ENTERTAINING PROSPECTS

SALLY BELL

The supermarket video landscape is changing. On the horizon comes sophisticated digital technology -- digital video disks, or DVDs, and CD-ROM (compact disk read-only memory) software -- in various formats and platforms. This technology will turn supermarket tape departments into complete home entertainment centers, observers predict.

In the supermarket home entertainment center of the future, video sections will expand substantially to accommodate the new entertainment.

Both video disks and video tapes may be merchandised side by side in such a center. The concept also would integrate interactive multimedia with other related entertainment and information products such as audio books, computer software, CD music, magazines, books and video games.

Whereas a retailer today can do a fine job in 1,500 square feet, at least twice that will be needed in the future, according to Ken Stilling, vice president of chain sales at ETD Entertainment Merchandising, a video distribution firm in Houston.

With its superior audio, video and informational capacity, digital technology eventually will be the linchpin for supermarkets' future growth in video, observers said.

As compact disks have replaced vinyl records, DVDs eventually will make inroads on video tapes. Personal computers with CD-ROM units will be in most homes to warrant selling moderately priced programs. Vastly improved graphics and action on games, meanwhile, will expand rental and sell-through dramatically.

Grocery retailers already have begun testing the waters with this new generation of multimedia products, specifically with CD-ROM.

Retailers like Scrivner's Boogaart Retail division, Concordia, Kan., have added CD-ROM and computer software to an expanded mix of rental and sell-through products.

"The business is evolving to a total entertainment software focus," said Kerry Smith, district manager. "The addition of CD-ROM and computer software is an example of this. We've got to keep looking toward the future, and the CD area is growing. We want to be on the cutting edge."

Interest in the new technologies is running high, as indicated by the increase in the number of food retailers now carrying CD-ROM products.

According to SN's State of the Industry Report on Supermarket Video, published earlier this year, the number of retailers who said they will carry CD-ROM in 1995 jumped to 36.5%, up from 19.4% last year. Another 36.5% said they will carry computer software, up from 25.4%, and 7.7% said they will carry movies if they are made available on compact disk.

Other chains that have begun testing new interactive products are: Community Cash Stores, Spartanburg, S.C.; Food Giant Supermarkets, Sikeston, Mo.; Fry's Food Stores, Phoenix; Giant Eagle, Pittsburgh; K-VA-T Food Stores, Grundy, Va.; Nash Finch Co., Minneapolis, and Stop & Shop Supermarkets, Quincy, Mass.

Interactive hardware and software sales have reached the $12.2 billion mark. That category is expected to grow to a $24.9 billion business by 1998, according to Patrick Ferrell, president of Infotainment World, a research and publishing company in San Mateo, Calif.

"Interactive products could be as big a business as video is now [$16 billion]," said Tom Adams, president of Adams Media Research, Carmel Valley, Calif. "The advent of new formats increases consumer spending. That will happen this time, too, both in first-time buyers and in people moving up to better versions."

Although retailers are showing enthusiasm for the long-term potential of today's emerging technologies, they said the marketplace isn't yet right for many of them.

"The biggest obstacle is getting the hardware in homes in order to accommodate renting the product or selling it," said Greg Davies, director of video operations at Dierbergs Markets, Chesterfield, Mo. "I think you need at least 25% home hardware penetration to make rental or sales viable in supermarkets."

Statistics show that personal computers with CD-ROM drives are quickly penetrating the market, growing from 5 million units in 1993 to 12 million in 1994 to between 16 million and 18 million by the end of this year, according to Glen Ochsenreiter, managing director of the Software Publishers Association, Washington.

Personal computers are said to be in 30% to 40% of U.S. households, and those computers with CD-ROM drives are expected to represent nearly half of the market this year.

Of all the emerging technologies, DVD has retailers the most excited. It promises better quality video and sound than tape cassettes. It also is sturdier for rental usage.

"DVD is a whole new market. It's very exciting," said Clifford Feiock, video coordinator at Nash Finch. "VHS has so many possibilities for product damage. DVD is definitely the way to go."

Jeffrey Eves, president of the Video Software Dealers Association, Encino, Calif., also expects DVD to become an important part of retailers' product mix within the next five years.

"As we approach the 21st century, it is likely DVDs will be one of the products that maintains the home video industry's competitive posture with other entertainment options," he said.

However, with manufacturers hotly pursuing the development of competing DVD formats, analysts say consumers will be cautious in accepting this new technology. Significant household penetration of DVD equipment is not expected until well after the year 2,000.

Dick Kelly, president of Cambridge Associates, a research firm in Stamford, Conn., projects that DVD will achieve only a 5% household penetration by 1999, while VHS penetration will reach 86% of the households by then.

However, some food retailers don't seem concerned that people will hesitate to invest in a new technology that replaces perfectly good videocassettes.

"It's not so hard for people to say, 'I'm going to buy a different format.' They'll start all over recollecting the higher quality DVD, just like they phased out their albums and eight-tracks," said Tim Harrison, video supervisor at Food Giant Supermarkets.

