VIDEO: UPS, DOWNS AND DVD

Dan Alaimo

It's the same plot, but with different characters.

In 20-plus years, the fundamentals of the supermarket video business have never changed. Meanwhile, some major players have come and gone. There have been three video formats -- Beta, VHS and now DVD -- and the business has been significantly challenged by other classes of trade. There's been shared revenue, departments owned by retailers, pay-per-transaction and studio copy depth programs. Through it all, video in supermarkets has survived.

The convenience of one-stop shopping, the return visit with additional sales, the touch of Hollywood in the grocery environment and substantial profits from a well-run program have been part of the supermarket video picture from its beginnings in the early '80s. Rental programs started out as shared revenue operations run by third-party companies, but quickly evolved into programs owned and operated by the retailers. In the late '90s, many got out of the business because of specialty store competition and increasing buying complexity, but now with the mass-market status of DVD, supermarket video rental seems to be enjoying a resurgence.

"A lot of supermarkets have had great successes over the years in the video category," said Mark Fisher, vice president of membership, Video Software Dealers Association, Encino, Calif. Fisher is the former video sales and operations manager of the Stop & Shop Supermarket Co., Quincy, Mass., and chief architect of that chain's trailblazing program. "But the times are changing, and the opportunities tomorrow are even better for revenues and profits for supermarkets in the video category."

The first video rental department was put in a Randall's in Houston in 1980 by East Texas Distributing of that same city. Randall's is now part of Safeway, Pleasanton, Calif., and East Texas later became ETD Entertainment Distributing. Both are now out of the video business.

It was 1982 when video rental caught on with cutting-edge retailers across the country, initially with racked, shared revenue programs. Among them: Stop & Shop, Albertson's, H-E-B and King Soopers. Throughout the '80s and early '90s, it gradually spread until supermarket video rental account to more than 20% of total industry revenues in 1994, according to SN studies conducted at the time.

Some retailers soon found they could make more money by owning and operating their own departments rather than using shared revenue rackers. For example, Stop & Shop opened a 1,000-square-foot department on Dec. 7, 1985.

Those were the days when, because of insatiable demand by consumers with new players, retailers couldn't do anything but succeed, Fisher said. "Anything you touched turned to gold. You could make all the mistakes in the world and still be profitable and successful," he said.

Eventually Stop & Shop had 60 video departments and five freestanding video stores that it opened in the early '90s.

Albertson's took another route. Even today the retailer relies on -- and expands with -- its shared revenue rackers. The biggest is Video II in Sandy, Utah, with about 1,000 stores, while B&M Video, New Braunfels, Texas, has 220 stores, including 16 it recently opened in former Albertson's units bought by Kroger Co., Cincinnati. The Movie Exchange, Oaks, Pa., racks some East Coast stores for Albertson's Acme banner.

B&M Video opened its first department in an Albertson's in April 1982, said Dwight Mason, chairman. Initially, the video sections went in the middle of the store, but the retailer soon decided to place them in the front of the store between the checkouts and the service desk, which was along the front wall of the store.

About 15 years ago, Albertson's started building live inventory departments in new and remodeled stores adjacent to the service counter. "Every time Albertson's remodels a store, they put a new video department in," Mason said.

Currently, the growth of DVD is causing merchandising dilemmas for many retailers still doing a brisk business in VHS tapes, but this is not the first time retailers have had to deal with two formats. In the early '80s, the Beta format was in competition with VHS. Throughout the '90s, supermarkets continued to do a good business in video rentals although margins eroded, SN's research found. This was attributed to increasing tape prices, stagnant rental rates and heightened specialty store competition from chains like Blockbuster and Hollywood.

But everything changed in late 1997 when Blockbuster entered into shared-revenue agreements with the studios and launched its well known "Go Home Happy" ad campaign, promoting the guaranteed availability of major new releases. Hollywood Video and other specialty chains followed, and supermarket video rental business took a big hit.

The studios offered other retailers various programs geared toward increasing copy depth, but many supermarket executives found them too difficult to deal with. "I've got numbers that tell me the average independent video retailer can spend upwards of 30 to 40 hours a month making purchasing decisions. What supermarket buyers have that kind of time?" Fisher said.

"That was devastating for us," Mason confirmed.

"There's no question that the elephant that broke the camel's back was in 1997 in the form of Blockbuster doing its direct revenue sharing deals," said Andrew Miller, director, supermarket division, Rentrak Corp., Portland, Ore. Long before he joined pay-per-transaction distributor Rentrak, Miller was a pioneer in grocery rentals, founding a company called Supermarket Video that opened its first racked shared revenue department in a King Soopers in 1982, and later was renamed U.S. Video. Miller later founded another supermarket video supply company called Sundance Video.

It comes back to basics, Miller said. "The most profound thing is to look at how the concept was so agreeable to the consumer. The square-one idea of the customer renting movies in supermarkets -- the convenience of renting and the ease of return, and the foot traffic, and all those basic building blocks that have been there from the very beginning. The fact is, the business just worked from day one," he said.

Videos for Sale

Sell-through video got rolling in the mid '80s, although the first sell-through title was "Star Trek 2: The Wrath of Khan," retailing for the then-unheard of price of $39.95 in August 1982, said a spokesman for Paramount Home Video, Hollywood, Calif.

Although Paramount pioneered sell-through with "Khan," and later did the first video cross promotion with Pepsi and "Top Gun" in 1987, other studios later became better known for their sell-through products, although Paramount was always a player.

Many supermarkets took to sell-through more easily than rental because it was a more familiar sales process, said some industry observers. Most supermarket products come into the store, sell and go out the door with the customer, never to return. While video rental was different, sell-through fit right in.

"It's no different than any other in-and-out product," said Mark Fisher, vice president of membership, Video Software Dealers Association, Encino, Calif., and a former video executive with Stop & Shop.

"We got into sell-through about the same time we got started our own video program in 1985," Fisher said. "The first major sell-through title we did was 'Beverly Hills Cop.' But in sell-through, the margins aren't near to what the rental margins are, although you never needed a dedicated space for it. Supermarkets always had the traffic flow to support it."

Now with all DVD movies at sell-through pricing, there is much more variety available, he said. "It's an exciting product for the consumer, and it doesn't take up a lot of shelf space. The question really is, 'Why not?"' Fisher said.

Dwight Mason, chairman, B&M Video, New Braunfels, Texas, also noted that sell-through is not as profitable as rental. "The stores do real well with it as long as it is tied in with video rental," he said.