WAKING A SLEEPING GIANT

DAN ALAIMO

ORLANDO, Fla. -- Despite some defections, supermarket video has plenty of upsides. Supermarkets remain a sleeping giant destined to gain market share on alternative format retailers offering video -- whether rental or sell-through -- said retail executives participating in SN's fourth-annual state-of-the-industry video roundtable, held here. The roundtable proceedings are presented in this special supplement to Supermarket News, which coincides with the Video Software Dealer's Association's convention in Los Angeles this week. The discussion covered all aspects of the business, including competitive issues, management concerns, and the rental and sell-through categories. Its ultimate conclusion was that there are more video revenues to be had for those with the commitment, creativity and aggressiveness to go after it. While future gains on the rental side of the business will come slowly -- as they will for all retailers -- video sell-through in supermarkets has the potential for more explosive growth, the participants said. "In our area, the market share growth is being driven by sell-through," said Randy Weddington, video specialist at Harps Food Stores, Springdale, Ark. "With the regularity of sell-through releases, that's where the upturn is. Rentals are stable in our area," he said. "The sell-through market, especially in supermarkets is relatively untapped," said Jeff Olson, video coordinator for Copps Corp., Stevens Point, Wis. Growth in video rental market share is still possible if cross-promotions involving rental and other departments in the store can be created, said Rick Ang, buyer at Video Mart, Sacramento, Calif., which racks video departments in 17 Bel Air supermarkets in the Sacramento area. "If we do that, I believe that grocery video rental is a sleeping giant right now," he said. Five executives participated in the roundtable. Besides Olson, Weddington and Ang, there was Tom Hembree, vice president of operations at K-VA-T Food Stores, Grundy, Va., and Clifford Feiock, video coordinator at Nash Finch Co., Minneapolis. Moderating the panel were SN Senior Editor John Karolefski, Home and Health Section Editor Tina Veiders and Video Reporter Dan Alaimo. While seeing the same double-digit growth in sell-through as the rest of the video trade, supermarkets have been gradually picking up market share. According to SN's annual video study, this grew from 12.7% in 1994 to 13.6% in 1995 to a projected 14.5% in 1996, when total sell-through volume should top $1 billion. The executives at the roundtable see plenty of growth potential ahead. "For Nash Finch's supermarkets, sell-through video is an untapped opportunity," said Feiock. While the company's corporate stores are heavily involved with sell-through, its wholesale customers are not, he said. "Most of our affiliate customers are really not paying much attention to sell-through at this point and I think they need to. It adds great value to our customers' shopping experience," he said. Nash Finch's sell-through volume was up by almost 50% last year, while rental revenues were down somewhat, he noted. "I think we are finally catching up a little" to the mass merchants, said Hembree of K-VA-T. Being able to cross-promote other supermarket products with big hit titles is a major advantage, he said. When it comes to price, K-VA-T goes head-to-head with the mass merchants, he said. "The way we look at it is, you don't really make money on the big titles, you just swap dollars. But you do create the image that Wal-Mart and Kmart have had for a long time, that this is the place to buy videos," said Hembree. Retailers have to look beyond the big hits to make money in sell-through video, said Olson of Copps. "There is margin to be made on a lot of other products, like the exercise videos and some of the old favorites. In fact, there are some very, very fair margins on those that are comparable to other products in the store," he said. But at Harps, Weddington has found that the prices on the big hits don't have to be as low as the mass merchants and they still will sell. "We are now typically $1 or so over Wal-Mart's prices and our volume hasn't been impacted much," he said. Weddington attributes this to increased promotion and merchandising, such as building big displays. "Our Disney rep worked with us on a display contest for 'Pocahontas' and 'The Many Adventures of Winnie the Pooh' and sales figures on those titles have been going through the roof," he said. Nash Finch tries to be within a dollar of Wal-Mart's prices on the big sell-through hits, said Feiock. "But if they go under MAP [minimum advertised price], we don't try to match them. We'll offer one or more free rentals with the purchase, which is not costly to us." Not only does the free rental promote the sell-through title, but it helps build interest in the rental department as well, he said. In recent months, several significant chains have said they are getting out of the video rental business. Among them: Meijer Inc., Grand Rapids, Mich.; Stop & Shop Cos., Quincy, Mass., and Dominick's Finer Foods, Northlake, Ill. But at the same time, big names in video retailing, like Blockbuster Entertainment, Fort Lauderdale, Fla., and Wherehouse Entertainment, Torrance, Calif., have started testing leased space departments in supermarkets. Also, rental departments have become an almost standard part of new Wal-Mart and Kmart supercenters, and Longs Drug Stores, Walnut Creek, Calif., is expanding its rental program. Supermarkets could be 30% to 40% of the video rental business within three years, Ron Eisenberg, chairman and chief executive officer of the largest video distributor, ETD Entertainment Distributing, Houston, told SN in a recent interview. According to SN's video survey, supermarkets were 16% of the rental business in 1994, rising to 16.4% last year, and are projected to reach 17.4% this year. All this, combined with their own experience, leads the roundtable participants to believe that there is plenty of life left in supermarket video rental. "Rental market share will continue to increase and I can see where 30% is achievable in the next three to four years," said Hembree of K-VA-T. His chain puts a strong emphasis on marketing all aspects of its video program. Feiock of Nash Finch sees many supermarket chains upgrading all their services right now, including video rental. "That will make us better able to compete with the Blockbusters and Hollywoods out there," he said. Supermarket video rental operations are changing in the same way that video specialty retailers have been forced to change, said Ang of Video Mart. "The business started with the mom-and-pops. All they had to do was open the door and throw a few tapes out there, and they could rent them for four bucks a night, no problem. When the supermarkets got into it, it was the same deal," he said. Now merchandising has become much more sophisticated, driven in part by the big specialty chains. "The supermarkets that have a dedicated space for video in their stores and really work at it are the ones who are making the bucks now," said Ang. The retailers at the roundtable agreed that their primary competition in video rental is the specialty stores and not other supermarket video programs. "Other supermarkets are certainly competitors of sorts," said Feiock of Nash Finch. "But someone who is shopping at another grocery store is not going to come to our store just to rent a video. I see Blockbuster and Hollywood as the competition," he said. "We've had a similar experience," said Ang of Video Mart. "It seems like every time we open a new store, a Hollywood or Blockbuster moves into the same parking lot. In one case, the Hollywood sign even blocked the view of the store." But this is not necessarily a bad thing, said Ang. It helps build traffic for all the stores. "You want to draw people to a certain area and give them all the choices," he said. Rental rates are generally lower in supermarkets than the specialty stores, Hembree pointed out. "We're cheaper than the Blockbusters, but on the same level with a lot of other supermarkets," he said.

