SUPERMARKETS SEEN TAKING BIG ROLE IN VIDEO RENTAL REVIVAL

DAN ALAIMO

Supermarkets are well-positioned to take advantage of the expected turnaround in the rental business this year, particularly the leaders identified in SN's ranking of the top 10 chains in video rental.

The top five in the ranking are all dedicated to taking best advantage of rental, opening departments in most new and remodeled stores, expanding space and adding depth and breadth to new release inventories. As found in SN's seventh annual State of the Industry Report, published last month, retailers are very optimistic about the future of rental and sell-through.

"Supermarket retailers continue to find new ways to grow the rental business in spite, or perhaps because of, the increased competition from video superstores. There hasn't been a single defection of significance from video rental in the last two years," said a supplier source who asked not to be identified

"The increased use of consumer advertising by retailers such as Blockbuster is going to significantly improve the visibility of video rental to the consumer. As interest in video rental rises, we believe that supermarkets, as the most convenient rental outlet, will benefit greatly," said the source.

This ranking represents the all stars of supermarket video. In consultation with leading suppliers, SN compared revenues with a more subjective view of merchandising aggressiveness and creativity to come up with a list of the true leaders in this category. All suppliers who participated remain anonymous to avoid jeopardizing relationships with retailers, whether included or not.

On the list, Kroger Co., Cincinnati, the nation's leader in terms of overall dollar volume, also ranks at the top of video because of the strong commitment to the category among most of its divisions. However, in the second spot, Giant Eagle, Pittsburgh, outranks Albertson's, Boise, Idaho, on the strength of its exceptionally well-merchandised store-within-a-store video shops. Albertson's is making progress in upgrading its many service center departments to larger live inventory programs, suppliers report.

The ranking only included in-house programs and, in Albertson's case, a shared-revenue rack program exclusively dedicated to the retailer. Leased-space shops in Wal-Mart Supercenters, Bentonville, Ark., run mostly by Blowout Entertainment, Portland, Ore., and also by Blockbuster Entertainment, Dallas, were not included. Blowout operates departments in stores of Super K Centers, Troy, Mich.; Ralphs Grocery Co., Compton, Calif.; and Fred Meyer Inc., Portland, Ore.

Following Albertson's on the list comes a trio of chains well-known for their merchandising acumen in all areas, including video: Schnuck Markets, St. Louis; Wegmans Food Markets, Rochester, N.Y.; and Randalls Food Markets, Houston. Ranking these three was a tough call, the suppliers noted, but Schnuck gained stature because of its aggressive rollout of a DVD program.

Rounding out the top 10 were four chains that do a very high volume in video rental, but also do well in merchandising the category: Safeway, Pleasanton, Calif.; Hy-Vee, West Des Moines, Iowa; Smith's Food & Drug Centers, Salt Lake City; and Pathmark Stores, Woodbridge, N.J. Safeway would have ranked better if not for its plain but effective approach to rentals, the suppliers noted. Two chains that came close to earning a berth in the top 10 were Hannaford Bros., Scarborough, Maine, for its volume, and Price Chopper Supermarkets, Schenectady, N.Y., for its merchandising.

Following is a review based on supplier sources and store visits of some of the top chains.

KROGER CO.

By any measure, Kroger tops the list of supermarket rental operators. Most of its divisions, especially those under the Dillons umbrella, regard video as a key strategic component. This is evidenced by the attractive live inventory departments put into most new and remodeled stores.

Kroger has an estimated 800 departments among its 1,356 stores, suppliers said. "Kroger is one of the national supermarket chains that is totally committed to the video category. It is clear that video is an integral part of the one-stop shopping concept at Kroger," said a supplier contact.

Last year, Kroger formed a committee to recommend consolidated purchasing arrangements. As a result, all Kroger divisions have been asked to use ETD Entertainment Distributing, Houston, as their primary video distributor, while also buying sell-through products direct from Buena Vista Home Entertainment, Burbank, Calif., and acquiring rental titles through the shared-transaction fee program of SuperComm, Dallas. Both Buena Vista and SuperComm are divisions of Walt Disney Co., Burbank.

Divisional follow-through on the recommendations has been mixed, and some have still not switched to ETD. But the very existence of a video buying committee mandated by top management says something about the category's importance to Kroger, said suppliers.

"This was the first effort by any supermarket retailer to coordinate video activities on a national basis," said a supplier. "It is indicative of the value of the category from Kroger's perspective."

