VIDEO ROMPS

DAN ALAIMO Additional reporting: MICHAEL SLEZAK

Supermarket video is a really big show.

Indeed, it is even bigger than nearly everyone in the industry thought it would be a year ago.

In this third-annual State of the Industry Report on Supermarket Video, SN found that total supermarket video revenues for 1993 topped $2 billion for the first time, greatly exceeding the $1.8 billion SN projected in last year's report.

Because supermarkets have become a prominent part of the video business, video is playing a starring role in building traffic, sales and margins for retailers. Among the key trends identified by the national study:

Supermarket video revenue increased 20.5% last year to $2.23 billion, up from 1992's $1.85 billion. This year revenue is expected to grow another 18.8% to $2.65 billion. Comparisons between 1992 and 1993 sales cited in this article include a revision of the revenue figures published in last year's State of the Industry Report. Recent research by SN editors and trade observers suggests 1992 revenues were closer to the $1.85 billion figure now cited than the $1.59 billion used last year.

Supermarkets now represent 16.2% of the overall video market, 18.1% for rental and 12.3% for sell-through. In 1994 this is expected to rise to a 20.8% share for rental, 12.7% for sell-through and 18% for both.

The number of stores with rental departments went up 14.3% last year, while the stores with sell-through sections increased 16.2%.

The growth of rental programs is expected to continue this year as 69% of retailers expand their inventories, 43.1% expand the number of departments, 32.8% expand the number of live inventory departments and 79.3% diversify into additional rental products such as games, audio books and compact disc/read-only memory software.

"We are looking at every opportunity we can to put video departments in our stores," said Clifford Feiock, video coordinator at Nash Finch Co., Minneapolis. "Whenever we do a remodel or open a new store, we are putting in ever-larger video departments," he said.

"Supermarkets are making some big money on video departments," said Sandy French, video coordinator at Thrifty Food Stores, Burlington, Wash.

The survey was conducted for SN by the Market Research Department at Fairchild Publications, New York, which publishes SN. Information from retailers, suppliers and other research companies augmented the survey data.

The questionnaire was mailed in December to supermarket chains, independents and wholesalers across the country. It reflects video rental business at 2,009 supermarkets and sell-through activity at 3,604 stores.

Survey respondents included 67 companies that represented 14,881 stores in 1993. These companies accounted for more than $800 million in video sales and rental revenue last year.

GROWTH TRENDS

Double-digit increases continued last year, with retailers reporting rental revenues up 19.7% to $1.68 billion and sell-through revenues up 23% to $553.5 million. The $2.23 billion total is up 20.5% from 1992.

Based on findings in this year's survey, plus other industry studies and projections, total video revenues for 1992 were $1.85 billion -- $1.4 billion for rental and $450 million for sell-through -- up 16% from the previously reported $1.59 billion.

More of the same kind of growth is projected this year. A 19% increase is in store for rental, bringing it to the $2 billion benchmark, and a 17.4% increase is on tap for sell-through, which should reach $649.8 million. The total for the year is expected to be $2.65 billion, up 18.8% over 1993.

"There's a huge potential in supermarkets that is yet untapped. It's the perfect marriage for the grocery consumer," said a buyer for a large Northeastern supermarket chain, who asked not to be identified. "

"Supermarkets are just getting stronger and stronger," said Des Walsh, vice president at Supercomm, Dallas, a shared-revenue, pay-per-rental video distributor.

"There is such an untapped demand for video rental and sell-through in supermarkets that when the retailers get serious about it, and increase their commitment, the business follows naturally," said Walsh.

Supermarkets also are increasing their share of the total video market. Last year video industry revenues at retail were $13.8 billion, with $9.3 billion for rental and $4.5 billion for sell-through, according to Advanstar Associates, Carmel Valley, Calif. Supermarkets had a 16.2% share of the total, 18.1% of the rental market and 12.3% of sell-through.

This is up from a 14.1% share of the total $13.1 billion video business in 1992, when supermarkets' rental share was 15.4% and sell-through was 11.3%. In 1994, as the total business climbs to $14.7 billion, according to Advanstar, supermarket share will go to 18% for the total, 20.8% for rental and 12.7% for sell-through.