Hot Issues

Supermarkets can gain significant video market share from other classes of trade. While there are many opportunities for growth, there are also challenges to be met. This year, the fourth SN video roundtable -- made up exclusively of retailer representatives for the first time -- met these issues head on. Below is a list of topics addressed in this year's report:.

5 Management Support Support from management is crucial to video's growth. Concern is rising as negative stories about video appeared in the media. 6 New Releases

Retailers are rethinking their rental inventory mix, shifting to a far higher percentage of new releases, some as high as 75% to 80%. 10 Shared Revenue

Four of the five participants in this year's roundtable are using or testing shared-transaction-fee programs to boost new release copy depth. 12 R-Rated Movies

A few years ago, there were many R-rated movies that retailers wouldn't bring in. This is no longer the case if a title is popular enough, like "Pulp Fiction." 14 Guaranteed Availability

A new promotional wrinkle gaining wide acceptance is guaranteeing the availability of specified new releases, offering a free rental if the movie is out. 49-Cent Rentals Retailers debated the viability of offering video rentals for 49 cents a night, every night, with good depth-of-copy on new releases. 18 Sell-Through Visibility Everybody agrees that the best location for sell-through displays is on the main sales floor. But concerns about shrink and territorial issues get in the way. 20 Permanent Sell-Through Sections The key to improving sell-through margins is having a permanent rack or in-line section devoted to the tapes. 22 Cross-Promoting Sell-Through Retailers and their suppliers are running better cross-promotions involving hit sell-through videos and packaged goods products. But there is still room for improvement. 26 Direct Purchasing

Many retailers would like to buy direct from the studios, cutting costs and building new relationships. Others think it will sour their good relationships with distributors. Minimum Advertised Pricing Are minimum advertised prices good for retailers? Are they good for competition? Is there sufficient margin between MAP and dealer cost?