video specialist at Bashas' Markets, Chandler, Ariz. "We wanted to see if that would stimulate more business," he said.

"We continue to increase space for new releases when we remodel," said Dillon of Boogaart. "The majority of our business is in new releases, so we feel that is what we have to go for."

Boogaart has taken advantage of sell-through titles like "Batman Forever" and "Apollo 13" to bring in great copy depth and run guaranteed availability promotions, he said. "It works. It gets people into the stores. The cost is nil for what you get out of it, so we are going to do it on some other titles," he said.

The Bel Air stores also have greatly increased copy depth on sell-through priced titles, said Ang of Video Mart. "In our larger stores, we've been putting in 30-plus copies of movies like 'Batman Forever' and 'Speed.' We've also increased our copy depth on rental-priced titles. For example, on 'Waterworld,' we brought in about 25 copies to the bigger stores," he said. The overall percentage of new releases has also increased in the Bel Air video departments, Ang said.

According to this year's study, retailers keep titles priced at new-release rates for 5.9 months, about the same as last year.

The percentage of retailers involved in other rental trends was down somewhat in this year's survey. But there is still a lot of optimism about rentals. For example, 47.1% said they were expanding in inventory size, down from 51.2% last year; 44.1% said they were expanding the number of their departments, down from 55.8% in 1995's survey, and 26.5% said they were expanding the number of live inventory departments, down from 37.2% the year before.

But there is still concern about the future, evidenced by the 17.6% who said they are cutting back or eliminating video, up from 11.6% last year, and 38.2% said they were cutting back on games.

Rental rates were down this year, with the average rate for new releases at $2.28, catalog titles at $1.12 and video games at $1.96. Last year, new releases came in at $2.32, catalogs at $1.26 and games at $2.10. Since 1993 the average new release has come down in price from $2.48 and catalog titles from $1.42.

As for how retailers are managing their video programs, owning and operating their departments continues to be the preferred method for 66.7% of the sample. Racked shared-revenue programs are used by 5.2%, leased programs like Video Home Theater and Selectrak are used by 13.9%, leased-space programs like Blowout Entertainment are used by 5.6% and 8.3% use a combination of methods.

SELL-THROUGH TRENDS

While video rentals and games have slowed up in the last year, sell-through continues to drive the overall business to ever higher levels. The overall sell-through business rose 14.5% to $6.3 billion in 1995, and will increase another 11% to $7.0 billion in 1996, according to Adams Media Research.

According to SN's study, supermarkets racked up 12% of the sell-through business, with $856 million in sales. This was up 23% from 1994. For 1996, SN projects that supermarkets will gain another 19%, rising to $1.02 billion, for 14.5% of the business.

"Rental has plateaued in some areas and shrunk in others, but sell-through has continued its march through Atlanta," said Dick Kelly, president of Cambridge Associates, Stamford, Conn. "It's doing extremely well.

"While rental volume is going to stabilize and possibly shrink in the next three to five years, I believe the sell-through volume is going to continue to grow as much as 12% a year," Kelly said. Declines in pricing have helped drive this market, especially in supermarkets, he noted. "As pricing goes down, that makes sell-through grow faster. That bodes well for retailers that are taking advantage of sell-through," he said.

"Sell-through is certainly an impulse business," said Adams of Adams Media Research. "So the more impulse-priced product there is, the better for supermarkets."

Unlike rental, which has little if any growth left in it, "sell-through has a long way to go before it flattens out the same way. Ultimately we will reach some sort of maturation on the sell-through side, too, but it doesn't appear to be anywhere on the horizon at this point," said Adams.

The overall share of sales going to supermarkets in the fourth quarter last year probably increased because McDonald's did not run a video promotion, said Arin Wolfson, general manager of VideoFlash Services at Alexander & Associates, New York. "There is a possibility that supermarkets picked up some steam from that," he said.

While the number of supermarkets carrying sell-through only increased 1.3% last year, according to SN's survey, overall growth in sell-through revenues for the respondents was close to 20%.

Products other than children's video are becoming more important to supermarkets, going from 25.2% of total sell-through revenues in 1994 to 31.9% in 1995, and projected to rise to 34.3% in 1996, the survey found.

