RENTAL PROPERTIES

DAN ALAIMO

Video suppliers remain bullish about the future for rental departments in supermarkets.

Despite the defection of several major chains from the rental business last year, overall supermarket commitment to rentals is increasing, according to supplier executives polled at a recent industry event. But to keep the market strong and growing, retailers must upgrade selections, continue marketing efforts and use category-management technologies, the suppliers said.

Meanwhile, supermarket video executives can expect to see strong support for their rental efforts from the major studios who depend on the rental market for the majority of their profits.

Supermarket retailers "need to realize and be comfortable in the knowledge that the rental market is critical to our future," said Michael Karaffa, executive vice president of New Line Home Video, Los Angeles.

"From our studio view, we believe the rental business is going to continue to be an integral part of the overall industry," he said. "Thus it needs to be an equally important part in the supermarkets' mix and strategic approach to the video business."

"Rental is a viable revenue-generator for supermarkets, where there is a lot of in-and-out traffic," said Jeff Fink, senior vice president for sales and distribution at Live Entertainment, Van Nuys, Calif. Based on the amount of business Live is now doing with supermarkets, Fink believes they will continue to be strong players in the rental trade.

"We see many of the grocery retailers expanding their video rental departments," noted John Maioriello, chairman of JD Store Equipment, a fixture manufacturer in Manhattan Beach, Calif.

While a supermarket with 300 to 500 rental titles can't compete with specialty stores, "major retailers, like Schnucks and Wegmans, to name two, have gone with full video rental departments with 3,000 to 5,000 titles," said Maioriello. "They are doing very well, they are expanding and they are opening up video rental departments in all their new stores."

"As I travel around the country, I see many, many, many more supermarkets that are expanding the category than are getting out," said John Jump, senior vice president of sales for video distributor Sight & Sound, St. Louis. These are chains that are as committed to video as they are to any other department, such as produce or floral.

"As for supermarkets that are not totally committed to the category, I think it is a foregone conclusion that they will exit sooner or later," he said. "When they devote energy and labor hours in video rental -- make an investment in it -- then they see a return on investment." Video rental is a key merchandising tool for supermarkets striving to differentiate themselves from the competition by enhancing customer service, said Herb Dorfman, former president of Orion Home Video, Los Angeles, who resigned his position earlier this month. "That is a very smart strategy for supermarkets that are using home video as a marketing tool to get brand equity," he said.

Supermarkets getting out of the rental business are hurting themselves, he said. "When they stop satisfying their consumers' needs, they start becoming the second supermarket of choice. I would suggest that those who are building their rental business are demonstrating their commitment to their consumers, while those who are getting out of the video rental business are not seeing the opportunity clearly," Dorfman noted.

Some supermarkets have had a difficult time with the video rental business because it is so dissimilar from their other categories, said Ron Berger, chairman of Rentrak Corp., Portland, Ore., a shared-transaction-fee distributor. "They are not accustomed to a business where they don't have what the customer wants in stock," he noted. "They are not accustomed to a business where you have high $70-per-piece costs and very low rental rates. So, generally speaking, I think they've had a problem with it."

But there are good examples of successfully managed supermarket rental departments, he said. He cited King Soopers, Denver; Randalls Food Markets, Houston; and the leased-space departments in stores of Ralphs Grocery Co., Compton, Calif., run by BlowOut Video, Portland, Ore., which until recently was a Rentrak subsidiary.

"So, I am highly confident that supermarket rental is here to stay and that the people who are getting out today will be back in the business in a few years, maybe under a different management structure," said Berger.

Many retailers need to rethink their approach to video rental category management, said Joe DiMuro, vice president of North American sales at Twentieth Century Fox Home Entertainment, Beverly Hills, Calif. "The days of just featuring the hit product are unfortunately upon us, and it is a trend that is going to stick around. The major suppliers are doing 40 to 60 films a year, but the open-to-buy dollars unfortunately haven't expanded as exponentially. If you are a grocer, you are now faced with a dilemma: Do I devote more of my money to fewer titles and increase depth, or do I broaden my selection?"

But the retailers are not set up to resolve this issue on their own. "Unfortunately, a lot of the economic models that have been established for many grocery rental departments haven't worked," DiMuro said.

"These retailers are going to have to push the envelope a little bit, and perhaps either look at some alternative distribution methods or come up with a different economic model to manage that inventory," he added.

Some of the chains that are phasing out rentals are expanding video sell-through, noted Allan Golden, vice president of sales at PolyGram Video, New York. "I'm heartened to see that people are not getting out of the video business so much as changing their focus," he said.

"If their concern is that they can get into another business that gives them a larger guarantee per square foot, that's a business decision they have to make," Golden added. "But I think video is here to stay in supermarkets. Things will shake out over the next 12 months and we will see how it pans out for many of the chains. There are many grocery chains that are doing a very healthy business that are going to continue to grow, let alone think about losing floor space to other concerns."

"Some of the supermarkets that got out had better offers for their space or they were not managing their departments correctly or buying right," said Lee Gimbel, market development manager at Specialty Store Services, Morton Grove, Ill., a store fixture manufacturer. "But otherwise, video in supermarkets is still viable.

"I still contend that a supermarket with the right inventory, managed correctly, computerized, with sell-through being a big portion of their business, can still do very well. Usually, in a supermarket, it can be their most profitable item next to bulk foods," said Gimbel.

"Supermarkets have to be every bit as innovative and market-savvy as a video specialty store," said Golden of PolyGram. "When you have the kind of repeat foot traffic that a supermarket has, you have to do things to make sure that those customers are satisfied." "You have to know your clientele," noted Fink of Live. "If you adapt your buying to the taste of your customers, you will do well whether it is rental or sell-through."

If supermarkets are to be successful in video rentals, "They have to be in the business in a meaningful way," said New Line's Karaffa. "You cannot do it in a half-hearted fashion. You are either in the business or you are not."

Some chains elect to only carry hit sell-through titles and other promotional programs on an in-and-out basis, Karaffa added. "If they are going to be in the video business day-in and day-out, they need to approach it with the most sophisticated technology. That means computer systems, merchandising and promotion, and their economic buying ability to acquire the product and promote it in the most profitable fashion within the stores," he said.

Per-square-foot sales was the deciding factor for some of the chains that pulled out of video rental, said Karaffa. "They need to do at least those things to maintain the return they must enjoy to justify the allocated space for a video department."

It's up to suppliers to provide the category management in video that the retailers lack, said FoxVideo's DiMuro. "What we have learned in the grocery and drug channels -- more so on the sell-through than rental side of the business -- is that most of the inventory needs to be vendor-managed, not managed by the grocer," he stated. "The less work we give to them, the better off we are all going to be."

But this can apply to rental as well as sell-through. "A major rental release, like a 'Die Hard With a Vengeance,' can generate a lot of consumer impressions, and many people want to go to the grocery and drug venues to rent that type of film," DiMuro added. "But they've got to get more creative in their marketing."