INVENTORY GAMESMANSHIP CALLED VITAL

DAN ALAIMO

REDMOND, Wash. -- When it comes to video games, smart inventory management will be the key to success in the year ahead for supermarkets, said George Harrison, director of marketing and corporate communications at Nintendo of America, here. The 16-bit game platforms, such as the Super Nintendo Entertainment System and Sega Genesis, will remain strong for the near future. But by the end of the year, new platforms like Nintendo Ultra 64, Sega Saturn and Sony PlayStation will start making inroads into the market, he said. "Amidst all the hoopla of the introduction of those systems, the real money to be made in the next year will be in the selling of software to the installed base of 16-bit users," Harrison said during an interview preceding the E3 show to be held in Los Angeles this week. Retailers also need to participate in the new systems as they come along, because they will present new rental opportunities. "But at least for the next calendar year or probably the next 18 months, the vast majority of their profits -- and to some degree their dollar sales -- will come from the existing systems," he said. Nintendo expects "modest sales" of about 1 million Ultra 64 hardware units from its launch in the fall to the end of the company's fiscal year in March, he said. There are about 16 million Super Nintendo systems in U.S. households. Ultra 64, a 64-bit cartridge system, will be introduced during the E3 show, he said. Video games are a natural addition to supermarket rental selections, but they can't be approached half-heartedly, said Harrison. "The development of the game business in the supermarkets won't necessarily be quick or easy. It's something you have to cultivate. You have to make a commitment to it." Supermarkets should first concentrate on building the rental side of the business before approaching sell-through, he said. "It helps people begin to identify your store as a destination to go to for video games." Supermarkets provide a setting for games that parents can feel comfortable about allowing their children to browse in, he said. "It's a friendly environment that is generally trusted by the parents in the household," he said, citing that it also gives children a place to go while their parents shop for food.

"But the supermarkets will have to accommodate themselves to the fact that kids will want to go there and spend time reading and browsing about the games, and even testing them to the extent that there is an interactive game machine in the section. If you have a policy of not wanting kids hanging around the store, you will never develop a video game business," Harrison said. Before supermarkets consider selling games they first must establish themselves as a destination for video game rentals. Then retailers should start out by offering the biggest video game hits in the same way that they sell major sell-through movie releases, said Harrison. "It will allow them to test the waters and find out if their customers are willing to spend that kind of money," he said. So far, video specialty retailers, like Blockbuster, have not done well selling games, he said. Their typical customers are used to spending under $10 for rentals, not to spending $50 to $70 to buy a game. Although mostly untested, this situation may be different in supermarkets, where the primary shoppers are in a buying mode, he noted. "But in the sell-through business, the real key to success is the struggle to be able to display and manage a complicated inventory of software titles," he said. "It's a hit-driven business where you want to present a depth and breadth of titles to the consumer, and yet you don't want to make a mistake." Harrison added, "Maintaining close inventories and not being overbought on titles that don't sell is really the key factor to success and overall profitability. This requires a fairly sophisticated inventory management program." Supermarkets have caught up to the mass merchants in their inventory systems in recent years and some chains even have superior systems, he said. Retailers who buy enough products can participate in the Nintendo Inventory Management System. "It allows them to read their sales on Monday from the previous weekend, reorder and have that new order arrive by Friday of that week," said Harrison. Supermarkets also will need to train the video game audience to read their ads for game price promotions, he said. "Somewhat to our surprise, our research has found that nine- to 17-year-old shoppers are attuned to reading the Sunday rotos. The reason they do this is, having decided to buy the product, they want to convince themselves or their parents that they are getting the best deal," he said. But supermarkets do not reach this audience, partly because many retailers' ads break midweek. "So they have to find some way to communicate with the nine- to 17-year-old male audience that they are in the business," said Harrison. The convenience factor of the supermarket is an advantage. "A large part of the population is not willing to go out of their way to buy a video game. Some will go across town and check two or three stores, but most will look for the best reasonable price in a place that they go often. Supermarkets, of course, fall into that category," he said. During this week's E3 show, Nintendo will detail the late summer launch of its Virtual Boy portable game system and announce several new 16-bit games based on the computer animation technology that was used for the company's six million unit hit, "Donkey Kong Country." Virtual Boy game systems will sell initially for under $200, said Harrison. "It's a virtual reality experience," although different from what some expectations might be for such a three-dimensional gaming system, he noted. "We think many people are underestimating its potential at this point. We had a very favorable reaction to it in January at the Consumer Electronics Show even though we only had about one or two minutes of game footage for a couple of games that we were developing," he said. There will be at least three 16-bit games that will be superior in quality to "Donkey Kong Country," including a sequel to that title, said Harrison. "That is important to us, because we have a large installed base that we want to keep stimulating with great new software," he said. The animation technology, called Advanced Computer Modeling, was created for Ultra 64 and then Nintendo found it could be used for 16-bit, said Perrin Kaplan, manager of corporate communications. "Consumers will be able to purchase that kind of game for a really great price, and they won't have to buy a new hardware system. The rental turns on it are really going to be very high. 'Donkey Kong Country' had a really high turn rate," she said. Nintendo embraced game rentals at about this time last year after a long period of staunch opposition. Since then, the company's rental program has been very successful, said Kaplan. "There is a recognition by companies like Nintendo that rental is a very viable business and that it is here to stay," she said. Although some supermarkets are still renting games for it, the original Nintendo eight-bit system has had a life cycle of nine years and is now being phased out. Meanwhile, Super Nintendo has been out for four years and "has a longer life ahead of it than many people give it credit for right now," Harrison said. "The deft management of the mature phase of the product is really where all the money is made. You have the installed base and the ability to sell the software," he said. Except for close-out products, Harrison does not expect the prices of games to come down significantly. "The new releases are driven by the amount of memory they use. As the games get more and more sophisticated, it requires more memory chips to be put into the cartridge, which drives up the cost," he said. The games market is becoming increasingly hit driven. "Consumers are very experienced in this category now. They've been in it for 10 years across a couple of different platforms. They are very demanding and want to have access for a test drive through the rental channel," he said. "Because the games are priced at $50 to $70, they are not an impulse purchase. They are a very considered purchase. If you put out a game that has a big movie title license, but it is not a very good game, consumers quickly figure that out, and the sales on it never materialize," said Harrison.

For example, a game titled "Shaq Fu" featured basketball star Shaquille O'Neal, "but was judged by consumers to be not that good. It was introduced in late 1994 and was being discounted even before Christmas arrived. So I think there is almost automatic market feedback on these products that separate the good from the bad very, very quickly," he said.