THE INCREDIBLE SHRINKING MARGIN

DAN ALAIMO

With the proliferation of direct-to-sell-through event titles, many retailers don't have the space to put in higher margin, but lower-profile titles. Retailers have to carry the hits. And because of widespread advertising, they can't price them significantly higher than the mass merchants. As a result, margins on sell-through have dropped precipitously.

Participants in SN's video roundtable talked about why this is happening, and what can be done about it.

"Margins have fallen and, as far as the competition goes, it's pretty steep," said Bob Gettner, video buyer/coordinator for B&R Stores, Lincoln, Neb.

One way to boost margins is to offer free rentals along with slightly higher, although still competitively priced sell-through titles, said Tom Carton, president and chief executive officer at Buckeye Entertainment Corp., Dublin, Ohio.

"You can spend a lot of time, a lot of money, a lot of capital selling 200 pieces of product for $1.12 profit. You need to add some value by coupling the sale with rentals, which is higher margin, higher frequency," said Carton.

Retailers can build a business of selling higher margin, through less-known titles, said Jamie Molitor, director of video operations for Dierbergs Markets, Chesterfield, Mo. "You can incorporate those into a sell-through program with the regular catalog titles and make better margins, because the consumer perception isn't out there on what prices of those are," she said.

"If you look at Wal-Mart, they do exactly that," added Carton.

But shrink remains a major problem. "When you are talking about a 15% margin, you don't have to lose very many to kill the whole display," said Dennis Maxwell, director of video at Reasor's Foods, Tahlequah, Okla.

Keeping it in the video department is a common solution. "If you spread it out too far in the store, I really feel that you will run into a pilferage problem," said Matt Dillon, video director at the Concordia, Kan.-based Boogaart Retail division of Fleming Cos.

Here is the roundtable discussion on sell-through margins:

SN: Our state-of-the-industry video survey showed a very significant drop-off in sell-through margins, from about 16% to 12%. How does that fit with your experience?

CARTON: Pretty consistent. I think the margins are going down.

SN: That much?

CARTON: Yes, I think so. If you look at the Christmas season last year, there were probably eight titles that were really featured prominently. That's the most that I could ever recall that were still hot titles for Christmas purchasing. But it proliferates the market so your margin of what you are selling in the fourth quarter really goes down on a weighted average basis. It also makes customers choose between titles because they are not going to spend $16 or $17 eight times in that time span. So you have to decide which of those titles you are going to have in your store.

MAXWELL: You have to be price competitive, especially in the fourth quarter. Because every customer who comes in your store is also going to hit several other stores that carry the same product during that time.

MOLITOR: And if you aren't close, you have created an image of being higher.

MAXWELL: Even if they bought it from you, and they walked into somebody else's store and saw it for a few dollars cheaper, you are in trouble.

FEINSTEIN: They remember.

MAXWELL: You are branded. You are not ever going to sell them anything again because they think of you as being higher priced.

DARNELL: While we were shopping for a new distributor, we came up with an idea that we would like to try. Another retailer brought in one 48-piece shipper of a Disney title and priced it $1 lower than Wal-Mart. That's all he sold, one 48-piece shipper. So for $48, he gave his customers the impression that he is just as cheap -- or cheaper -- than Wal-Mart. That is something that we are probably going to try just to be more competitive. It is in the customers' minds that they can go somewhere else and buy it cheaper because, in the past, we really weren't as competitive on pricing as we would have liked.

CARTON: We who are involved in supermarket video have a real advantage. I personally believe we need to combine rentals with the sell-through side of the business. By doing that, we can do something the mass merchants can't do, and obviously the ones who aren't in rental. Blockbuster has been a big believer in this. For example, if the consumer bought "101 Dalmatians" for a competitive price, you got a coupon good for six free kids' rentals. That way, you sell a piece of product competitively, yet you have really given the customer something else value-added, and tied it into a rental experience. You make your own business opportunity there and, meanwhile, it separates you from the mass merchants. If you try to make a business out of selling each piece of product for what the mass merchants are selling it for, your margin is not even going to be 12%.

MAXWELL: You are swapping dollars.

MOLITOR: Right.

