KROGER WILL SHIFT VIDEO BUYING TO FOCUS ON ONE DISTRIBUTOR

DAN ALAIMO

CINCINNATI -- Following similar moves in other categories, such as greeting cards, Kroger Co. here is in the process of selecting one video distributor of the four it presently buys from, according to industry sources.

In the past, Kroger divisions had the autonomy to negotiate deals for the purchase of video rental and sell-through product from distributors and, in some cases, directly from studios. But a committee has solicited bids from the wholesalers for a three-year deal and will decide on one video supplier for the entire company before the Video Software Dealers Association convention, which starts July 9.

Five distributors have submitted bids to Kroger, including its four current suppliers -- ETD Entertainment Distributing, Houston; Sight & Sound Distributors, St. Louis; Ingram Entertainment, La Vergne, Tenn.; and WaxWorks Video Works, Owensboro, Ky. -- and Major Video Concepts, Indianapolis, which does not sell to the retailer at this time.

Kroger's main objective, said the sources, is to lower costs. This was confirmed in multiple interviews with video-supplier executives, most of whom spoke on condition of anonymity.

However, if the retailer accomplishes this, it will be without the wholehearted support of the distributors and its divisions, the majority of which are happy with the status quo.

Paul Bernish, a Kroger spokesman, declined to comment.

"They fully intend to consolidate and go with a single distributor nationwide," said one industry executive. "The word I've got is, they are just looking for the lowest bidder. It's profound news."

This could lead to similar moves by other supermarket chains. However, such consolidation will affect video distribution less severely than it did the magazine business, as there are less than 10 significant video distributors left, and most supermarkets only buy from one. Exceptions are Safeway, Pleasanton, Calif., which takes a regional approach to video like Kroger; Albertson's, Boise, Idaho, which uses three rack jobbers in different regions of the country, and Smith's Food & Drug Centers, Salt Lake City, which buys from two distributors, apparently for competitive reasons.

ETD stands to lose the most if the Kroger account goes to another distributor. In 1993, Blockbuster Entertainment, Fort Lauderdale, Fla., consolidated all its buying with ETD. Last year, the specialty store giant decided to go direct with the studios, reducing ETD's total revenues by 70%. Now Kroger is ETD's biggest account, representing about 15% of the company's remaining business. ETD gets more than one-half of the estimated $100 million Kroger spends on video. Executives at ETD did not return phone calls for comment.

If ETD loses the Kroger business, "they would have to go through and clean house again," said the industry executive. "There are some markets, like Denver, where if ETD didn't have King Soopers, they wouldn't exist."

With ETD's experience with Blockbuster fresh in mind, many of the video distributors are approaching the consolidation at Kroger with less enthusiasm than they might have a year ago. It's a question of loyalty, said some distribution executives. "If Kroger went to just one distributor, that distributor might be hesitant to go all out and build up their operation because Kroger's next step might be to try and go direct with the studios, and then they would be out in the cold," said one.

"If we lost them, I'd hate that. But if we got all of it, I'd be a little concerned quite frankly because of the tremendous gearing up that we'd have to do. I'm not afraid of the business, but it is a big chunk that could go away very quickly, said the distributor. "Every distributor would view this as a situation that is not good for margins," said another. "Consolidation at retail may mean consolidation of distribution."

Another distributor executive said he was not bidding for Kroger "because we're in the profit business. We're not in the volume business anymore. We'd rather keep some dollars in our pocket than exchange them with retailers who do not respect our ability to make a profit."

But others praised Kroger's move as demonstrating the retailer's commitment to the growth of the video category, both rental and sell-through. "They've [become] very successful in the video business," said Doug Meadows, president of Major Video Concepts.

"In the light of the news about some grocery stores getting out of the video business, to me this is a commitment that they are going to stay in," he said.

"I always wondered why they dealt with different distributors when they could have gone to one. It makes sense in terms of marketing programs, co-op and overall service. So I wasn't surprised to hear that they are going to one," he said.

"This is such a good idea, it just makes you wonder why they didn't do it years ago," said another video industry executive. "Kroger has always been a regional powerhouse in video rental. Combining their purchasing power and influence will now make them a major player on the national stage," he said.

One question is how far Kroger will go in maximizing the potential of such a buying arrangement, said the executive. "Will we see them exploring common marketing and cross-promotional opportunities? Kroger's influence with packaged-goods companies and other nonvideo vendors could enable them to leverage some real promotional advantages and make them a force to be reckoned with," he said.

"Video is becoming a bigger part of Kroger's business," said a distribution executive. With a single supplier, the retailer could use more of a category management approach to video with more and better data, he said.

"Retailers want to see numbers. They want to see how your applications are doing in their stores compared to someone else." Because of this, other large supermarket chains also are looking at consolidating video suppliers, said the executive.

But specific regional needs and local representation are still important to the Kroger divisions, other distributors noted. "There is a point where you start losing efficiency and profitability when you deal on a scale like that," said one.

Like produce and dairy, video is a perishable that has to be dealt with locally. "There is a limited lifespan to these movies." The movies are the same across the country, but the marketing needs vary greatly from region to region, he said.

"If this was a great idea, I think others would have gone to it much faster and they haven't because it is not in their long-term best interest," he said. This executive noted that Kroger has not put anything on paper that commits them to selecting one distributor.

A distribution branch manager said a better idea for Kroger would be to name several distributors who could work as a team representing Kroger to the studios and other suppliers. This is similar to how mass merchants like Bentonville, Ark.-based Wal-Mart work with music rack jobbers, the branch manager said.

"Kroger could dictate the pricing, but the distributors could share marketing ideas and there would still be competition between them," he said.