"Supermarkets are growing their share and aggressively buying to build that share," said Tom Adams, managing director of Advanstar. The growth of supermarket video helps explain why suppliers' revenues for rental products increased 8% to 9% last year while the overall market was essentially flat, with only 2% growth, he said.

Ingram Entertainment, La Vergne, Tenn., has seen video growth among its supermarket customers ranging from 10% to more than 40%, said David Ingram, vice president for major accounts/special markets. Ingram is the nation's biggest video distributor.

"Our projections call for a growth of between 18% to 25% in our supermarket business from 1993 to 1994," he said.

Retailers are rapidly expanding the number of stores that offer video. The number of stores per company with rental departments went up 14.3% from 1992 to 1993, and is projected to grow another 14.7% from 1993 to 1994.

The number of sell-through sections increased 16.2% from 1992 to 1993, and that number is expected to rise another 10% in 1994.

Meanwhile, same-store revenues are growing at an even more impressive pace. Same-store rental revenues only went up 8.9% from 1992 to 1993, but are projected to rise 22.9% in 1994. Average store video rental revenues totaled $236,300 in 1992, $257,400 in 1993, and are expected to reach $316,300 in 1994.

These numbers are generally higher than those of the typical video specialty store, but much lower than those at Blockbuster outlets.

Same-store sell-through revenues increased 36.6% from 1992 to 1993, and retailers expect a 28.2% rise in 1994. The average store realized $75,400 from sell-through in 1992, $103,000 in 1993 and SN's survey projects this to reach $132,000 in 1994.

"We are going to continue to see a lot of growth, especially among those supermarkets that are established in video," said Ingram. "Many of them have honed their programs to a fine edge and have found that video is very profitable for them."

OPERATIONAL TRENDS

Gross margins continue to be strong for supermarket video departments. The survey average was 35% for 1993, up from 33.9% in 1992. In 1994, the survey projects gross margins to reach 36.5%. One chain reported margins of 70% to 79% for 1993 and 16% reported margins of more than 50%.

Retailers who have made the bigger investments in their video operations, whether with large live-inventory departments, ownership of inventory or expanding programs, reported higher margins than others.

But this year's numbers reflect a slight erosion from the past, which may be attributable to lower prices on sell-through items, lower average rental rates and higher rental product costs.

When asked about the biggest challenges facing the video business, respondents put "cost of acquiring videos" at the top of the list. Last year that factor ranked fourth.

Prices on rental tapes have been going up slowly in the last two years, said a buyer for a major chain, who asked not to be identified. "The cost of tapes is becoming an issue," he said.

What supermarket retailers want to say to the studios is, "Enough of the hats and T-shirts and things like that. Just shoot me your lowest cost on the videos," the buyer said.

"Cost of new releases is a concern. At $1.99 to $2.99 a rental, it takes a long time to capture $70, let alone late fees and damages," said the buyer for the Northeastern retailer.

On the list of challenges, "labor" moved up from third to second, also reflecting retailers' worries about weakening bottom lines. Ranked third was "selecting and managing inventory," which was last year's top concern. "Shrinkage" moved down from second to fourth.

Other items on the list, in the order they were ranked by the retailers, were: "competition from video specialty stores," "upper management support," "lack of advertising funds" and "cooperation with other internal departments."

Proposed in-home video delivery systems such as video-on-demand and the threat they represent to video retailing, have been given massive publicity. But survey respondents ranked concern about these new technologies dead last on the list of challenges facing them.

In a follow-up question, 33.3% of the video executives polled said either they or their top management were worried about the potential impact of such in-home delivery technologies. A larger portion of chains said they were worried about these technologies than independents. Companies that are experiencing the strongest growth in video tended to be less worried about such future threats.

"I'm not worried about it. People like to browse and pick out what they want," said French of Thrifty Food Stores.

"It's certainly a concern. But it remains to be seen how successful it's going to be. We're not just going to sit and wait for it. We're looking for better ways to do what we're doing now," said Feiock of Nash Finch.

Many of those who are worried about the in-home delivery systems are taking action to secure their market position. These supermarket companies are more likely to be diversifying into alternate product areas such as audio books, audio music, computer software, blank tapes and accessories than other respondents, the survey showed.

