FINDING THEIR MOTIVATION

DAN ALAIMO Additional reporting: DAN HARRISON

Why have four prominent chains bailed out of video rentals?

Last year's downturn in rental revenues, increased specialty competition and a reluctance to put more money into what was perceived as a declining category were common factors. But Dominick's Finer Foods, Northlake, Ill.; Kash n' Karry Food Stores, Tampa, Fla.; Meijer, Grand Rapids, Mich., and Stop & Shop Cos., Quincy, Mass., had other reasons for exiting the rental business.

All were early entrants into the rental business and market leaders at one time or another. But Dominick's program had been in severe decline for several years, and Kash n' Karry's 60 non-live 2,000-tape sections needed significant improvements to remain competitive, said supplier sources.

Kash n' Karry did well for a few years, but when rental revenues dropped, the retailer cut back on purchases of new releases, said a distribution source. "That started a slow downward spiral." It was a similar situation at Dominick's, which declined to comment.

Bob Highsmith, vice president of sales and marketing at Kash n' Karry, said a concern about future in-home delivery technologies was a factor in the decision, as was "a general decline in video rental in supermarkets." Another factor was the amount of resources needed to stay competitive with specialty retailers. "We don't think it is worth the amount of investment it would take to remodel the stores and make video a totally separate store-within-a-store," he said.

The situations at Stop & Shop and Meijer are less clear-cut. Some supply sources have confirmed that Stop & Shop has decided to exit the rental business entirely and instead install banks in its stores. The retailer was apparently guaranteed a high profit per-square-foot from the banks. "They went with a sure thing," said the unidentified supplier.

But others say the decision may not be that final or far-reaching. "I think they are going to stay in the business and, if anything, they are going to expand their sell-through business," said a distribution source. Stop & Shop's video program is highly regarded in the video industry, but some said it has not kept pace with the new competition.

Mark Fisher, Stop & Shop's video sales and operations manager, declined to comment. Fisher was recently appointed to a second term on the board of directors of the Video Software Dealers Association, Los Angeles.

Meijer is definitely getting out of the business, a company official has said, but the retailer's reasons are unclear. Meijer would not comment to SN for this story.

One distribution source confirmed that the retailer was responding to a prolonged boycotting campaign by the Michigan chapter of the conservative American Family Association. AFA objected to R-rated movies that Meijer carried, and continued the boycott even after the Midwest retailer stopped buying such movies for its rental departments.

"The perception of senior management was that video cast a negative light on their chain. It didn't have anything to do with profitability, return on investment or generating traffic for the stores," he said. Cutting back on R-rated movies probably hurt their revenues and traffic, though, he added.

But a source close to the decision-makers at Meijer said the AFA boycott did not influence the decision. "From my discussions with Meijer executives, this is purely an economic issue. They feel they can generate more revenue per-linear-foot with sell-through titles than they can with rental titles," said Dick Rolfe, managing director at the Dove Foundation, Grand Rapids, Mich.

Meijer is expanding its presentation of sell-through, as well as other entertainment software products, like computer software, he said. "Meijer is still committed to their family-friendly image and is still committed to the Dove program. They are converting it from rental to sell-through," said Rolfe.

Meijer was one of the earliest and staunchest supporters of the Dove Seal program, which identifies family-friendly videos that meet Dove's criteria. Dove-approved sell-through products will be identified through merchandising and signs, said Rolfe.

Even smaller retailers are reconsidering their commitment to rentals.

For example, Goff Food Stores, Haslett, Mich., has removed rentals from three of its five stores, "and the other two are probably only a matter of time," said Shirley Decker, video buyer. "We tried everything to spark interest in our rental sections, to no avail," she said.