VSDA CONVENTION 2000-07-24

RANDY WEDDINGTON

LAS VEGAS -- Supermarkets stand to benefit from shifting trends in video rental and sell-through as DVD's rapid acceptance impacts the mix, said Mike Saksa, vice president of marketing, Warner Home Video, Burbank, Calif., noting that "growth occurs when innovation is embraced and managed together."

Saksa spoke at the fifth annual SN supermarket breakfast during the Video Software Dealers Association held here July 8 to 10. His presentation emphasized the synergy between VHS and DVD that can revitalize video revenues for supermarkets and other retailers. Projections from Alexander & Associates, N.Y., show, for instance, that although both rental and sell-through consumer spending are expected to level off this year and decline slightly in the next few years, when DVD growth is factored into the mix, total video spending should rise from roughly $23 billion this year to over $32 billion in 2003.

In his industry overview, Saksa also elaborated on Warner's role for the future, including a discussion of this year's convention hot topic -- Warner's Rental Direct, the "new rental distribution model" that begins with September releases. These are toplined by "Any Given Sunday," the $76 million-grossing Al Pacino football film by Oliver Stone, streeting on Sept. 1, and the horror film "Final Destination," which grossed $52 million theatrically. It will be released to video on Sept. 26. The plan, under which retailers will purchase product directly from Warner via fulfillment through Ingram Entertainment, La Vergne, Tenn., will benefit buyers by utilizing Warner's "knowledgeable sales force and customer service representatives," Saksa said.

According to Saksa, the new Rental Direct program will create a partnership enabling the "creation and administration of copy-depth programs to allow retailers to satisfy consumer demand" and generate "more effective advertising and in-store promotions to increase consumer demand."

Following his presentation, Saksa opened the floor to questions. When none were immediately forthcoming he closed the discussion with one resonant comment: "We obviously have all the answers, or we're so far off we're not even in the ballpark."

With so much yet to be determined about the untested new program, attending retailers concurred with this assessment. "Warner has had program after program since these (buying programs) began," said Bill Glaseman, video specialist, Bashas' Markets, Chandler, Ariz. "Who's to say that this is the right one?"

Figures presented by Saksa show that for the year to date through June 17 VHS sales are up 3.6%, with supermarkets capturing just 5% of the market, a decline of 10.4% from last year. In contrast, discount mass merchants have 63% of the market, a growth of 8.1%, while specialty stores have an 18% share, a decline of 3.5%.

In 1999, he continued, catalog titles showed an 8% unit growth, while new release performance declined 37%. This was attributed to new release titles that were "fewer in number and in strength than in 1998." Over these years catalog sales rose slightly from 436 million units to 439 million, while new releases dropped precipitously from 244 million to 154 million.

"While new release hits drive category traffic, category profit is generated by catalog titles," Saksa added.

For the year to date, catalog sales represent 31.5% of the VHS market and an impressive 50.3% of the DVD market. Among mass merchandisers, catalog sales represent 36% of the total video category, generating 47% of the dollar volume and 25% of the profits.

One factor boosting overall sales is the fact that "the average street price declined 9% from $12.14 in 1997 to $11.07 in the first quarter of 2000," according to Saksa. Referring to a unit sales increase in the $7 to $13 price range from 27% in 1998 to 43% in 1999, he said that the increase in sales resulted from the studios' introducing more new product at the $14.95 price point. "The pricing trend can create an opportunity for grocery," he said, pointing out that "catalog is important for growth, profit and variety."

DVD received considerable attention in Saksa's address, as it did elsewhere throughout the convention. "VHS is still big business," he said, "and DVD, if managed correctly, should be largely incremental." He noted that DVD hardware sales are currently up three times over the comparable period last year, with 1999 software sales of $2 billion projected to climb to $4 billion this year and $7 billion in 2001.

Studio support for DVD is growing, Saksa said. "Most new DVD titles are now released day-and-date with VHS." Key titles like Steven Spielberg's films and Disney's animated classics are coming to the market. And studios are offering strong advertising and promotional support, along with lowering the prices on new and catalog DVD titles. DVD is expected to account for 30% of total sell-through sales this year.

Warner sees a decline in the rental market, in terms of the number of households renting VHS in an average week, from 35.8% in 1995 to 31.3% this year. One reason for this is that, according to Saksa, "competition is increasing from other delivery systems." The 3.7 billion VHS rental transactions recorded in 1999 are expected to drop to 3.7 billion this year and to 3 billion in 2003.

Meanwhile, the average VHS rental price has increased from $2.50 in 1993 to $2.97 in 1999, and is expected to rise to $3.15 by 2003, Saksa said.

"VHS rental is an $11 billion-plus industry," he said, with last year's $11.10 billion forecast to climb slightly to $11.17 billion this year. That revenue is projected to drop to $10.60 billion next year, however, and to fall to $9.43 billion by 2003. With VCRs now in 90% of U.S. households, "the maturity of VCR ownership means consumers want new hit movies, not older catalog," Saksa said.

Citing that "new releases motivate customers," Saksa outlined an approach to revenue sharing as one possible remedy for this decline.

Its goal, he said, is "an increase in consumer satisfaction" by means of "a minimal increased investment over traditional purchasing models" that would "protect retail profitability."