However, the emphasis on video varies by division. For example, the Michigan Kroger Marketing Area has a weaker video program due to lack of management support than most, observers said. Among the strongest are all the Dillon Cos. divisions, including King Soopers, Fry's, City Market and Dillons in Hutchinson, Kan.; the KMAs in Columbus and Cincinnati, Ohio; Dallas/Houston; Louisville, Ky.; and Atlanta.

"There are some people within the Kroger organization that don't feel video is a viable part of the supermarket business," said a supplier. "They believe the square footage could be used better providing another product of some sort. But they are in the minority at Kroger. Most of the Dillon and Kroger divisions are very bullish on video."

For example, in the Columbus KMA, Kroger opened two new stores late last year and both had video rental departments. Four remodels of smaller stores acquired from Cub Foods, Stillwater, Minn., did not have video.

In a new store that opened last fall in the northwest suburb of Dublin, Ohio, the live inventory video rental department occupied almost 1,000 square feet, making it one of the division's largest. Inventory included 1,300 new release tapes and 1,000 catalog units.

Most live inventory video departments in the Kroger Columbus division are about 800 square feet or less, with about 2,000 units of inventory. Like other Kroger divisions, older stores in Columbus have non-live inventory video rental departments of varying sizes that are located in the center of the store, serviced by the same desk that sells cosmetics.

The second new store that opened last fall was in Whitehall, an area in eastern Columbus, with a lower-income demographic than upscale Dublin. That store had a 600-square-foot rental department, also with about 2,000 tapes.

Kroger Columbus recently raised and standardized its new release rental rates to $2.49, from $1.99 in most locations. Catalog titles rent for 50 cents a night and video games for 99 cents. All stores featured a Monday special on new releases that discounted the rental rate to 99 cents.

GIANT EAGLE

The secretive Giant Eagle chain has a hard time hiding the fact that it is one of the premiere home-entertainment merchandisers in the supermarket field.

With about 130 Iggle Entertainment departments out of 201 stores, including franchisees, Giant Eagle's newest store-within-a-store departments compete on an even footing with the best video specialty stores.

"Without question, Giant Eagle is one of the top three supermarket rental operators in the country and, in their larger stores, they are the equal of any specialty retailer," said a supplier.

The video departments are on a par with Giant Eagle's other services, said another supplier. "It's really cutting-edge stuff. I don't think I've seen a stronger player. A lot of retailers talk about the one-stop shopping concept, but Giant Eagle is it. They are service-driven in every respect and their stores reflect it."

The larger departments range from 3,000 to 5,000 square feet with upwards of 7,000 units of rental inventory, along with a full complement of other entertainment software products. These include DVD, video games, audio books, computer software, magazines, snacks and, in some stores, music. Sell-through also is a prominent component in the offering.

The newest shops fall in the 3,000-square-foot range, depending on space availability, and make better use of front-window display areas. These stores have two or three banks of three monitors suspended from the ceiling to add to the entertainment ambience of the departments. New releases represent about 25% to 30% of the rental inventory, depending on the size of the stores -- the larger stores carry more catalog product.

Giant Eagle has long been at the forefront among supermarkets in video game merchandising, with strong offerings for rental and sale. The newer departments have three or four game demonstration units and also offer the hardware for sale, including Nintendo 64 and Sony PlayStation. Used games and accessories also are part of the offering.

The retailer is both aggressive and creative in promoting its video offerings. Chainwide this is represented by regular advertising in the company's circulars, sweepstakes and with radio promotions. But Giant Eagle especially shines when it comes to store-specific promotions. Grand openings feature multiple activities, such as celebrity appearances, live musical entertainment and radio remote broadcasts.

Giant Eagle recently standardized its video rental rates at $1.99 for a one-day new release or $2.99 for two days. At the same time, the chain switched to a new point-of-sale software system from Unique Business Systems, Santa Monica, Calif.

ALBERTSON'S

With video rental departments in about 820 of its 882 stores, Albertson's is among the national leaders in video rentals. However, because most of the chain's departments are small, 1,200- to 1,500-tape configurations that are adjacent to the store's service centers, the retailer is seen as a distant second to others in merchandising.

Albertson's also differs from other leading chains in that it relies on three rack jobbers to supply its rental departments on a revenue-sharing basis. These are Video Two, Sandy, Utah; B&M Video, New Braunfels, Texas; and H&M Video, Burien, Wash.

These companies are apparently well regarded by Albertson's, as evidenced by the increasing commitment of space and labor that has allowed the rackers to increase inventories of new releases. The rackers also supply sell-through for the chain, which is one of the better merchandised of such programs in the industry.

According to one supplier, "Albertson's departments generate a lot of foot traffic and video rental is a very strong part of their one-stop shopping concept."

