TIME TO JUMP IN

DAN ALAIMO

DVD will emerge as a mainstream entertainment format this fourth quarter and supermarkets need to be ready for it.

That was the unanimous consensus of suppliers polled during the recent National Video Week in Los Angeles, which included the convention of the Video Software Dealers Association, Encino, Calif. At the show, the DVD Video Group, Los Angeles, projected that the installed base of DVD hardware will grow to 3.5 million to 4 million by the end of the year. More than 200 new software titles are being released on DVD each month and there will be about 5,000 titles available by the end of the year, the group reported.

While these numbers pale next to the 90% of U.S. households that have VHS players, DVD has been growing at an unprecedented rate in the consumer electronics industry in its two years on the market. Comparative studies show DVD sales dwarfing those of previous technologies such as VCRs and compact discs during the same introductory periods.

Also, DVD purchasers have a voracious appetite for software, buying 25 titles per hardware unit, according to Best Buy, Minneapolis. Warner Home Video, Burbank, Calif., expects DVD to account for 33% of all sell-through video sales by 2001. Meanwhile, consumption patterns are shifting from the action titles favored by male-dominated early adopters to a wider range of genres, including family and children's.

"DVD growth is explosive," said Bill Bryant, vice president for sales, grocery and drug at Ingram Entertainment, La Vergne, Tenn. "We expect it to be 20% of Ingram's total business this year."

Several factors will contribute to DVD's accelerating growth and consumer acceptance:

Hardware is expected to drop below $200 by the end of the year. At that price, some at the VSDA even cautioned that there might be hardware shortages again this year.

DVD-ROM drives for computers that play DVD movies will become commonplace, and DVDs on laptops are becoming increasingly accepted as a form of airplane entertainment by business travelers.

Five studios and seven DVD hardware brands will put a fourth-quarter marketing program behind DVD.

Divx has been discontinued, eliminating a possible source of consumer hesitation and reorienting the attention of national electronics retailer Circuit City toward regular DVD.

The vast majority of new releases are coming out in DVD and VHS on the same date.

Two landmark DVD titles are hitting the market. "Titanic" will be released on DVD next week and a new Barney title released last month is the first children's video to take advantage of DVD's unique interactive features.

The buzz generated by studios, retailers, distributors and hardware manufacturers, along with consumer word-of-mouth and media coverage, will drive the DVD market through Christmas and into the new year.

Meanwhile, game makers Sony and Nintendo will include DVD-playing capability on their next generation of machines, expected next year. In sum, DVD is starting to look less like an upstart electronics format and more like a mass-market sure thing.

"In this fourth quarter, a retailer that is committed to video should certainly either support DVD or certainly experiment with it," said Mitch Koch, senior vice president and general manager at Buena Vista Home Entertainment North America, Burbank, Calif. "For supermarkets, it is definitely time to put DVD on the shelves," he said.

DVD is surpassing Disney's expectations and will see "meteoric" growth in the months ahead, Koch noted. "This will be clearly the biggest hardware period ever. It still looks like the people who have purchased machines are buying many, many titles per machine. It is a very avid consumer who is participating in DVD," he said.

Disney has not yet announced DVD plans for its "Masterpiece" animated movies, and Koch would not comment. "Our approach has been to try and develop a long-term success with the category. We want people to be smart about how they get into the DVD business. We don't want people to overshoot and end up with a bad taste in their mouths. But we are seeing across the board better success than we had hoped, and many retailers in other categories of retail are beginning to broaden the rollout," he said.

There will be a "huge impact" on fourth-quarter video sales from DVD, which is "wildly" exceeding his expectations, said Craig Kornblau, president of Universal Studios Home Video, Universal City, Calif.

"The numbers that we are seeing from DVD are staggering. When you consider what we are going to ship and ultimately sell to consumers on 'The Mummy,' I'd never dreamed that we would be at these numbers this quickly. This format is being embraced by the consumer," said Kornblau.

"At Fox, we believe that there is a market out there for the digital consumer," said Steve Feldstein, vice president for corporate and marketing communications at Fox Consumer Products, Beverly Hills, Calif. "That doesn't mean that anything in the near term, or even within 10 years, is going to supplant the VHS business."

Fox is moving more slowly with DVD than other studios. "A lot of those in the industry who are not involved with hardware are taking a longer, closer look. It is a matter of defining who the DVD consumer is currently, and releasing the appropriate products for them. Not everything works," Feldstein said.

Many major supermarket chains, like Schnuck Markets, Giant Eagle and Wegmans Food Markets, have been far ahead of video specialists in renting and selling DVD software. Schnuck even started as soon as DVD was introduced two years ago, and other chains were not far behind.

For example, Carr Safeway, Anchorage, Alaska, rents and sells DVDs in all its stores. "Rentals are improving all the time, especially in certain areas of our market," said Gary Schloss, vice president for general merchandise. "The more affluent upscale stores are doing much better. People with more discretionary income are more likely to buy a DVD player than someone on a fixed income," he said. Schloss is confident that DVD will become the video format of choice within 12 to 18 months. "The problem now is the amount of hardware out there. But it will take off real quick as the price of hardware goes down," he said. The retailer is building up its inventories of DVD titles to prepare for this change, he noted.

Bashas' Markets, Chandler, Ariz., has been gradually rolling out DVD rentals. "DVD is going to be a much more important factor for us," said Bill Glaseman, video specialist. "The titles that I see coming up indicate to me that we should do rather well on both sell-through and rental," he said.

Another retailer that has been aggressively rolling out DVD is Harps Food Stores, Springdale, Ark. Perhaps too aggressively, noted Craig Hill, video specialist. "We're having pretty good luck with DVD, but we ventured out a little bit heavier than we probably should have in some of our rural stores," he said. An early test indicated acceptance in the rural areas, but success didn't follow with the rollout, he noted. Stores in bigger towns are doing very well with the format, he said.

Like other supermarkets, Harps is a DVD leader in its market areas, Hill said. "I'm surprised that our competitors haven't caught on to it yet," he said. As the price of DVD players goes down, he plans to start renting the hardware. "Twelve of our stores are geared up to put players in," he said.

C&K Markets, Brookings, Ore., also has many rural stores and is still waiting to invest in DVD, said Larry Hage, division supervisor/video buyer. "We haven't made much of a splash in DVD yet. We are still sitting on the backside of the bubble waiting to see how successful it is going to be," he said.

Ingram's Bryant confirmed that many supermarket chains got into DVD ahead of video specialty stores. "They tested DVD in 20 or 30 stores, liked the response they got and then rolled it out chainwide. There are several cities in the U.S. where supermarkets are the only place where you can rent DVD," he said.

Disney's 48-piece prepack mixing VHS and DVD versions of "A Bug's Life" sold through very cleanly for supermarkets, he pointed out. "That was an animated title, and so far action titles have been the better sellers for DVD. So it looks like DVD is becoming more of a broad-based format," Bryant said.

Because of DVD's growth, "it really will be a very interesting and powerful fourth quarter," said John Fincher, national account sales at Baker & Taylor, Morton Grove, Ill. "In the year 2000, home entertainment will be defined on this new medium," he said. Not only is DVD exceeding the expectations of distributors, but also those of Warner Home Video, he noted.

Fincher pointed to the coming lower-priced machines, the game consoles with DVD-playing capability and the increase in the number of DVD-ROM drives as evidence of this gathering strength for the format. "Our studies show that 90% of the new installs from Gateway and Dell have DVD drives," he said.

With recordable DVD players on the horizon, VHS will become "obsolete," he said. "The BMW crowd will be first to adapt that new technology. But every home-theater owner will want to have that technology."