Of these alternate product areas, audio books saw the strongest growth, with 70.1% of respondents saying they will carry them in 1994. This is up from 43.3% last year.

"We just started with audio books in two of our stores and they're doing great," said French of Thrifty Food Stores. "We've had them for about two months and all of a sudden they are just going like crazy. So we might put them into our other stores."

Other products now being carried by supermarket video departments include blank tape, cited by 89.6% of the respondents; video games software, 68.7%; video and audio accessories, 58.2%; related licensed products, 44.8%; audio music, 43.3%; computer software, 25.4%; entertainment hardware, 25.4%; CD-ROM software, 19.4%; movies on compact discs, 10.4%, and laserdiscs, 7.5%.

RENTAL TRENDS

Supermarkets' strength as sell-through merchants is widely recognized, but this year's survey confirms that they are rapidly becoming an even more significant force in rental.

This year supermarkets should attain 20.8% of the video rental business, the study indicates. This will be about the same market share as all domestic Blockbuster stores, corporate-owned and franchised. This supports the predictions of some industry observers that the rental business would eventually be dominated by Blockbuster and the supermarkets. It also suggests the vast importance of the supermarket channel to the home video industry.

Store-within-a-store, live-inventory departments have made significant gains in supermarkets, growing to 19.7% of rental locations in 1993, up from 11% in 1992. Separate stores, either freestanding or adjacent, are operated by 5.5% of the retailers responding to the SN survey, while 50% have clearly defined departments or sections, and 24.8% just have racks near their customer service desks. None of this year's respondents reported having video vending machines, although there are many in operation.

There is a wide variety of store sizes and formats, and the sizes of supermarket video departments are similarly broad. Nearly a third (30.8%) of the retailers operate small departments with less than 1,000 tapes in inventory; 44.7% run medium-sized departments of 1,000 to 2,500 tapes, while 24.5% have large departments of more than 2,500 tapes. These numbers are similar to those reported in last year's survey report.

The composition of rental inventories shifted somewhat this year toward more catalog movies, reflecting the general expansion of video departments. The average inventory was comprised as follows: 44.4% catalog movies, up from 39.4% last year; 28.8% new releases (less than 90 days old), down from 34%; 13.6% children's and family titles, down from 16.1%; 2.6% special-interest, the same as last year; and 10.7% video games, up from 7.9% last year.

B movies, which are often a second choice of video rental customers, are getting special attention from many retailers. Forty-two percent said they plan to buy more B movies in 1994 than 1993.

"One of my main objectives is to find some good B products. That's where the profits are for us," said Feiock of Nash Finch.

"There are a lot of B's out there that are trash and we're trying to stay away from those and just go for the high-quality B's," said French of Thrifty Food Stores.

"We bought quite a few B movies last year. Some were real ducks but others were sleepers that rented as well as the A titles," said Tony Kronenberg, video clerk at Scolari's Warehouse Markets, Sparks, Nev.

The biggest portion of rental revenues, however, came from new releases. The average respondent got 57.9% of total rental revenue from new releases, 20.3% from catalog movies, 9.7% from children's and family titles, 1.4% from special-interest, and 10.7% from video games. These numbers were similar to past years, except for video games, which have increased 78.3% since 1991.

This year's survey saw a decline in rental rates. The average single-night rental for new releases was $2.20, down from $2.48 last year, while catalog titles were $1.28, down from $1.42 last year. Video games, a new item on the list this year, were $1.95.

Multinight rentals are offered by 52.5% of the respondents, and 14.5% said they expect to raise their rental rates in 1994, down from 17% last year.

The survey confirmed the mutually beneficial relationship between video rental departments and the supermarkets they are located in. Seventy-seven percent of video customers make other purchases while in the store.

The respondents reported a high level of card-member activity compared to video specialty retailers. Of the survey total, 65% of card members are active, renting videos at least once a month.

Independents do an even better job, with 84.4% of their card members staying active. This is perhaps due to their more rural locations, with fewer competitors and less transience. For chains, the number is 58.4%, closer to specialty stores, where 50% is considered good.

The average store has 5,035 card members, of which 3,270 are active. When compared to the average store's foot traffic, estimated by industry sources at more than 13,000 a week, this shows the potential that many retailers have for building on the video customer base they've already established. It also indicates the number of customers a retailer could hope to serve by putting in a rental section.

