CD-ROM GROWTH LIES AHEAD FOR SUPERMARKETS

DAN ALAIMO

LOS ANGELES -- Impulse purchasing and changing computer- user demographics will drive budget-priced CD-ROM sales in supermarkets.

So far, the CD-ROM market is not right for a big sales success in the grocery channel, but the future potential is strong, said suppliers polled at the recent E3 (Electronic Entertainment Exposition) show here. Packaging, merchandising programs and the growth of CD-ROM into a mass market will make the supermarket environment an ideal place for the disc-based computer software products. "For the most part, supermarkets have been interested in the category, but they have not been real pleased with the sell-through," said Joe Spector, vice president of sales and marketing at Essex Interactive Media, Englewood Cliffs, N.J. "But the publishers are starting to understand what's right for that class of trade. In the next nine months, CD-ROM sales in supermarkets will be much greater than before," he said. He expects supermarkets to be 5% to 7% of Essex's sales by the end of the year, up from around 2% now. The penetration of computers into homes needs to increase before CD-ROM will take off in supermarkets, said Richard Gnant, chief executive officer at Sirius Publishing, Scottsdale, Ariz. Currently, about 32% of homes have computers, he said. "Back when the VCRs only had a 32% market penetration, you weren't renting or selling many home videotapes in supermarkets. But as soon as it hit a higher percentage, then it didn't matter if it was "Terminator" or "I Love Lucy." You were able to sell it in a grocery store," Gnant said. Sirius now sells less than 1% of its product through supermarkets, but Gnant sees this increasing to 10% within a few years. Budget priced CD-ROMs do sell in supermarkets now, but only children's educational products, he said. "Anything else is not there yet." Cambridge, Mass.-based SoftKey International has put a corrugated shipper-based program of children's CD-ROMs in many supermarkets, going through video distributor Ingram Entertainment, La Vergne, Tenn. "Sales have gone beyond our expectations in a lot of cases," said Eric Levin, national sales manager of new markets. The mostly female supermarket demographic lends itself to a targeted program that emphasizes children's game and educational products, he said. "We see tremendous potential. As a company, we see supermarket and pharmacy as two of the largest growth areas for us over the next 12 to 18 months." UAV Corp., Fort Mill, S.C., has seen sell-through rates of 85% on CD-ROMs in plastic jewel-case packaging in supermarkets, said Patricia Sherry, computer software marketing. "We had phenomenal success in supermarket and drugstore chains in the Northeast." But with prices under $10, or a few dollars above, the content of the discs has to be good, Sherry said. "CD-ROM in supermarkets is going to be really big. The key is that publishers have to watch their quality. Even at $9.99, you have to give the customer a good value," she said. As with videos, supermarket customers can be expected to pay up to around $20 for a CD-ROM, said Larry Castro, director of sales and home entertainment at Saban Children's Entertainment Group, Los Angeles. The key is offering a combination of entertainment and education, he said. Saban is now testing a program of value-priced audio, video and CD-ROM products with Ralphs Grocery Co., Compton, Calif. The program is sold from a colorful corrugated display. "It appeals to kids and it should be parent-friendly as well in terms of price point and entertainment," he said. Supermarkets are just getting started in the CD-ROM business, said Pamela R. Unruh, director of marketing at N-TK Entertainment Technology, Cerritos, Calif. Typically, they need to be merchandised in the front of the store near the checkouts for impulse sales, she said. "They have to be lower-priced products. I don't think someone going to the supermarket will pay more than $9, $12 or $15 for a CD-ROM product. If they are willing to pay more, then they will go to a computer store. "There's so much growth potential in supermarkets, but the chains have to support it," Unruh continued. "They have to get interested in it, they have to give it a section, they have to do promotions and get people in there. It is always going to be an impulse item in supermarkets and it is always going to be a lower-priced product." SoftKey's Levin sees supermarkets handling CD-ROM the same way they do music products. "You don't see many supermarkets that have a full-fledged music department, but come Christmas time, you see bulk displays of Christmas music or end-caps of relaxing music. That's how we see this marketplace coming together," he said. Shrink is much lower with CD-ROMs than with music, Levin noted. This is because of two factors, he said. "One is these products are meant to be impulse lines. It is always merchandised in its own display and always merchandised in a high-traffic area," which automatically cuts down on theft, he said. "Secondly, the demographics of the CD-ROM buyer at this point are very different than the average music or video consumer. These tend to be very well-educated people" who are not likely to risk their reputation over a a $12.99 CD-ROM, he said. "We've found very low shrinkage on it. We think the opportunity is far greater than the risk at this point," said Levin. Multiple purchases is another characteristic of CD-ROM transactions, he noted. "We generally sell about 2.1 of these products at a time. That multiple purchase is a big part of the sales-per-square foot factor that retailers are so concerned about."