DVD GIVES VIDEO RENTAL A WELCOME SECOND WIND

Dan Alaimo

It's been a rough stretch of time for video rental in supermarkets. Back in the 1980s, retailers couldn't avoid making gobs of money from video, but that era is long over. As supermarket video executives converge on Las Vegas this week for the Video Software Dealer's Association's Home Entertainment 2002 event, it is a much different and much more challenging business.

But it is also a business that has its second wind because of DVD. Retailers are seeing a resurgence in video rentals and sales because of DVD, which has the advantages of strong consumer demand and a simplified cost structure. This was much needed.

Video-rental profits had been slowly eroding throughout the 1990s, but late in the decade, the category rapidly went from cash cow to sick puppy. Spurred by the big video specialty chains, the movie studios implemented complex revenue-sharing and copy-depth programs. In many cases, these challenged the time and expertise of supermarket video executives who often have other responsibilities.

Those same specialty chains embarked on massive promotional campaigns that sent rental turns and revenues in supermarkets into a tailspin. As a result, numerous small chains got out of the rental business, as well as many stores under Kroger and Safeway banners.

But some stood their ground. The Safeway division in the Pacific Northwest continues to do well with rental, as do several Kroger divisions, notably King Soopers. Albertson's kept expanding its program of racked shared-revenue departments. As of last month, 16 Kroger-bannered stores in the Houston area opened with a very similar program to Albertson's in stores acquired from the Boise, Idaho, retailer. This may portend more rental program growth, especially using this kind of shared-revenue model, which minimizes risk for the retailer.

Then there's Giant Eagle, which SN acknowledges this week as its first "Supermarket Video Retailer of the Year" recipient. The Pittsburgh-based retailer closed up many of its older, smaller departments and focused on developing large, store-within-a-store departments that effectively compete with the big specialty chains, said Chuck Porter, director of the retailer's Iggle Entertainment and Video operation.

Giant Eagle had always been very aggressive in its merchandising strategies. It was one of the first retailers to stake a claim to the DVD market (another was Schnucks, which was the first among supermarkets) and it has consistently been a leader in the fast-changing video game business. Instead of agonizing over the new buying programs, Giant Eagle tried them and found that they worked. Porter and his team also went to the studios to encourage them to fine-tune the programs for the supermarket environment.

Now Giant Eagle is using DVD to bolster its rental program, and is putting a major emphasis on sales of both DVD and VHS.

So, all the fundamentals that made video rentals in supermarkets a success are still in place: Convenience, the return trip to the store, the excitement of Hollywood in the store, and most important, profits from the business. Meanwhile, video sell-through continues in importance.