Retailer interest in pay-per-transaction, shared-revenue programs like Rentrak and Supercomm has lessened since last year's survey. At that time, the programs were new to supermarkets, and 33.3% said they would use or test them in the year ahead. This year, the number is down to 12.7%, reflecting the number who have had a chance to evaluate the programs, and also some frustration with the number of new releases they offer.

"Pay-per-transaction is a good concept, but it needs a lot of work. It needs a succinct strategy. It needs major consumer advertising. It needs the major studios. From the supermarket's point of view, pay-per-transaction is not going to work unless it quadruples sales," said the Northeastern buyer.

On the other hand, interest in the Dove Foundation's seal of approval program for "family-friendly" titles remains strong, with 33.8% saying they plan to use or test it in the year ahead. This is about the same percentage as last year, when that program also was new. This reflects the importance of family products to supermarkets, the growing concern over violence and sexual content in entertainment programming and the relative simplicity of Dove's program.

Major promotions will help the Dove program succeed, said Feiock of Nash Finch. "They're enlarging their program, doing a lot of new things. If they continue to go that way, the payoff will definitely be there," he said.

Supermarket video executives continue to see major video chains such as Blockbuster as their primary competition in rental. Of the respondents, 59% cited the major video chains, 24.6% said small video specialty stores, 13.1% said other supermarkets, while 3.3% said some other class of trade.

On supply trends, the number of retailers who own and operate video programs grew last year at the expense of shared-revenue programs. The number of retailers using video distributors rather than rack jobbers also increased, the survey reported. Both of these development reflect the heavy competition among distributors and aggressive programs they are using to pursue the supermarket trade.

SELL-THROUGH TRENDS

This year's survey reveals a growing commitment to sell-through video as an ongoing part of retailers' video programs, rather than just an in-and-out offering. More than 58% now have ongoing sell-through programs in permanent sections of the store.

"Sell-through is really where the future growth is going to be," said Feiock of Nash Finch. "We are focusing on improving in that area, and not only video sales, but computer software sales and whatever else may come along."

Catalog movies as a part of sell-through inventories increased to 25.4% from 17.5% last year. As a part of sell-through revenues, catalog rose to 21.1% from 18.5%. Children's and family titles increased slightly as a part of inventory, going from 25.3% last year to 27.8%, but revenues for this segment jumped from 21.3% to 30.5%.

New sell-through releases declined to 37.6% of inventory from 52.5% last year, while new-release revenues dropped to 41% from 55.2%. Special-interest gained as a part of inventory, going from 3.2% to 3.7%, but declined in revenues, dropping from 3.7% to 2.3%.

Meanwhile, the sale of video games increased significantly, going from 1.5% to 5.5% of inventory, and from 1.3% to 5.1% of revenues.

The cross-merchandising of sell-through with other products, usually those connected to a mail-in rebate offer, dropped from 48.5% last year to 37.1% this year. Retailers cross-merchandised an average of 3.8 of the hit sell-through titles with related products last year. This indicates that retailers prefer to cross-merchandise with major titles that they can feature prominently, although tie-in deals are available on many other titles.

"There are significant opportunities that retailers are not taking advantage of in cross-merchandising other products with video," said a video distribution executive, who asked not to be identified.

Retailers are becoming more aggressive in their marketing of "previously viewed," or used tapes. Fewer are selling old copies of rental titles to used-tape brokers -- 12.3%, down from 27.6% last year. More are using them to build inventory -- 17.5%, up from 13.8% last year -- or are selling them to consumers -- 89.5%, up from 84.5% last year.

Overall, previously viewed tapes now account for 31.6% of retailers' sell-through volume, the balance coming from new products.

"Supermarkets have found selling off used tapes to be a very profitable area," said David Ingram.

"We're making good money" on previously viewed tapes, said French of Thrifty Food Stores. "We wait until a movie makes about an 80% profit, and then we'll sell it for $9.95."

A surprise in supply trends was the 30.2% who said they will buy hit sell-through products directly from the studios in 1994. This is up from 13% last year.

