ACTIVE INTERACTIVE

ANNE SHERBER / Additional reporting: DAN ALAIMO

As interactive software gradually becomes a mass-market category, more supermarkets are cutting CD-ROM titles into their product mix.

The interactive software industry will gather in Atlanta this week for the Electronic Entertainment Expo, better known as the E3 Expo. The event comes at a time when many in that industry are looking to supermarkets to broaden their sales, and retailers are enjoying increased sales success with the product.

"We will pursue grocery with more vigor in 1999 than in 1998," said Walter Walker, vice president of marketing for Simon & Schuster Interactive, New York.

To address retailer concerns about shrinkage, software publishers have been willing to provide products on a consignment basis to distributor Major Connections, Dallas. "The publishers are very excited about developing this new channel of distribution," said David Lonsdale, chief executive officer.

Some of the top chains in the country have put in the Major Connections program, he said. Among them are Grand Union Co., A&P, Randalls Food Markets, Winn-Dixie Stores, one Albertson's division and seven Kroger Co. marketing areas. In all, Major's program is in 1,500 supermarkets, he said.

Another supplier, Expert Software, Coral Gables, Fla., which markets software priced under $15, has placed its now-familiar spinner rack in supermarkets across the country, including Lucky Stores, Safeway, Ralphs Grocery Co., Pathmark Stores, Tops Markets, Glen's Markets and Albertson's, as well as in drug chains like Longs, Eckerd and Genovese.

"Our belief is that supermarkets, drug stores and convenience stores are probably not going to be successful selling $50 to $100 retail-priced software because that is very much a considered purchase," said Ken Currier, CEO. "But we do feel that there is an opportunity for those channels to sell software in the under-$15 category, which is much more of an impulse purchase."

Research points to supermarkets' potential in selling computer software:

In the past year, personal-computer prices have dropped precipitously, reaching mass-market levels well under $1,000. Later this year, the Wall Street Journal has reported, consumers may be offered free computers with the advance purchase of Internet service.

Studies estimate that between 45% and 50% of U.S. households now have PCs, 75% of which are equipped with CD-ROM players.

PC Data, Reston, Va., has reported that software unit sales increased by 45% from 1996 to 1997 in the mass-merchant category. Sales of software for children ages 5 and below more than doubled last year, to $41 million, PC Data said.

Much of that growth has come from console games like Nintendo 64 and Sony PlayStation, said Doug Lowenstein, president of the Interactive Digital Software Association, Washington, operator of the E3 show. "But the PC market is also in a very strong growth cycle," he said.

Despite the steep growth in the installed base of PCs and the overall increase in software sales in all retail channels, some supermarkets are still hesitant about committing to the software category.

For example, Stop & Shop, Quincy, Mass., once carried some CD-ROM titles, but the retailer had them removed, according to Bob Mardo, general merchandise buyer. "We did have software and we're still looking at it," he said.

Consumer demand is a big concern. Supermarket retailers fear that only a small segment of the category -- mostly kids' products and games -- will appeal to their shoppers, and only under certain conditions. "It's certainly not right for every store," noted Randy Weddington, video specialist at Harps Food Stores, Springdale, Ark. "It would only work in upscale markets."

Other issues are shrink and margins. Some retailers believe that only the lowest-priced products, with the lowest margins, are viable in supermarkets.

"What's really moving is value or budget product priced at $12.99 and under," said Jeff Rouse, vice president of interactive media at Ingram Entertainment, La Vergne, Tenn.

But Lonsdale of Major Connections challenges the idea that supermarkets cannot sell computer software priced at more than $12.99. He said the average sale on products in his company's racks is now just over $20.

Despite its book division's access to supermarkets via distributors, Simon & Schuster, with offerings like "The Busy World of Richard Scarry" and "Star Trek," has had little luck placing its products -- most of which are priced above $20 -- in supermarkets, Walker said.

But as the company fulfills royalty obligations on specific titles and is able to offer those titles at lower price points, it will find wider acceptance in supermarkets, he said. "Some of our Richard Scarry product may go under $20 this year. We may try to visit new retail channels with that price point."

In the fourth quarter, Simon & Schuster will release a CD-ROM version of "The Joy of Cooking" that is scheduled to retail for $19.99. Walker said he believes the product and the price may appeal to supermarkets.

Based on Major Connections' sales experience, Lonsdale said, consumers are more willing to purchase software of all kinds in supermarkets.

"There are several sections that we focus on. One is education, which is broken into adults and children. Linguistic programs for learning foreign languages are extremely popular."

Another key segment is lifestyle titles. "Everything from three-dimensional home design to trophy bass fishing to NASCAR racing -- these do exceptionally well," Lonsdale said.

In Ingram's experience, successful supermarket titles fall into a more narrow subject range, said Rouse. "Children's product and games do well in supermarkets. We did an Electronic Arts promotion with titles like 'Madden Football,' 'NBA Live' and 'The Need for Speed,' and the sell-through was incredible. They were marked down to budget prices and consumers responded."

Consumers' lack of familiarity with specific titles is another worry to supermarket retailers, said Simon & Schuster's Walker. When new PC owners begin to explore the software market, they are unfamiliar with what software can do, what constitutes a good product and what the differences among products are, he said.

Branding can make consumers more comfortable purchasing software in nontraditional outlets, Walker said. "We have to get to the point where consumers have enough experience with the brand so that when he or she is walking down the aisle with the shopping cart, they can see the product and put it in the cart and not wonder if it's any good."

Lonsdale said that Major Connections is now offering interactive endcaps that give a 30-second preview of the product. "The rack has a TV screen and CD-ROM player mounted in a display with 30 to 40 facings, and you can preview every one of the titles," he said.

"Revenue levels increase by 50% whenever interactive endcaps are present." Major Connections will have 150 of the interactive units in stores by the end of June, and the company plans to have more than 500 in stores by end of the year.