Retailers are also very bullish on sell-through, with 41.2% reporting that they are expanding in inventory size, 25.5% expanding the number of sections, 38.2% cross-merchandising regularly with related items, 64.7% selling videos in the main shopping areas of stores and 58.8% offering low-priced, under-$10 in-and-out programs. Meanwhile, 20.6% reported that they are buying sell-through titles direct from a major studio, such as Disney.

On the negative side, 5.9% said they were cutting back or eliminating video sell-through, compared with zero when the same question was asked last year. Additionally, 8.8% said they were selling videos only from secured areas or service desks, while 38.2% offered only hit products sold from shippers.

The percentage of survey respondents offering an ongoing sell-through program in a permanent section rose slightly from last year, going to 58.8% from 56.9%. Permanent sell-through sections are on the to-do lists of many video executives. For example, Dierbergs Markets, Chesterfield, Mo., is testing a planogrammed section of 8 linear feet in a new store's video department, said Jamie Molitor, director of video operations.

"I wanted people to know that if they needed to buy a movie for a gift, they could get it there every day and not just when something was on sale," she said. If the section is successful, which it has been in its first few weeks, the program will be rolled out to other stores.

"I'm still very excited about the strong assortment of titles that are coming out direct to sell-through and the number of titles that are being repriced for sell-through," said Feiock of Nash Finch. "I think the real opportunity is for all stores to devote space to permanent sell-through areas for the titles that are being repriced," he said.

"We are looking at trying a permanent sell-through section in a couple of new stores. If that goes well, then we will try to introduce it to other stores," said the video executive with the Midwestern chain.

Boogaart put in such a program last year, Dillon said. "We rotate the titles every month. We carry all the major sell-through titles, but then we hit a lot of older sell-through, like the fitness and other specialty categories," he said. These are carried on an in-and-out basis, he added. "In most stores, we do it with shippers, but in some we have permanent racks," he said.

"This is the year that we are making a consolidated effort to get permanent sell-through programs in all our stores," said Teri Severinsen, manager of video services at Roundy's, Pewaukee, Wis. "The largest percentage of those sell-through titles is going to be in the children's area because of their popularity," she said.

Roundy's also is trying to get more sell-through programs displayed in the main part of the store outside video departments in its corporate stores and wholesale customers. "That is a big push for us right now," Severinsen said.

NDC/Mega Marts, which is one of Roundy's customers, is following through on Severinsen's recommendation. "We are going to take a look at moving some sell-through outside the department," said Glisch. "We think that will attract new sales because of the convenience and impulse," he said.

Revenues on the Rise

Rentals in supermarkets declined 1.3% last year, less than the industry average. In 1996, supermarkets will again outperform other video retailers and register a 4.8% growth in rental. SN projects sell-through in supermarkets grew 23% last year and it is expected to rise another 19% in 1996. Total video revenues were up 6.3% last year and should increase another 9.7% this year.

Supermarket Video Revenues (in billions)

1994

Rentals $1.52

Sell-Through $0.70

Total $2.22

1995

Rentals $1.50

Sell-Through $0.86

Total $2.36

1996 (projected)

Rentals $1.57

Sell-Through $1.02

Total $2.59

What's New

Responding to customer demand, retailers are steadily increasing the percentage of new releases they carry.

Percentage of Rental Inventory in New Releases

1994 34.2%

1995 40.1%

1996 (projected) 43.1%

Supermarket Share of Revenues

Supermarkets have achieved a healthy segment of the video business: more than 16% for rentals in 1995 and more than 13% for sell-through. Total video revenues in 1995 for supermarkets were more than 15% of the entire video industry.

Share of Total Video Industry Sales (percentage)

1994

Rentals 16.0%

Sell-Through 12.7%

Total 14.8%

1995

Rentals 16.4%

Sell-Through 13.6%

Total 15.4%

1996 (projected)

Rentals 17.4%

Sell-Through 14.5%

Total 16.2%

Now Showing

Sell-through hits like "Batman Forever" and "Apollo 13" boosted retailers' sales of nonchildren's products, a continuing trend.

Percentage of Sell-Through in Nonchildren's Theatrical Movies

1994 25.2%

1995 31.9%

1996 (projected) 34.3%