Disney's video distribution and marketing subsidiary, Buena Vista Home Video, Burbank, Calif., has said it is not interested in selling directly to supermarkets, although it does sell directly to mass merchandisers, warehouse clubs and certain other high-volume accounts. Disney is the clear leader in hit sell-through video sales.

But video distribution sources confirmed that, except for H-E-B Grocery Co., San Antonio, which has been a direct Disney customer for more than two years, Buena Vista is not known to be selling directly to supermarkets.

The 30.2% probably reflects the number of retailers that would like to buy directly from the studios, said video industry sources. It may also represent those planning on purchasing individual titles as other studios, such as Warner Home Video, step up their sell-through activity this year, they said.

"Supermarkets would buy directly if they felt it was advantageous to them. In general, I don't think that it has been," said the video distribution executive. "But I wouldn't be surprised if they were hedging their bets."

As in last year's study, respondents regarded other classes of trade, such as mass merchandisers, as their primary competition in sell-through. This year more respondents also mentioned major video chains, reflecting Blockbuster's increased aggressiveness in sell-through. Other supermarkets declined somewhat as sell-through competitors.

Retailers merchandise their sell-through inventory in a variety of locations in the store, with 67.7% offering product in the main shopping area. Asked about their sell-through programs, 21% said they sell only from secured areas or a service desk and 40.3% only offer hit sell-through titles sold from prepack shippers. In-and-out programs with low-priced products under $10 are offered by 69.4% of the respondents.

VIDEO GAME TRENDS

Video games are no longer an "alternative" product for many retailers. Games are now 11% of retailers' overall video revenues, the survey reported.

"We're seeing tremendous growth in video game rentals," said Feiock of Nash Finch.

"Games just boom out of here," said French of Thrifty Food Stores.

"Game rentals are the hot product for the 1990s," said a buyer for a major chain. "If you are not in games, you had better get in it."

Of retailers carrying games, 65.6% have rental programs only, 3.3% have sell-through programs only, while 31.1% do both. Used games are sold by 21.3% of the responding supermarket companies.

Despite inroads in the overall market by Sega, Nintendo products remain the biggest part of supermarket video department games programs. Eight-bit Nintendo is carried by 91.8% of the retailers, 16-bit Super Nintendo by 93.4%, and Nintendo Game Boy by 19.7%. Sega Genesis is carried by 85.2%, Sega CD by 13.1% and Sega Game Gear by 9.8%. Other games software is carried by 11.5% of the respondents.

Revenues on the Rise

There seems to be no slowing the double-digit growth of supermarket video revenues for both sell-through and rental. Total revenues are projected to hit $2.65 billion in 1994, on 18.8% increase.

1992 1993 1994

Rental $1.4 bil. $1.68 bil. $2.0 bil.

Sell-Through $450 mil. $554 mil. $649 mil.

Supermarket Share of Revenue

Supermarkets have made big strides in their share of the video industry. This year they will capture 18% of the total business and their 21% of the rental business will be about the same as Blockbuster.

1992 1993 1994

Sell-Through 11.3% 12.3% 12.7%

Rental 15.4% 18.1% 20.8%

Total 14.1% 16.2% 18%

Overall Industry Revenue

Video revenues are projected to near $15 billion this year.

1992 1993 1994 (in billion $)

Total 13.1 13.8 14.7

Rental 9.1 9.3 9.6

Sell-Through 4.0 4.5 5.1

Margins on Steady Rise - Survey results indicate investments in supermarket video are paying off in strong gross margins that are expected to average 37% this year.

PERCENTAGE GROSS MARGIN

1992 33.9%

1993 35.0%

1994 36.5%

Rental Department Profile

While half of all video rentals are merchandised from a clearly defined department, the store-within-a-store concept with live inventory has gained ground.

RENTAL DEPARTMENT LOCATIONS

Separate store 5.5%

Store-within-a-store 19.7%

Service desk 24.8%

Department 50.0%

Store-Within-a-Store Grows

Merchandising of rental tapes through the store-within-a-store format gained significantly: The percentage of respondents offering this concept grew by 79% over the previous year.

% OF RENTAL DEPT.'S USING STORE-WITHIN-A-STORE FORMAT

1992 11% 1993 19.7%

Size of Rental Tape Inventory

While retailers are rapidly expanding their video programs, medium-sized sections remain the most popular.