But for the next five years, retailers say, DVD will be a video supplement, rather than an outright replacement of existing VHS equipment and tapes. "It will be at least five years before it really takes off. There will be demand for VHS for years to come," Feiock stated.

Stilling of ETD agrees. "Digital won't make that much of an inroad within five years. It will be a definite portion of the business, but not the majority," he said. "Eventually, digital will replace VHS. It's anyone's guess when that will occur, but not by 2000."

During the transition period, supermarkets will probably carry both formats -- meaning duplicate and noncompatible inventory. "The question mark in the store is how to make that changeover," Feiock said.

Some don't foresee a problem because digital disks are about half the size of videocassettes, so inventory can fit in a smaller space.

"In a space-crunched supermarket, the advent of DVD is a beautiful thing. They are smaller and easier to store. You can nearly get two in the space of one video. That has to be good news," said Adams of Adams Media Research.

Others, though, say smaller size won't help during what will be at least several years of transition. "You still need to show the face of the box," said John Taylor, president of Arcadia Investment Corp., Portland, Ore. "DVD doesn't lend itself to higher and deeper stacks."

But while waiting for the evolving technologies to shake out, retailers are keeping informed by reading about the new technologies, attending seminars and making small-scale tests.

Educated store personnel can help sell the products. "Part of having a successful program in the supermarket is making sure those in the store know what it is, how to use it and how to sell it. If they don't, it will be neglected," said Food Giant's Harrison.

Retailers expect many of the problems to evaporate in the next several years as people buy the gadgets for their homes. CD-ROM and computer software both will benefit as that process continues. CD-ROM lends itself either to sales or rental, but since computer software can be copied onto computer disks, it likely will be exclusively sell-through.

Feiock said he is encouraged by early results of testing computer software. "Certainly there's a market. It's getting better all the time," he said. "We're doing a small amount now on a market-by-market basis through independent dealers. Within several years I expect we'll probably carry it in most stores."

Other retailers have tried software, but with dubious results. "We've dabbled a little in it, but people just aren't looking for computer software in a supermarket," said Don Shafer, video distribution assistant at Carr Gottstein Foods, Anchorage, Alaska.

The category hasn't matured enough to command a permanent home in supermarkets, said ETD's Stilling. ETD now distributes 30-day to 60-day software promotional programs "on an every so often basis." By 2000, though, "it will command a 10- to 12-foot section, with perhaps 200 to 250 titles carried regularly" in both IBM and Macintosh formats.

Dierbergs, one of ETD's clients, began a four- to six-week software test of about 50 titles in April at 14 stores. Prices will range from $5.99 to $19.99. Davies said the computer programs will be sold on dump tables rather than in a proper display cabinet because "when you throw it on a table, people think it's a bargain."

Feiock says Nash Finch is testing CD-ROM rental but finds "the potential isn't there for it yet. It's paying for itself and that's about all. We're also having problems with people -- probably kids -- not knowing how to treat the disks. We get them back with scratches, fingerprints and things spilled all over them."

The view is marginally more positive at Bashas' Markets, Chandler, Ariz. Bill Glaseman, video specialist, said CD-ROM is now carried only in the company's newest store, but will be part of expanded departments as they are added. He said customer receptivity is "acceptable, so we will continue it."

While video games have been a mainstay of supermarket sections and are expected to be key in the entertainment section of the future, there seems to be a lull right now as technology makes its next shift.

Retailers said audio books are currently a small niche market, but several project a good future for the category.

Rick Ang, video operations consultant at Bel Air Markets, Sacramento, Calif., for instance, said audio books will be hot in the future. "They are doing just OK now. I think interest will build by 2000," he said. "As things become more technological, people in general will feel they don't have time to read an entire novel, but they will go with an abridged audio version so they can do something else at the same time."

Bel Air now carries about 40 to 50 titles in six stores, rotating in a few new tapes each month. He views the category as a rental market rather than sell-through.

Davies of Dierbergs, on the other hand, is negative about prospects for audio books. "I don't see a big future in that," he said. "They have just not caught on except in limited specialty markets. The return on investment is too low." Dierbergs discontinued them last fall after experimenting with both sales and rental in the previous year.

Feiock said most potential customers aren't aware that some of his Nash Finch stores carry audio books, so he thinks it's worth working to build usage because "this is an untapped market." Even as retailers contemplate the entertainment section of the next century, they are keeping an eye on "information superhighway" developments. But they think what they will offer in the future entertainment departments will provide a buffer from the electronic highway's inroads.

CD-Romp

Strong growth is projected for computer-based CD-ROM hardware and software sales.

Hardware and Software Sales in CD-ROM (in millions)

1994 Units 1994 Dollars 1995 Units 1995 Dollars

Hardware 9 $1.8 11 $2.3

Software 20.1 $704 26.7 $854