THE LOW-RATE DEBATE

Low everyday rental rates of under $1 implemented by some supermarket chains have stirred great controversy in the video industry. It was the same in SN's second annual video roundtable. The practice drew strong responses from the participants, some of whom criticized it as an unnecessary step for retailers with good video programs in place. "We are fortunate to live in a world where price isn't the driver in the video rental business. The business is driven by the availability of what you want to see tonight," said John Fincher, who handles national account sales at Baker & Taylor, Morton Grove, Ill. "When I look at a situation like the 49-cent rentals, you can see what their motive is. But I don't think that at this point in time it's necessary to go that low," said Teri Severinsen, manager of video services at Roundy's, Pewaukee, Wis.

SN: Let's talk about some of the pricing trends in video rental rates. There is one supermarket out there with a 49-cent-per-night offer on all titles, every day, and it claims it is profitable. Others say they do well with 99-cent programs. What do these low-price programs mean to supermarket video and to the future of proposed in-home delivery technologies, like video-on-demand?

INGRAM: Perhaps this chain, when they say they are profitable, is looking at the big picture and the incremental traffic that they are generating with the 49-cent rentals. I believe they are looking at the whole thing as advertising. But can you make money at 49 cents? I guess if you don't buy very deep and your titles are out constantly, perhaps you can. I'm not really sure if you can or can't. Also, if the supermarkets, or any entity, can rent and make a profit at a dollar or less, that has got be an enormous roadblock to these new (video-on-demand) technologies, especially with the convenience factor in the supermarket. What does video on the information superhighway give you? The main thing is you don't have to take the tape back. But the consumer is very price-sensitive. The majority of the consumers will be willing to make the trip back to the supermarket if the price is right. This impulse transaction of 49 cents is nothing out of most people's pockets. Even if the superhighway charges 49 cents a pop, you'd see it all add up on your monthly bill, and that will be a significant amount of money. Because of the convenience and relatively low price, I think supermarket video is going to be very important in thwarting the superhighway, and that will be potentially good for the whole video rental business.

PIERCE: I don't think any home delivery mechanism can be a major competitor to any video location, whether a supermarket or video store. When video-on-demand or something of that type that is directed to the home becomes a competitive issue, price is going to play a big part real quickly. Videocassette rentals, in evaluation against other products, are an incredible value. It's amazing. I guess I understand someone trying to be real aggressive and trying to create an image for themselves with those kinds of low prices. But you also can create that image with promotions during the week, once a quarter. Until there is another medium or another product that becomes very competitive, very quickly, I don't understand low prices like that. There is plenty of time to get to that price point.

FINCHER: I see that as a year 2000 strategy.

PIERCE: If that's the year. It could be the year 2005. Who knows?

FINCHER: We are fortunate to live in a world where price isn't the driver in the video rental business. The business is driven by the availability of what you want to see tonight. It's the perception of supply in relation to the demand, not the cost of goods. That's the beauty of it. National chains, like Blockbuster, are able to report great profitability because they recognize and respect that. The beautiful thing about our area in the supermarket business is that we're able to enjoy that as well. While we have the perception of being priced extremely sharp in comparison to other trade channels, we still enjoy maximum profitability. That is in the best interest of the consumer, because it allows us to provide the widest selection of new releases at any given time. SEVERINSEN: Because grocery stores don't have the overhead of a stand-alone video store, there are two different approaches out there. There is the operator who looks at the video department as another profit center, and focuses that department on the bottom line, just like any other department of the store. Then you have the other type of operator who looks at video rental and says, "Let's use that draw. Let's keep getting those people in here." When I look at a situation like the 49-cent rentals, you can see what their motive is. But I don't think that at this point in time it's necessary to go that low. When our stores do it, it's only on a temporary basis. They are probably reacting to something competitively that has happened.

FINCHER: I'd like to point out that it is a unique retailer strategy. I've only observed it in two or three cases and it absolutely is not a trend.

SN: There are a number of retailers out there priced at 99 cents every day.

FINCHER: There are a number that have very poor programs that are doing it at 99 cents. They have chosen to use the price weapon as a tool to promote a very weak retail environment. They use that vehicle rather than invest in other areas -- square footage, expanded sections, fixtures, signage and everything else. They've just made the simplest decision, and I would question their profitability, especially in comparison to retailers like the ones at this table.

MUELDENER: We could price it at 99 cents and have fewer new releases.

STAGNER: You are going to have less copies, absolutely.

INGRAM: Most of the supermarket retailers that have very large and good departments are priced competitively with the video stores at $2 or $3. The particular retailer we're talking about has, in some cases, fairly marginal departments, with very low depth of copy. It's a very promotional item for them to be able to say "49 cents" and get people in. For some of the more established, better and very nice stores, they have that traffic anyway, and there's no reason for them to do that. They don't necessarily need additional traffic. So they are focusing on making their video departments very profitable. There are different strategies. You can drive traffic. You can make money. Some choose to be in the middle and try to make some money and drive some traffic.

SN: Have any of the retailers here changed your rental pricing within the last year, or will you change it in the year ahead?

STAGNER: We went to a higher price for new releases on weekends. We were at $1.99 and raised it to $2.49 because, in our market area, that's where the video stores were. In conjunction with that, we changed the catalog to a lower price and went for multiple copies and multiple days.

SN: Has it been profitable?

STAGNER: We have seen a little uptrend in catalog rentals, which was our goal. We wanted to see an increase in the movement of catalog inventory.

SN: Did anybody else make any changes?

SEVERINSEN: We've become more flexible. When we started, we had just one price point and it was rather aggressive. We're now trying to be more in touch with what's happening in the individual communities. We have gone up a little bit in some outlying areas and, in other places, we've changed our focus on catalog and reduced the price on that. We now gear it toward the area that we are in.

MUELDENER: It's market-driven, depending on what kind of value you are going to pass on to the customer. SN: In your company, Kirk, are there year-to-year changes in pricing? MUELDENER: To some extent. Our corporately owned stores have the autonomy to set the retails. That's dependent strictly upon what their market deems necessary and how much they want to pass on to the customer in value.

FINCHER: In recent industry studies, there's been a continuing market upswing on pricing. The average transaction is up to around $2.42 now, which I think is great. That continues to add to our message that consumers will shop with you if you offer them the right product, and that is not necessarily the title, it's the product, the whole experience that happens when the consumer goes into your store. It's very exciting when the retailers put that to work.

SN: Steve, you recently went with a five-day rental on catalog titles.

BERNS: Catalog product is 98 cents for five days. But to us, new release and catalog are two totally different issues. We feel very strongly that catalog rentals had to be driven. They needed a push, more pizzazz, more excitement. The titles in my science-fiction section do not turn every day. I do not need a daily rate or even a two-day rate. The perceived value of the offer really stimulated the catalog rental business, and the number of tapes per transaction was driven upward, which was the goal of the program.