DROPPING OUT

DAN ALAIMO

Amateur hour is over for video rentals in supermarkets.

Not long ago, it was easy to make money on rentals: Put out some movies and out the door they went.

But with the increased competition from sharp specialty chains like Hollywood Video, Blockbuster Video and Movie Gallery, retailers are finding that only the fittest survive.

There's still good money to be made in rentals, but not without a heavy focus on new releases, good customer service and a department that projects showbiz glamour, observers noted. All that takes space and money that could be used otherwise.

As a result, four major chains have so far decided to exit the rental business: Dominick's Finer Foods, Northlake, Ill.; Kash n' Karry Food Stores, Tampa, Fla.; Meijer Inc., Grand Rapids, Mich., and Stop & Shop Cos., Quincy, Mass. All four were long-time players in video rentals.

While their reasons for exiting varied, observers said common elements in most of the chains' decisions included:

An apparent unwillingness to make the investment needed to make rental departments competitive.

A significant downturn in rental revenues in 1995 -- the first one in the history of the video industry. So far this year, the rental business has rebounded and is up significantly. A promising fourth quarter is in the offing.

Worries that future in-home delivery technologies will cut into rentals.

It's likely that others will follow these retailers in the months ahead. However, there are many more who are convinced that staying in the rental business is well worth the effort.

"I think supermarkets are short-sighted if they get out of video rental without thoroughly considering the consequences," said a video executive with a Northeastern retailer, who asked to remain unidentified. The chain recently evaluated its rental program and decided to stick with it and upgrade it. "I think it is premature [to abandon rentals]," the executive said.

Another chain that nearly got out of the rental business, but then reconsidered, is H.E. Butt Grocery Co., San Antonio. "We think there is still life in video rental," said Mike De La Garza, vice president of public affairs. While H-E-B is closing some departments, stores that are successful with video "will continue to carry it," he said.

"There is still a demand, and we find that people are still renting videos in much the way that they have for some time," he said.

"We still find video rental to be a profitable business and a strong offering for our customers," said Bob Hunt, director of general merchandise at Price Chopper Supermarkets, Schenectady, N.Y. "Where we have the space and feel the market can handle it, we will add a video rental department," he said.

A good presentation is key. "If you want to be in the game, you have to be there consistently with fun and exciting promotions," Hunt said.

"It's almost a Darwinian effect where those retailers that are doing the best, and therefore are the fittest, are growing and prospering," said Des Walsh, vice president and general manager at SuperComm, Dallas. "It is the less dedicated retailers that are gradually expiring," he said.

While the big chains pulling out of the business have made the headlines, many others are quietly and steadily increasing their commitment to rental, said Walsh. Among them: Price Chopper; Giant Eagle, Pittsburgh; Randalls Food Markets, Houston; K-VA-T Food Stores, Grundy, Va.; Ingles Markets, Black Mountain, N.C.; Nash Finch Co., Minneapolis, and various divisions of Kroger and Safeway. Meanwhile new players, like Finast, Maple Heights, Ohio, and Gooding's Supermarkets, Altamonte Springs, Fla., have entered the rental business.

Because of this activity, there was a net increase in rental departments in the last 12 months, said Walsh. In the next 12 months, as the four big chains close most of their departments, there might be a slight decline in the total number, he said.

Also, the new departments are bigger and flashier, with large presentations of new releases that may be 50% or more of total rental inventory, said industry observers. For example, the 10 10,000-tape store-within-a-store departments that Gooding's plans to install would nearly offset the total inventory lost because of the 60 2,000-tape non-live sections that Kash n' Karry is closing across the state.

"By and large, the departments that are being closed are older departments that have not been well maintained," said Walsh. "In contrast, the new video departments are exactly the opposite. These are large, well-merchandised departments with extensive new-release sections, which are being aggressively promoted to the retailer's customers," he said.

"So, from an industry perspective, we've got a strengthening of the video rental presence and quality in supermarkets, and a net gain in volume," he said.

In spite of the high-profile defections, Ron Eisenberg, chairman and chief executive officer of ETD Entertainment Distributing, Houston, maintains that supermarkets could attain 30% of the total rental market within three years. Supermarket share of the rental market was 16.4% in 1995 and was projected to grow to 17.4% in 1996, according to SN's State of the Industry Report on Supermarket Video. (Eisenberg first made this prediction earlier this year in an interview with SN before the extent of the department closings became known. SN's survey was conducted prior to the closings being reported.)

This market share growth will come as consolidation continues among the specialty retailers, but it is up to supermarkets to seize the opportunity, Eisenberg said. "Top management of the chain has to be committed to the category. They have to devote sufficient space to it and they have to be innovative," he said.

"As the number of video specialty stores decreases, there is more of an opportunity in the supermarket," said Shellie England Tibbitts, president of The Movie Exchange, Oaks, Pa. Tibbitts is seeing expansion of both the racked and leased-space departments her company runs for supermarkets.

Simply put, it's a matter of "either you are in or you are out," said Bill Bryant, vice president of sales, grocery and drug, at Ingram Entertainment, La Vergne, Tenn. "Where we see senior management support all the way down through to store level, we see very, very satisfied retailers with both profits and the add-on sales that are generated through the video rental departments," he said.

"Where the commitment does not exist, the program will wander and eventually become nonexistent," he said.

Especially disturbing is the domino-effect of retailers making decisions based on what others are doing, said Bryant. "I see too many chains jumping out for no reason other than they see other chains doing it. That's silly because there are a lot of years left in video rental," he said.

"I think video rental has a solid three to five years left," said the video executive with the Northeastern chain. The hype of new in-home delivery technologies may worry some retailers, "but video is just too entrenched in everyday life."

But even so, reinvestment in aging video departments is a hard question for chains. "The mentality is, get what you can out of it while you can. Then, if it should go by the wayside, so be it," the executive said.

Good weather and poor titles contributed to a bad year for video rentals in 1995. "But that is not an acceptable answer to senior management as to why sales are off. It's irrelevant to them," the executive said.

The same wave of specialty store consolidations that creates opportunity for supermarkets has brought about a new generation of regional video chains that rival Blockbuster in depth and breadth of selection.

This competition is the single biggest reason for supermarkets re-evaluating their video rental programs.