COPY DEPTH CAUSES FLOOD ONTO USED-TAPE MARKET

RANDY WEDDINGTON

The proliferation of copy-depth programs for rental videos is having an unplanned side-effect: an oversupply of used tapes.

What's happening to these tapes and how will they affect future business trends? Supermarket video specialists and distributors are beginning to assess these concerns based on data gathered in 1998.

"Our situation is different from the big video chains," said one video specialist for a medium-sized supermarket chain. "They're dealing with huge stockpiles of not-so-new releases from revenue-sharing programs. We're not as concerned with our own, more modest buildup from copy-depth programs as we are with the market saturation caused by these competitors."

For example, a record 995 million VHS tapes entered the North American market in 1998, up from 971 million in 1997, according to speakers at the Annual Marketing Summit of the International Recording Media Association in New York last month.

A significant part of the increase was due to the copy-depth programs in the rental market. After a year of assorted copy-depth programs, the accumulation and disposal of rental tapes have become key issues affecting every stage of the traditional home-video business model for supermarkets and specialists alike.

The key factors affecting rental profitability, say analysts, are initial cost, turns per copy and used-tape sale pricing. Copy-depth programs of all sorts have lowered costs but raised the number of available copies, so demand peaks early and falls quickly, lowering the return on investment. And as the supply of used product escalates beyond demand, those prices drop as well.

"If you satisfy the rental appetite the first week of release, there aren't enough turns left to show a profit," said Kirk Kirkpatrick, vice president of marketing at WaxWorks/VideoWorks, Owensboro, Ky.

Already seeing ROI decreases due to the rental glut, many supermarkets are scaling back their participation in copy-depth programs, helping to minimize losses in the devalued used market.

"We started out participating in the copy-depth programs but we're doing less and less," said Cindy Seale, general manager of video operations for Jitney-Jungle Stores of America, Jackson, Miss. "The problem is the increasingly unrealistic goals. The studios keep getting greedier and greedier."

As these programs have evolved, going from bonus copies and discount pricing to leased and buy-back units, away from prepacks and back again, retailers have had to juggle different strategies for maximizing profits while keeping inventories at manageable levels.

"We've used a few of the copy-depth programs but we haven't been able to make many of them work for us," said Clifford Feiock, video coordinator at Nash Finch, Minneapolis. "We're not flooding the market by any means; we're just lowering our cost with 20% free copies."

Craig Hill, video specialist at Harps Food Stores, Springdale, Ark., said Harps still participates in the copy-depth programs despite the changing deals. "Typically, we have to overbuy to use them, so what we've done from the beginning is to sell off the extra new copies to other retailers. We're getting $30 per tape, which is a bargain, and it keeps us from having to deal with too many used copies down the road," he explained.

In the past, many retailers have purchased 30-day-old movies from tape brokers as a way of economically augmenting their new-release selection. However, with the advent of copy-depth programs, retailers are shifting these buying dollars to new product bought for street date.

"Thirty-day product is in the toilet," said Keith Wingfield, president of WLW Investments, Denison, Texas, a used-tape broker. "Stores are so loaded with product that there's no way they can sell off that much to their customer base. Their tapes have lost 80% of their value due to lack of demand. Smaller stores have gone by the wayside, and that's where the market was for 30-day product. That market's a dead dinosaur."

In an attempt to slow the flood of used tapes onto the market, studios are shifting their emphasis to lease and buy-back programs. Although this relieves retailers of the need to find their own disposal outlets, these programs create new problems for both retailers and distributors.

"Not only are retailers unhappy with buy-backs, think about us," said Kirkpatrick. "We're responsible for all the returns, and that's not easy to administer."

"Buy-back programs just don't work for us," said Hill of Harps. "

"When you're dealing with the No. 1 or the No. 2 title of the month it makes sense to consider a lease or a buy-back program," said Greg Rediske, president of Video Management Co., Tacoma, Wash.

As these plans develop, retailers find new ways to turn them to their advantage. "There are some buy-back users who will get 20 copies of a title, immediately sell them, and then at the end of the lease, go to Blockbuster to buy copies to send back," said Kirkpatrick.

Blockbuster Entertainment, Dallas, indirectly benefits supermarkets in another segment of the used market. "We're still aggressively buying used tapes from Blockbuster, and grocery stores are a great market for them," said one used-tape dealer. "We're supplying supermarkets with 144-piece spinners on a guaranteed-sale program. We charge $5 per tape and they sell them for $6.99. We're talking to several major chains about after-Christmas programs," said the dealer.

"Blockbuster headquarters says that they're not selling to dealers, but the reality is that they don't know what's going on out in the field. The average Blockbuster store, whether corporate or franchise, pulls 300 to 1,000 pieces per week of shared-revenue tapes off its new release shelves," said the dealer.

This business tradeoff is one indication of how dramatically copy-depth programs have changed the video landscape in the past year. What changes are yet to come, however, are still being debated.