VIDEO SUPERSTORES SPUR FADEOUT FOR TWO STEELE'S RENTAL PROGRAMS

DAN ALAIMO

FORT COLLINS, Colo. -- Steele's Markets here closed two of its three video-rental departments in early March because profits have been eroded by competition from new video specialty superstores, said Russ Kates, president and chief financial officer.

Several months ago a Moovies store moved in next door to a supermarket with a 2,000-tape department, while Moovies and Blockbuster opened up near an 800-tape department over a year ago, Kates said. The four-store independent is keeping a 1,200-tape department. One other store has never had video, said Kates.

"We are dropping the departments that are not profitable and keeping the one that is," he said. "We feel that since the [video] service is available real close to our stores, we are better off doing something else with the space," said Kates. "That new Moovies store is attached to our store, so it's not like we're taking anything away from the customers."

When that store moved in, "we knew that the writing was on the wall," said Kates. Video revenues dropped 25% to 30% after the specialty stores opened, he added.

The space will be used for other general merchandise, including film and seasonal items, said Kates.

The one store where Steele's is keeping video rental is located in an inner-city area with no video superstores nearby, he said. "It still does a good volume," he said. Steele's supplier is Video Home Theater, Des Moines, Iowa, which provides entire video-rental programs for a set lease fee per month. Steele's has worked with Video Home Theater for about 10 years, Kates said.

But he said the agreement calls for only four of 100 pieces of inventory to be new releases. "We have tried to get more new releases, and we have been moderately successful at that. But because of the cost of the new releases, the number has never been what we would have liked it to be," he said.

Overall, Video Home Theater has done a good job for Steele's. "We have been satisfied with them," Kates said.

But a shortage of new releases contributed to the departments' inability to compete with the specialty operators, he noted.

"You go into those stores on the big rental days and all the new releases are gone, while everything else is there," said Kates.

But the costs of those titles are prohibitive. "To invest $85 to $90 in a new release that is going to have a life of three to four weeks just doesn't make sense to us. I'm sure that Video Home Theater has the same problem in how much they can invest in their inventory," he said.

Prior to going with Video Home Theater, Steele's operated its own departments, but didn't make money. "At least with Video Home Theater, we could show a profit," he said.

Asked if Steele's had considered expanding its video-rental presentation to compete with the superstores, Kates said, "It's not worth the risk."