CARTON: You can spend a lot of time, a lot of money, a lot of capital selling 200 pieces of product for $1.12 profit. You need to add some value by coupling the sale with rentals, which is higher margin, higher frequency. They don't have to come twice for a piece of sell-through, but they do have to come twice for a rental. That is the most effective way that we can compete with the mass merchants.

MAXWELL: We've done a little bit of that, too. There's another advantage to that. When you add a rental to it, a new release or whatever, at a price that is not as cheap as Wal-Mart, but you are taking care of your customers. They feel like they get an advantage out of being your customers.

CARTON: And you may develop some new customers.

GETTNER: Our experience with sell-through margins is about the same. Margins have fallen and, as far as the competition goes, it's pretty steep. We have different stores in Lincoln, [Neb.] We have a pretty diversified population. We have one store on one side of Lincoln that is more upscale and another that has more of a blue-collar clientele. That store has a Wal- Mart very close by, so we have to be very careful on how we price our titles. But we have one price for all our stores, so we have to be very price conscious.

SN: Is it possible to get better margins in sell-through? And how can this be done?

GETTNER: I'm sure it is possible through bigger buys, but the buys aren't always justified. I could bring in 1,000 pieces of a particular item, but then I have to sell that many. And my return, if it can be returned, is typically around 20%. I don't want to be hung with product, but I want to remain competitive. I realize there are a lot of people who are direct buying and they are going to get better pricing, but I do think the studios could help. I'm not sure if the studios realize how much impact the supermarkets have on the business.

MOLITOR: One way you can increase your margin percentage on sell-through is to look at it as a category and not just carry the hits, the big Disney titles and the ones with the slim margins. Then you can incorporate those into a sell-through program with the regular catalog titles and make better margins, because the consumer perception isn't out there on what prices of those are. They know what they are paying for "101 Dalmatians," they know what they are paying for "Bambi." It's in every ad that week, but you can increase your margins on the others and those are impulse buys too.

CARTON: If you look at Wal-Mart, they do exactly that.

SN: How many linear feet do you devote to your ongoing sell-through presentation?

MOLITOR: We have 12 feet in the grocery store and other sections in the video departments. It's interesting that we can't keep many of these catalog titles on the shelf. It's amazing that we are selling these titles. They are the older titles that you don't think about every day, but people want to own them.

DARNELL: We have sell-through sections in our departments, but not out on the grocery sales floor. You're right. It's the "Rocky" movies and "Dirty Dancing" that sell.

MOLITOR: Those are their favorite movies and they want to own them.

MAXWELL: We started about two or three weeks ago with a nice fixture that rolls out onto the main sales floor. We roll it in front of the checkstands. That's an opportunity we've missed out on in the past because we were worried about security. It has yet to be seen what the shrink will be, but we are selling product.

SN: Some of the distributors have gone with fairly sophisticated computerized planogram systems. How important is that to a sell-through program like this?

MOLITOR: I think it is a good place to start. It gave me an idea of what titles to carry. But as we get more into it, I think each store needs to develop its own sections, because they know what their customers want. They know what their customers like. They are the ones who do the reordering, and if something hasn't sold in a couple of weeks, they ought to replace it with something else.

SN: On putting sell-through out on the main selling floor, Matt, you were telling me that you prefer to keep it within Boogaart's video departments. Why?

DILLON: Mainly for security reasons. We sell some videos around the front end, similar to what Dennis described. But if you spread it out too far in the store, I really feel that you will run into a pilferage problem.

SN: Does the increased volume overcome that?

DILLON: No.

MAXWELL: When you are talking about a 15% margin, you don't have to lose very many to kill the whole display.

DILLON: Right.

MAXWELL: That's always been my concern. Our rack sits right in front of the checkstands in a prime space. The checkers are looking at it all day, so they monitor it closely. I'm sure we are losing some. But if we moved back into the store at all, we would be losing product instead of selling it.

MOLITOR: There definitely is a perception that video is a highly pilfered item. But it is no more highly pilfered than film or sunglasses, or even pregnancy tests, or any of those other high-ticket items that they steal, and then they return. That's definitely what they are doing with them. At first that problem was my biggest hurdle to get over, but we are out there and we are selling videos.

FEINSTEIN: I think with the film and the sunglasses, you have the margin to absorb some of the pilferage, while with video and the margins you have to sell it at, you can't have any pilferage, period. If it is around your store where it isn't visible, and you lose one or two copies, it is a big deal.