Said another, "Albertson's obviously has made a commitment to the category because the rackers have spent a lot of money on fixturing and in generally upgrading the departments. I'm sure they did that based on some kind of long-term commitment."

This supplier defended the non-live kind of department, where the video sleeves are displayed on a rack within the main sales floor and the tapes themselves are kept behind the counter. "If it is open, you are going to get more casual traffic, whereas if it is closed in, people can't bring in their shopping baskets."

Albertson's is changing to live inventory departments in most new and remodeled stores. In some visited by SN, these have ranged from 288 to 360 square feet, depending on the store. These sections had between 1,800 and 2,600 tapes. However, larger departments of about 1,000 square feet are going into some stores, like one in the Las Vegas area visited by SN last year.

Instead of putting the new releases in a given area, the smaller live inventory departments merchandise the titles at eye level around the department, with catalog items top and bottom and on islands. New releases are $1.99 or $2.49 depending on the store and its competition.

SCHNUCK MARKETS

Schnuck Markets, long held as one of the supermarket chains that pioneered video, continued to claim a leadership position by being one of the first to test and roll out DVD for rent and sale. According to a current listing in the company's Web site, Schnuck offers DVD rentals in 24 of its 63 departments and five of its seven freestanding video stores.

"We are always interested in new technology and additional revenue-generating formats, and DVD is one of them," Denis Oldani, director of video, told SN when the chain rolled out the program.

"We see DVD as part of the future of home video and not as a flash-in-the-pan. The penetration of hardware and customer demand will determine whether all stores will eventually carry DVD," he said.

According to a supplier, "Schnuck has a very strong commitment to the entertainment category. They were the first to rent CD-ROM several years ago, and they were the first into DVD rental and, most recently, they have entered DVD sell-through. During the heyday of laserdiscs, they had a full-line laserdisc. They are just on the cutting edge. If there is a new product line out, Schnuck will have it."

The in-store departments vary in size and inventory, depending on available space and store configurations. These departments ranged from 800 to 1,700 square feet, with total inventories from 5,000 to 9,500 rental units.

WEGMANS FOOD MARKETS

Wegmans, with video rental in 54 of its 55 stores, is one of the most effective merchandisers in the category, according to supplier sources. Its newer departments are among the best in the industry and the retailer is moving older departments located deep within stores up to the front.

"That is a very good strategic move. For those customers who just want to come in, rent a video and grab a snack, it makes it much more convenient than having to walk to the rear of the store," said a supplier.

Wegmans has always been very committed to video rental and has very impressive departments. The entire video category has always been very strongly supported by Wegmans, both rental and sell-through.

For example, in a showcase store in Pittsford, N.Y., Wegmans devotes 1,000 square feet to the live inventory rental department in the front of the store. The rental inventory is about half new releases, which rent for $2.99 a night. The retailer offers catalog rentals at four tapes for four days for $4.

Wegmans also had DVD for rent and sale in the department. DVD movies rented for the $2.99 new release rate and sold for $24.98. DVD players rented for $9.95 a day or $19.95 a week. Signs in the department offered DVD players for sale at $499.99.

"Wegmans continues to be a leader in video rental and very strong in sell-through also," said another supplier. It is known within the industry to be one of the first supermarkets to go direct with Buena Vista for sell-through purchasing.

RANDALLS FOOD MARKETS

Although reportedly hit hard by Hollywood Video's entry into the Houston market, Randalls and its Dallas Tom Thumb stores remain one of the dominant video retailers in an area where video is an expected part of the supermarket operation.

In the two areas, and in Austin, Texas, Randalls has a total of 102 video departments in 114 supermarkets.

"Hollywood was very aggressive at attacking market share. But Randalls is still a major player," said a supplier source. "They are still a force to be reckoned with in both markets despite the increased competition from superstores."

Some suppliers have noted that Randalls departments would benefit from an updating, as video departments tend to age more rapidly than others and many of Randalls stores have been in place for a long time. Randalls was one of the first supermarkets to be put into the video rental business in the early 1980s by pioneering distributor Ron Eisenberg, president of ETD Entertainment Merchandising, Houston.

"A little freshening up of color scheme and signage would help them. If you have a department that's four or five years old it can look dated," said a supplier. But Randalls has an advantage in that its departments were open and well-designed from the outset.

To compete with the specialists, the retailer moved aggressively with shared-transaction programs such as that of SuperComm, Dallas, and Rentrak Corp., Portland, Ore. This bolstered depth of copy and allowed the retailer to run high-profile guaranteed availability promotions.

Meanwhile, Randalls departments also benefit from wide-ranging customer services run from the adjacent service center and a video point-of-sale system that was one of the first in the industry to be integrated with that of the main store.

