NEWS & SOLUTIONS LEASING SPACE

DAN ALAIMO

ARCADIA, Calif. -- Hindered by high labor costs and small store sizes, southern California supermarket chains have found it difficult to gain a foothold in the highly competitive video rental business.

Vons Cos. here, however, has apparently found a solution to this long-running challenge. The chain will open two more leased-space video rental departments by the end of this month, bringing its total number of store-within-a-store, destination departments to 11. These live inventory departments are all run by Marbles Entertainment, Los Angeles. The first opened a year ago.

The Marbles operation is Vons' sixth attempt at video rental and, from all appearances, its most successful to date.

Although a Vons official said the company does not comment on its marketing activities or its vendors, the two-store expansion indicates the retailer is pleased with the program, noted industry observers. The arrangement is not expected to be affected by the pending acquisition of Vons by Safeway, Pleasanton, Calif.

"We couldn't be happier about the locations we are in and we are very excited to be growing," said Matthew Feinstein, vice president, Marbles Entertainment. He would not discuss the departments' sales or profitability.

Through this arrangement, Marbles is providing Vons' shoppers with a flashy format and full product mix geared to total entertainment. At the same time, it is delivering good depth of copy on hits and secondary titles, with a main focus on customer service. Marbles also is taking advantage of the synergistic promotional opportunities that exist within the supermarket. In doing so, the entertainment company is positioning Vons for the future of entertainment software.

Meanwhile, Marbles is close to reaching an agreement with another major supermarket chain to put in similar video sections, Feinstein reported. He declined to reveal further details.

"We are totally committed to the concept of leased-space or revenue-sharing video rental programs in supermarkets," said Robert Feinstein, company president and Matthew's father. "We want to bring a little bit of the excitement of Hollywood into the stores."

The leased video shops in Vons range from 1,000 to 2,000 square feet, with 4,000 to 8,000 rental units, said Robert Feinstein. Many of these departments are located either in the dedicated video spaces of former stores of Salt Lake City-based Smith's Food & Drug Centers taken over by Vons last year, or in stores where the retailer had attempted to run its own destination video rental program.

The Marbles shops are run separately from the host supermarket, with their own nonunion employees, he said.

The relatively high union wages in southern California have hindered the growth of video rentals in supermarkets there, noted industry observers. It is a key reason why the three major players have installed leased space departments where they've had the opportunity, the observers said. Vons has Marbles, while Ralphs Grocery Co., Compton, Calif., has Blowout Entertainment, Portland, Ore., as a tenant, and Lucky Stores, Dublin, Calif., has Wherehouse Entertainment, Torrance, Calif.

At least in the case of Marbles, the separate employee base allows them to focus on training and customer service, which is essential in entertainment retailing, said Matthew Feinstein. "We are able to educate them about the movies. They are video pros." Some of that expertise comes from the Video Software Dealers Association, Los Angeles, of which he is associated with as president of the southern California Chapter. Contrasted to some supermarket employees who have video layered on top of other responsibilities, Marbles' staff members "go to work living, thinking, eating and breathing video," he said. "Customer service is No. 1 for supermarkets, so it is No. 1 in our stores, too. The way we make our money is from the customer," he said.

Because of the priority Marbles places on having well-versed employees, the company is content to expand at a deliberate pace. "This business is very, very labor intensive. It's difficult to find good people who are going to stay on and really do the job expected of them. I would find it very difficult to open a store per week and be able to find qualified, trained personnel," said Robert Feinstein.

A leased-space operator like Marbles complements existing supermarket departments, said Matthew Feinstein. "We train our people to be video pros. That is our business and we spend 24 hours a day doing it. A supermarket has other things to worry about," he said.

Video rental is very different from the buying and selling that takes place in other supermarket departments, Robert Feinstein noted. "We spend all our time deciding what movies to buy, and then making sure that we get them rented, through advertising and promotions. We make sure that we get the movies back from the customers. Then we make sure that we can dispose of the movies once they have lost their interest and glamour. So it is not just like buying something and selling it off the racks. It really takes a total involvement," he said.

Marbles' comparatively small size and its concentration of stores in southern California and nearby Nevada enables management to keep close tabs on each operation, said Robert Feinstein. "We try to have a management person in each store every couple of days. That's close supervision," he said. This is a positive change for the company, which in the past had video shops on military bases scattered across the country. "We are excited about being able to have stores in California."

Marbles has been preparing for the imminent expansion with Vons, said Matthew Feinstein. "We have gotten to the point where we really have good employees and good management who know what they are doing, so we can take our business to the next level. We feel very comfortable in expanding," he said.

Vons started in video rental in the 1980s with two shared-revenue rack jobbers: U.S. Video, Denver, now a sell-through subsidiary of distributor Sight & Sound, St. Louis; and Family Home Video, San Fernando, Calif., a company which has since been bought out by another retailer customer, Bashas', Phoenix.

In the early '90s, Vons tried video rentals in vending machines from Keyosk Corp., Irvine, Calif., and then with an in-house program, which was shut down in August 1994. In 1995, another outside operator, Mr. Video, Saugus, Calif., entered the picture, but the Vons Expo stores in which the video company was to operate were closed before the program got going.

The nine Vons departments now operating are meeting Marbles' expectations, said Robert Feinstein. But those expectations were based on a long experience in the video rental business. The company has operated similar video programs on military bases since the early 1980s, as well as franchising video specialty stores, he said.

'When this Vons situation came up, it seemed to be a natural for us. We have a space that we lease and pay a percentage on, which is the same thing we do with the military," he said.

United Business Group, Los Angeles, an umbrella company for the Feinstein's enterprises, continues to operate 22 Rent-All stores on military bases, offering products like televisions, stereos and appliances. Their video rental operation originally grew out of this business, one they have been in for 25 years, said Robert Feinstein.