RENTAL REMAINS A BULWARK

DAN ALAIMO

Because of return trips, incremental spending and strong gross margins, video rental remains a growth area for many supermarket chains.

In its seventh annual State of the Industry Report, SN found that 39.7% of respondents were expanding the number of departments, up from 31.9% last year, and 28.6% were expanding the number of live inventory departments, up from 27.7% the prior year. However, 17.5% said they were "cutting back or eliminating" video rental, up from 12.8% the year before, and fewer -- 23.8%, down from last year's 29.8% -- said they were expanding in inventory size, although there was a dramatic increase in the number expanding new releases, B-movies and games.

"We see significant expansion in the overall U.S. video rental business, which will be mirrored by a comparable expansion in video rental in supermarkets," said Des Walsh, vice president and general manager at SuperComm, Dallas. "This will be driven by vastly increased availability of new releases under revenue sharing and the increased level of video-rental consumer awareness because of promotional programs undertaken by Blockbuster and the studios."

The number of respondents reporting that they are expanding their percentage of new releases was up dramatically, 73% compared with 46.8% a year ago. Buying more B-movies were 28.6%, up from 19.1% a year ago, while 36.5% said they were expanding the number of games, up from 17%.

The percentage of rental inventory identified as new releases also went up, to 38% this year from 33.1% the year before. More than a third said they are keeping their movies out longer as new releases than they were a year ago.

"Everyone is focusing on new releases and trying to meet the customers' demands," said Bill Bryant, vice president for sales, grocery and drug at Ingram Entertainment, La Vergne, Tenn.

In 1995, the first year that the rental market ever declined, several major supermarket chains decided to get out of the business. Industry observers noted no similar defections took place in 1997 and that the investment in rental programs revealed by this survey indicates a growing understanding among supermarkets of the title-driven cycles of the movie business and the long-term potential of rental.

SN's survey indicates retailers are increasing their new release inventory at the expense of catalog, thought by many in the video trade to be the key to rental profits. But the average gross margin for rental reported by the respondents was 37.8%, up very slightly from last year's 37.5%. In 1996, SN's retailer survey reported an average rental margin of 40.3% and 39.4% in 1995.

Bryant attributes this to "right sizing" rental inventories. "In many instances, supermarkets were under-buying on new releases and now they are making adjustments to the percentage of their purchases that are going toward new releases. This is helping them compete with video specialty stores."

Also related to retailers' ability to keep margins up is an increase in the average rental rate charged for a new release for a minimum period of time. This has gone up from $2.28 in 1996 to $2.33 in 1997 to $2.50 in 1998. About a quarter said they would increase rates this year, compared with a third last year who said they would do so. More than half said they have an intermediate rental rate for new releases older than 30 days that is lower or offers a longer rental period than the newest titles.

Directly related to the uptick in new release and B-movie buying is a sharply rising interest in shared-transaction fee programs, like those of SuperComm; Rentrak Corp., Portland, Ore., or upcoming programs from traditional distributors. With shared-transaction fee programs, retailers pay a fee of $10 or less to acquire a tape, and then share roughly half the revenues with the supplier. This allows retailers to bring in greater depth on A-titles and more breadth on B-movies. Many run promotions guaranteeing the availability of a major hit with the offer of a free rental.

Of respondents, 39.7% said they will use or test a shared-fee program for acquiring videos in 1998. This is up from 27.8% in 1997, 26.5% in 1996 and 12.7% in 1995. Those now using this form of shared revenue buy an average of 2.75 times more copies of big-hit rental-priced movies than they would from traditional distribution.

Demand for these programs may be even higher, as the survey was in the field before the news broke that Blockbuster Entertainment, Dallas, would use Rentrak and offer guaranteed-availability promotions. Also, announcements about video distributors' plans for shared revenue were expected in early April, before press time.

"This year 1998 is going to be the year of shared revenue," said a distribution source who asked not to be identified. "But I don't know what the effect is going to be. It's going to expand the business, it's going to make a lot of customers happy and it's going to be a wild ride."

Meanwhile several studios, like Warner Home Video, Burbank, Calif.; Columbia TriStar Home Video, Culver City, Calif.; and Universal Studios Home Video, Universal City, Calif., are promoting copy-depth programs, where retailers get free products based on their purchases. "Everything is now geared to getting more copies out on the shelves to satisfy customers and obtain shelf dominance. It is almost too much of a change," said the source.

"The increase in the number of those retailers anticipating testing revenue sharing is a reflection of the continued success existing accounts have had in using revenue sharing to improve the profitability of their business," said Walsh of SuperComm. "The impact of guaranteed-availability promotions has been exceptional and it is interesting that Blockbuster has now also embraced this message as the means of growing its business."

Buena Vista Home Entertainment, Burbank, Calif., has invited distributors to participate in revenue sharing in its rental titles. Sources said agreements between the Disney video arm and some distributors were imminent in late March. So far, WaxWorks Video Works, Owensboro, Ky., has declined to join in. "We would do whatever our customers wanted, but we have just not had any customer desire for us to do so. Until they do, I don't think that we would seriously consider it," said Kirk Kirkpatrick, vice president of marketing.

Distributors appreciate being brought into the revenue-sharing loop, but some remain skeptical of its value. "The studios are looking at short-term fixes and not looking at the long-term longevity of video," said one executive, who declined to be identified.

But retailers see a clear competitive benefit to such programs as they watch Hollywood Video, Portland, Ore., rapidly expanding, and Blockbuster reinvigorating its marketing efforts. When asked what they have done to meet this competition, 73.5% said they have increased their promotional activity and 70.6% said they have increased copy depth on new releases.

Meanwhile, 48.5% said they took greater advantage of supermarket synergy, such as traffic and tie-ins, while 42.6% said they have updated the aesthetics of their departments -- which is long overdue in many stores, noted industry observers. Other responses included 22.1% who said they expanded departments, 13.2% who closed departments and 14.7% who lowered rental rates.

"More and more chains now believe that they have to update their departments so they look more current and exciting, with more of a Hollywood look," said Ingram's Bryant.

The Deal on Divx

At least a few retailers think Divx has a future in supermarkets, but most are undecided. Almost a quarter were unfamiliar with the upcoming limited-play DVD format.

Rising Rates

For the second year, the average rental rate for a new release has gone up, indicating retailers desire to make more profits off video rental while competing with specialty stores that generally charge more.

Average Rates for a Typical New-Release Rental

1998 $2.50

1997 $2.33

1997 $2.28

1995 $2.32

Shared Demand

There is a move to increased use of revenue-

sharing programs in the video-rental industry, and more supermarkets are part of it.