SAFEWAY

Safeway rents a lot of videos, but the activity is concentrated largely in the 120 departments in its Seattle division. The departments there are effectively merchandised in the front of the store, using a non-live configuration, but are otherwise nondescript compared with other chains, it was said.

At least four other Safeway divisions have video rentals: Phoenix, Portland, Denver and the Eastern division based in Lanham, Md. But their efforts are less thorough than Seattle's, where video rental is a major emphasis. The northern California division had about 17 rack-jobbed departments that closed last year. When division figures are combined, though, Safeway is still a major player on the video rental landscape.

"In Safeway's case, it totally depends on which division you are talking about," said a supplier.

"The Seattle division just does an outstanding job. But the others never had the same degree of corporate involvement. So it has entirely been an individual division by division issue." The Seattle division was one of the first to test the shared-transaction fee program from SuperComm when it was introduced in 1992 and continues to use it to build depth of copy on new releases. The departments feature as many as 3,000 to 4,000 tapes merchandised in the front of the stores.

"The Portland division has always been good, but they are almost in a different league from Seattle. They are definitely a notch below," the supplier said. The Denver division stacks up roughly the same as Portland. Meanwhile Phoenix and the Eastern division each have "a smattering" of departments, said the supplier.

HY-VEE

With 174 departments out of 240 supermarkets, including some freestanding stores, Hy-Vee is a video rental force to be reckoned with in its Midwest markets. A decentralized buying structure hinders the development of what could be a stronger program, but the retailer is still among the nation's best in rental and sell-through, said the suppliers.

"Hy-Vee is just a very strong regional operator," said one supplier. "They have a very strong commitment to the category," noted another.

Because of a variety of store configurations, Hy-Vee has a similarly wide range of video department sizes and set-ups, suppliers noted. Many departments are adjacent to counters offering a number of services. The chain uses a reduced-image card type of merchandising in many stores and has a video point-of-sale system integrated with the main store. Hy-Vee has been a leader in sell-through, notably in cross-promotions.

SMITH'S FOOD

& DRUG CENTERS

Smith's has 120 video departments among its 150 stores and in the past has been one of the leaders, especially in developing store-within-a-store departments in the front of the supermarkets.

But as with others, time has taken its toll on the Smith's program and it is a program that now needs substantial improvement to stay competitive in today's video rental market, said suppliers. For example, new release inventories need to be increased from current levels, which are below 20% in most stores.

One reason for this may be that the attention of corporate decision makers has been elsewhere. "They have been a potential takeover target for some time, and I just don't think the investment was maintained as strongly during that period of years," said a supplier.

It remains uncertain how it will play out now that Fred Meyer Inc., with no recent experience in video rental, owns the chain. "Having said that, their stores are still excellent and they still represent a significant market share. They are still a major player and I think they can come back again. But they are still going through a transitional stage," the supplier said, noting that the company changed video buyers last year.

In a recent store visit to a Smith's store that has been open less than six months, SN noted that about 20% of the inventory was in new releases, with 24 copies of "G.I. Jane" offered as a guaranteed rental, apparently from the SuperComm program.

Rental rates for new releases were $2.97 for a two-night rental, but the store seemed to be getting considerable promotional mileage out of offering catalog movies for 47 cents for the same period. "Hot Titles," or older new releases, were priced at 97 cents.

Also merchandised in the department was a four-sided Disney rack being supplied on a direct basis by Buena Vista Home Entertainment, a large selection of music for sale including top new compact discs priced at $9.99, $12.99 and $13.99, and a new DVD rental and sale program. DVD was promoted by hanging signs and displayed on 8-foot island racks

DVD rentals were the same as new releases, $2.97 for two nights, with about 140 units in stock. DVD sell-through prices were $19.99, $24.99 and $27.99, with titles like "My Fellow Americans," "The Fugitive," "Lord of the Dance," "Terminator 2" and "George of the Jungle."

PATHMARK STORES

Another chain with an older program in older stores, but which does a very good volume, is Pathmark. The retailer has 120 rental departments among its 135 stores.

"Pathmark, despite all the competition that they have in most of their markets, they still continue to make a major commitment to video rental," said a supplier source. Competition is not the only pressure this program faces. "It also faces pressure for floor space. But they continue to see video rental as a major part of their customer service strategy," the source said.

In Pathmark's older stores, rental departments are cramped for space. "But in their remodeled stores, their presentation is as good as anybody's in the business. Pathmark is another retailer that has been using the shared-transaction fee method of acquiring new releases since the earliest days of the SuperComm program," the source said.