THE INCREDIBLE SHRINKING DVD 2004-09-20 (1)

DAN ALAIMO

Once when a video was said to have "legs," it meant only good things: The title would sell or rent for a long time.

With growing demand for DVDs, movies have been growing "legs" of a different kind, ones that carry them out store doors without payment.

By far the biggest -- and in many cases the only -- complaint, by retailers about the sell-through video category is that too many DVD inventory units are being stolen.

"What troubles us is that this is a dynamic category which seems to help in traffic and sales, and a lot of other very positive ways," said Tony Pooler, director of GM/HBC, Save Mart Supermarkets, Modesto, Calif. "That's why we are ambivalent about the action we should take."

Because competition forces retailers to sell the biggest hits at a very low margin, the loss of one or two units can offset all profits of a display unit. Meanwhile, many retail executives have complained of "sweeping," where thieves come in, take as many units as they can carry -- sometimes the entire shipper -- and walk out the door unhindered. While retailers talked mainly about consumer theft of the product, suppliers pointed out that half of all retail theft is by employees -- a fact borne out by several recent studies. Also the suppliers said, video theft is no worse, if not less, than other categories. It's a fact of retail life that has to be dealt with, they lamented.

"Shrink is a problem. Shrink will always be a problem. People steal," observed Steven Feldstein, senior vice president, marketing communications, Twentieth Century Fox Home Entertainment, Century City, Calif.

With the lack of security devices or personnel in many supermarkets, a disinclination to admit to the internal theft problem, an ambivalence on the part of store-level employees and "no chase" policies that prohibit employees from going after thieves, some doubt that DVD shrink will ever go away. "I don't think it is a solvable problem," said Andrew Miller, director, supermarket division, Rentrak Corp., Portland, Ore.

Studies by the University of Florida, the Food Marketing Institute and the National Supermarket Research Group all agree that about half of supermarket theft (not specific to video) is related to employees, while shoplifting is responsible for 20% to 32% of it.

The FMI "2004 Security and Loss Prevention Issues Survey" reports that videos represent 3% of items most frequently shoplifted from supermarkets, much lower than the 25% for HBC items, 16% for meat, 12% for analgesics, 9% for baby formula and 8% for razor blades. However, industry observers pointed out that the 3% is probably higher than the overall percentage of inventory represented by video industrywide. DVD shrinkage across all retail channels is about 2%, according to a report in Video Business magazine, citing a 2002 study from the University of Florida.

Whether the DVDs are going out the front or the back door, this problem has caused many retailers to rethink their approach to displays, and whether they want to be in the category at all.

"We have discontinued almost all new-release DVDs because it seems like our customers were waiting at the back door for the UPS truck to show up and drop them off," said a nonfood executive with an east Texas retailer. "We were losing them fast, and when we locked them up, nobody asked for them." The retailer now mainly carries DVDs priced under $10 that are less desirable to thieves, he said.

Although the Texas retailer has an electronic article surveillance system, people would take the disc out of the package in the store, presumably to be copied, he said. "We're looking at a locking fixture, but anytime you lock something up, you lock up the sales, as well," he said.

Pooler of Save Mart said, "We are not at the point of contemplating exiting the category, but we are contemplating exiting the category in highly vulnerable locations, if we need to do that." Steve Urgo, Save Mart's GM buyer, is studying the situation, Pooler stated.

Theft had always been a challenge with VHS tapes, but with the compactness of DVDs, the problem has escalated, Pooler said. While studios and video distributors have talked about providing a solution, Save Mart has gotten little cooperation, he said. "We are not getting any help on design from any of the providers of this product, although I think they are providing it to others," Pooler commented.

"Shrink is a huge concern," said Gordon Thompson, general merchandise and HABA buyer/merchandiser, Rosauers Supermarkets, Spokane, Wash. "Many of our stores are seeing a lot of movement, but it's not getting rung up. So we are looking for partners who want to sell to us on a pay-per-scan basis. I think that is where that category is headed."

"Shrink certainly is a hot button around here," said Greg Rediske, president, Video Management Co., Tacoma, Wash., which supplies video rental programs to about 100 stores, and sell-through to 250 stores. "Some retailers have had some significant problems." Thieves will raid the store and steal a lot of product at once, "so it's a total freak-out situation. Of the people who are freaking out and still want to stay in the sell-through business, they are taking the product behind the counter, which definitely kills the sell-through business."

Rediske questioned whether the video theft problem is greater than shrink in any other department. "Often, grocery people in particular tend to look at video with a much harsher eye than anything else in the store -- 'We're getting ripped off, so get it out of here."'We are trying to encourage those retailers to determine exactly what the level of shrink is before making any rash decisions," Rediske said.

Half joking, Dan Gurlitz, vice president, video, Koch Entertainment, Port Washington, N.Y., said, "I guess they should start taking meat out of their stores, too, because meat can be as expensive as a video and you can slip it into your underdrawers, too." There's no easy solution for supermarkets except to add better security. For example, not enough stores have systems like those from Sensormatic and Checkpoint, he noted.

"You can't prevent shrink on any product that somebody really wants to steal," said Bill Mansfield, vice president of general merchandise and HBC, Pueblo International, San Juan, Puerto Rico. "By eliminating those products, you'd probably put yourself out of business. You have to put service and technology initiatives in place that will help you manage shrink."

This is especially important for DVD. "DVD is a sales driver for supermarket, drug and mass. Sell-through DVD is one of the highest velocity categories you can have," Mansfield said.

"It's important to not only sell the product, but to sell it profitably. Placing DVD in a high-traffic location with lots of eyes on it certainly would improve the profitability. If you try to sell the product from behind the service counter, it just will not be as successful. You might save a little on shrink, but you won't like the results from the sales retardation," he said.

There's a lot of concern about shrink, but Lanny Hoffmeyer, corporate director, wholesale general merchandise, Supervalu, Eden Prairie, Minn., said he has been hearing fewer complaints about it in the last year. "It appears that retailers have decided that they are going to be in the DVD business, they put the product in, and they know they are going to have some shrink." Because of the high sales potential, "they're ready to take that risk," Hoffmeyer said.

"Shrink in video is like anything else," said Charles Yahn, vice president, merchandising, Associated Wholesalers Inc., York, Pa. "A well-managed store, with the personnel watching what's going on, is the key to managing shrink. Also, I don't think the shrink in video is worse than anything else; you've got to have your employees watching what's going on in the store and being alert. So I think it's a matter of training and education," he said.

With no viable solutions on the horizon, Rediske is resigned to the status quo. "Shrink will continue, particularly when it comes to DVDs. It's a difficult problem. Unless something comes along to save the day, I don't see any big changes," he said.

Items Most Frequently Shoplifted in Supermarkets

Batteries 3%

Contraceptives 4%

Liquor 4%

Cigarettes 6%

Razor Blades 9%

Baby Formula 9%

Videos 3%

HBC Items 25%

Meat 16%

Analgesics 12%

Other* 10%

* Among items listed as "other": other foods, 3%; other nonfoods, 2%; film, less than 1%; and vitamins, less than 1%.

Source: Food Marketing Institute's "2004 Security and Loss Prevention Issues Survey;" 32 FMI member companies participated representing 6,884 supermarkets.

This is the first part of a series. Part 2 will appear in an upcoming issue and will focus on solutions to supermarkets' DVD theft problem.