FIRST-QUARTER SALES INDICATE SPEEDY GROWTH FOR DVD

MARY ANN FARLEY

LOS ANGELES -- DVD-video player sales picked up freight-train momentum during the first quarter, according to the DVD Entertainment Group here, and grocery retailers, some reportedly reluctant to stock software, could be surprised when demand hits sooner than expected.

The group released the robust first-quarter DVD hardware and software sales figures, compiled by the Consumer Electronics Association, Arlington, Va., on April 12. Sales of both set new records in the first quarter of 2000. DVD players in the U.S. now total 6.7 million - 1.18 million of which were shipped during the first three months of this year, according to the CEA.

First-quarter software sales broke records, with over 30 million DVD movies and music videos shipped during the first quarter of 2000 -- a 200% increase over the number of titles shipped in the same quarter last year.

Hardware sales represented a 188% increase in the first quarter this year versus the same period in 1999. Industry observers are projecting that if current growth rates continue, there will be 11 million to 12 million DVD players shipped to retailers by the year's end.

According to Amy Jo Donner, executive director of the DVD Entertainment Group, the new figures represent a 7% penetration rate for DVD players in North America. The benchmark of success for any consumer electronics product, she said, is 10%.

"We'll hit that soon. At the moment, hardware and software sales are ahead of industry expectations," she said. "The fact that 80 million software units sold in the last two quarters is outstanding, and the hardware sales figures are clearly ahead of what was predicted in 1999."

Initially, she said, analysts were predicting 8 million hardware units would be sold by the year's end, but those predictions have changed as a result of the strong first quarter. "Consumers have really been wowed by the format," she said. "Home theaters are growing, and the largest growing component has been DVD."

Surprisingly, Donner said price was not a factor in the first quarter's success, as the cost of a DVD player dropped about eight months ago to its current price of about $200, and stayed there.

"Falling prices is old news," she said. "They may drop a little more, but that's not the story anymore."

A recent study by Video Store Magazine noted that grocers have been slow to pick up on DVD, as many are still struggling with the complexities of copy-depth and revenue-sharing programs. It noted that some supermarkets are phasing out video rentals altogether, citing Adams Media Research statistics that show supermarkets' share of the rental market is in decline, dropping from 15.1% in 1997 to 13.2% in 1998 and 12% in 1999.

Are grocers missing out on the DVD product build? Certainly not Mandy Budreau, video buyer at G&R Felpausch Co., Hastings, MI. She said her stores began stocking the format just a few months ago, and so far, sales and rentals are strong.

"It's doing really well," she said, admitting the chain was slow to adopt the new format because of space limitations. "We had to find room for it in 17 departments, and in some, it has completely outperformed our expectations."

Some stores are seeing an ever-increasing demand for DVD software, she said, predicting that DVD will most likely eclipse VHS the way compact discs eclipsed audio cassettes.

Gail Norrick, video manager at Scott's Food Stores, Fort Wayne, Ind., also said DVD sales and rentals are strong, but that's been a first-quarter development.

"We've been carrying DVD for two years," she said, "and sales were flat until last fall. Sales picked up then, and since Christmas, they've been even stronger."

She attributes the spike to two things: many customers received a player during the holidays, and studios are now releasing all new titles on DVD.

"A year ago, you didn't see all major titles on DVD," she said, "and not as many people had players."

Norrick believes the new format has a way to go, however, before it makes a serious dent in her library. "DVDs barely encompass two or three percent of my total inventory," she said. "Right now, we're devoting very little floor space to it, and I don't see that changing anytime soon. People are asking about it, but those people are a small percentage of my customers."

Currently, there are almost 70 DVD players marketed under 30 different brand names, and there are nearly 6,000 software titles available. The DVD Entertainment Group expects that number to grow to more than 8,500 by the year's end.

The group also predicts that DVD will double its 1999 sales by shipping at least 200 million DVD movies and music videos this year, representing $4 billion in revenue for retailers selling DVD -- approximately half of the total revenue generated from VHS sell-through.