DISTRIBUTOR DISTRESS

RANDY WEDDINGTON

Video distribution is not for the faint of heart.

Fewer customers and more complicated buying programs are just two of the factors making life difficult for the wholesalers who are typically a supermarket's primary lifeline to the home-video industry. The distributors have responded with efforts to improve operating efficiencies and take advantage of the Internet. To the surprise of many industry watchers, there have been no closings or mergers in recent years.

"Fifteen years ago there were 50 distributors," said Bob Tollini, senior vice president for marketing at Major Video Concepts, Indianapolis. "Now there are nine, and maybe only three or four will be left in the future."

"It's surprising there are still nine distributors left, since they're handling a much smaller percentage of the product than they were two years ago," said Kirk Kirkpatrick, vice president of marketing for WaxWorks/VideoWorks, Owensboro, Ky.

With the video industry in a continued state of flux, the relationships among retailers, distributors and studios are readjusting to improve efficiency and profitability. As a result, supermarkets must adapt to a buying environment that differs in many ways from that of just two years ago.

One current trend is a slackening of the rampant downsizing of last year. Only 785 independent video retailers closed in the first half of 1999, compared with 2,200 in the latter half of 1998, according to the National Association of Video Distributors, Owensboro, Ky. But the loss of independents, combined with the proliferation of buying strategies meant to reduce tape costs, has complicated the flow through the video pipeline, especially affecting distributors.

"It has been a challenging year for everyone," said Kirkpatrick. "As the middleman, distributors occupy the middle ground between a rock and a hard place."

One hurdle for distributors is the business loss as large chains and buying groups shift to purchasing directly from studios. "Two years ago 95% of video sales were through distributors, and only 5% were direct," said Tollini. "Today it's 50-50. And that may trend to 60% direct sales in the future."

Another obstacle is the difficulty of managing profitability under the administrative load of studio buying programs. "As far as distributors go, our biggest problem is shrinking margins," said Bill Burton, executive director of the NAVD. "That's exacerbated by the complicated buying programs that are difficult to understand and explain. Many of them require product to be returned, which is difficult for supermarkets. They've also led to an increase in sideways buying. And they've been the bane of the distributor's existence for the last 12 to 18 months."

Like supermarket video executives, distribution sales representatives find themselves slowed by the complex buying procedures. "It's a challenging task for an account representative to explain the details to 50 or 60 accounts," said Kirkpatrick. "We spend more time explaining programs than selling product, which is a warning flag that something is wrong."

Further buying complications have arisen with the distributors adding revenue sharing to their administrative mix, although this concept has yet to be embraced by some distributors, studios and retailers. "We've been trying to bring together the principals of the studios and the supermarkets," said John Jump, senior vice president for sales at Sight & Sound Distributors, St. Louis. "But not many supermarkets have jumped on the revenue-sharing bandwagon yet."

Most distributors agree that revenue sharing is becoming a standard option. "Studio revenue sharing is here to stay," said Tollini, "since Blockbuster and Hollywood started it." And most distributors agree on a practical approach. "As long as the studios see an advantage to revenue sharing, it will continue," said Kirkpatrick. "Distributors will handle the product any way our two partners see fit."

Some distributors have reacted to the changes by downsizing. Ingram, for instance, recently closed sales offices in Boston, Denver, Detroit, Houston, Phoenix and Seattle. "Our goal is to consolidate facilities and to continue to provide outstanding customer service to our entire retail base," said Bill Bryant, vice president of sales, grocery and drug for Ingram Entertainment, La Vergne, Tenn. "We recently opened a 265,000-square-foot distribution center in Memphis to improve our overall efficiency. We've had a net increase of warehouse space, but a reduction in brick-and-mortar sales office space. The business is changing and Ingram is making the appropriate adjustments to change with it."

"We're prepared for the business consolidation, having restructured a couple of years ago," said John Jump. "Now we're lean and mean."

Another distributor, MS Distributing, Hanover Park, Ill., has been the subject of much industry speculation since its recent purchase by e-commerce firm Puzzlesoft. In the wake of unexpected changes in its purchasing agreements with studios, MS has reportedly been unable to ship products from some of its suppliers, leaving customers to scramble for alternate sources. The company did not respond to calls for comment.

As the market shrinks, competition increases among distributors, who are responding by carving out new niches for themselves. "Each distributor is doing different things to retain and attract customers," said Tollini.

"We're concentrating on in-store promotions to make supermarket video departments more exciting and more visible," said Jump. "We're doing things like putting footsteps on the floors, putting up checkstand displays advertising the top titles, and doing promotions with scratch-and-win cards."