% OF RENTAL DEPT.'S BY SIZE

1991 1992 1993

Small 23% 31% 31%

Medium 52% 46% 45%

Large 25% 23% 24%

Pieces of the Pie

Catalog and other products make up a large portion of retailers' inventories, but new releases account for the most revenues.

RENTAL REVENUE BY TAPE CATEGORY

1992 1993

Special interest 3% 1%

Video games 7% 11%

Children's/Family 10% 10%

Catalog 21% 20%

New Releases 59% 58%

Taking Stock

TYPICAL RENTAL INVENTORY

1992 1993

Special interest 3% 3%

Video games 8% 11%

Children's/Family 16% 14%

Catalog 39% 44%

New Releases 34% 29%

The Pricing Is Tight

Average rental rates declined substantially last year, reflecting more aggressive pricing by retailers.

ONE-NIGHT RENTAL RATES BY CATEGORY

1991 1992 1993

new releases $2.19 $2.48 $2.20

catalog titles $1.46 $1.42 $1.28

More Is More

More than half of all respondents said they offer multinight rentals.

DO YOU OFFER MULTINIGHT RATES?

YES 52.5% NO 47.5%

An In-House Business

In-house-only programs gained last year at the expense of those run by outside companies.

PROGRAMS RETAILERS USE

1992 1993 1994

In-house only 61% 59% 66%

Shared revenue only 31% 25% 11%

Leased-space prog. 0% 0% 12%

Combination 8% 16% 11%

Makeup of Sell-Through Volume

Previously viewed 32%

New products 68%

Sell-Through Profile

Permanent sell-through sections are used by 58% of retailers while 40% sell the product from shippers only.

WHERE VIDEO IS DISPLAYED

in-and-out prepacks 69%

main shopping area 68%

permanent section of store 58%

only shippers of hit products 40%

cross-merchandising w/ related items 37%

service desk 21%

Old Tapes Never Die

More retailers are using old tapes to build inventories and to sell to customers.

HOW STORES DISPOSE OF OLD TAPES

1991 1992 1993

sell as previously viewed 76% 85% 89%

sell to broker 20% 28% 12%

build inventory 14% 14% 17%

Cataloging the Inventory

Retailers' sell-through inventories are less focused on new releases and include more catalog products.

TYPICAL SELL-THROUGH ASSORTMENT

1992 1993

Special interest 3% 4%

Video games 5% 5%

Catalog 17% 25%

Children's/family 24% 28%

New releases 51% 38%

Hot Issues

Here's how retailers responded to questions regarding hot issues in the industry

Will you buy sell-through titles direct from the studio yes 30% no 70%

Are you worried about the impact of future in-home delivery technologies like video on demand? yes 33% no 67%

Will you use or test the Dove Foundation's family-oriented seal-of-approval program? 1993: yes 34% no 66% 1994: yes 34% no 66%

Will you buy more B movies for rental this year? yes 42% no 58%

Will you use or test some form of pay-per-transaction program, like Rentrak or Supersomm, in the year ahead? 1993: no 67% yes 33% 1994: no 67% yes 13%

Big Gains in Store

Same-store video revenues are growing at impressive rates for sell-through and rental. The average store in the survey is expected to have annual revenue in rentals grow 23% this year while sell-through revenues are projected to rise more than 28%.

SAME-STORE ANNUAL REVENUES FOR THE AVERAGE STORE SURVEYED

1993 1994 (thousands of $)

sell-through $103 $132

rental $257 $316

In the Game

Video games have become an important part of supermarket video programs, especially for independents

PERCENTAGE OF VIDEO BUSINESS IN GAMES

Chains 10%

Independents 16%

Total 11%

The Games Market

Most retailers only rent games, but almost a third rent and sell games.

sell-through only 3.3%

rental only 65.6%

both 31.1%

The Brand Games

Nintendo products are carried by more retailers than Sega games. Sixteen-bit is the leading format.

Super Nintendo (16 bit) 93%

Nintendo (8 bit) 92%

Nintendo game boy 20%

Sega CD 13%

Other Sega software 12%

Sega game gear 10%