Made to Rent

MICHAEL GARRY

Food retailers have often tried to incorporate kiosks of various kinds into their store footprints, only to find them bypassed by shoppers. But movie-rental DVD kiosks appear to have captured the attention of shoppers in many stores across the United States.

In supermarkets and other retail stores, the lure of $1 nightly video rentals — by far the least expensive rental option available — coupled with the convenience of picking up and returning DVDs to frequently visited destinations, has made the touchscreen DVD kiosk an attractive medium and revived video rentals in non-specialty video outlets.

While still a relatively small percentage of spending on video rentals — projected to be 13% in 2010 by the Entertainment Merchants Association (EMA) — the kiosk segment has grown from just 1% in 2006, and is expected to reach 17% in 2013. By contrast, traditional in-store rentals, which represented 79% of sales in 2006, are predicted to fall to 45% in 2013, said EMA.

“Most supermarkets have converted from live rental departments to kiosks,” said Bill Bryant, vice president of sales, Ingram Entertainment, La Vergne, Tenn., a distributor of DVD software. Just a handful of regional chains, including Coburn's, St. Cloud, Minn., and K-VA-T Food Stores, Abingdon, Va., still run video rental departments, said Bryant, adding that Safeway operates video departments in its Seattle division but kiosks elsewhere.

Bryant said there is still room for kiosks in more supermarkets, though “the rapid expansion was completed by 2009.” Moreover, he sees rental kiosks as a sustainable format. “Consumers have adjusted to them and retailers are comfortable with them,” he said.

The leading provider of DVD kiosks as well as the pioneer of the category is Redbox, Oakbrook Terrace, Ill., a division of Coinstar, which has its kiosk in more than 20,000 U.S. retail locations, including about 2,000 locations with more than one kiosk, the company said. (Meanwhile, Coinstar coin-counting machines are used by 149 supermarket companies.) Redbox is testing Blu-ray rentals in select locations and plans to expand Blu-ray availability later this year, the company said.

Each Redbox kiosk holds 630 DVDs, including up to 200 new releases, and consumers can reserve them online or with an iPhone. The DVDs are labeled with bar codes, which require them to face a certain direction when inserted into the kiosk upon return.

Food retailers offering Redbox include Kroger, Wal-Mart Stores, Giant Eagle, Food Lion, Stop & Shop and Albertsons LLC; other retail outlets with Redbox include Walgreens, 7-Eleven and McDonald's, which featured the first Redbox kiosks in 2004.

Following Redbox, the next largest DVD kiosk vendor is POS and ATM provider NCR, Duluth, Ga., which provides Blockbuster Express-branded kiosks under a licensing agreement struck with video rental chain Blockbuster in 2008.

Augmenting its business with the acquisitions of DVDPlay and The New Release kiosk programs last year, NCR now has 5,000 DVD kiosks (typically one per store) in such supermarkets as Publix, Safeway, Big Y and Basha's, as well as in convenience store chains Tedeschi Food Shops and Sheetz, the company said. One-quarter of the kiosks are outdoors.

NCR expects to have 7,000 kiosks in stores by the end of June, and is targeting 10,000 placements by the end of the year, said Alex Camara, vice president and general manager, NCR Entertainment. It is testing Blu-ray at 50 sites, he added.

Blockbuster Express kiosks hold about 1,000 DVDs, including 200 or more titles. The DVDs are labeled with RFID tags, so that they can be inserted into the kiosks in any direction upon return.

Ingram Entertainment's Bryant described the Redbox and Blockbuster Express kiosk programs as “comparable,” with both having “quality machines.”

Another provider of DVD kiosks is Prairie Video, Brandon, S.D., which has units in Wisconsin, Minnesota, Iowa, Nebraska, Kansas, North Dakota and South Dakota, according to its website. (Prairie Video did not respond to an email request for comment on its operations.)

TURNKEY OPERATION

For food retailers, the appeal of a DVD kiosk program is its relative simplicity. It's a low-risk proposition offering a modest but steady revenue stream. (Retailers divide the rental fees with the kiosk provider, though the percentage split is a closely guarded secret.) Retailers provide a small amount of space near the front of their stores, an electrical outlet and an Internet connection for credit card processing, as part of a multi-year commitment. The kiosks are owned by the vendors, who deliver and retrieve DVDs weekly, either themselves or through a carrier. It's a fairly turnkey operation.

Still, questions remain about DVD kiosks. For one thing, they are limited in the number of DVDs they can hold. As a result, forecasts of demand for new titles need to be more precise than a video department that has more stocking room. “Finding the right product mix for each store can prove to be a challenge,” said Maria Brous, spokeswoman for Publix, Lakeland, Fla., which offers Blockbuster Express kiosks. Camara said NCR collaborates with Blockbuster on titles and numbers of copies to carry per locations.

In addition, three movie studios began insisting last year that kiosk rentals of new releases wait for 28 days after the release of a new DVD for sale (see story, Page 46). And while digital downloads of movies over the Internet and through on-demand services have started slowly, digital media has a way of encroaching on the turf of physical media like DVD kiosks.

Thus far, said Bryant of Ingram Entertainment, downloading digital rentals, whether onto computers or TVs, have not made a serious dent in physical DVD rentals. For many computers, movie downloads still take several hours. And video-on-demand services for TVs have run into the problem of “sticker shock” when consumers receive their monthly cable bills and see that numerous movies were rented by various family members. “Consumers would rather pay as they go rather than see a big bill at the end of the month,” he said.

But in preparation for the growth of digital rentals, NCR is testing a kiosk in six stores with the capability of downloading movies onto a SD (secure digital) memory card, which would be played on a computer or TV via a special adaptor. The test is expanding to 60 stores at a “specialty entertainment retailer” later this year, said Camara. “SD is how DVDs will evolve.”

Grace Lee, a spokeswoman for the EMA, Los Angeles, sees a place for a variety of rental options. “Some will be attracted to the many copies, ease of browsing, and customer service available at a brick-and-mortar store,” she said. “Others will welcome the low price and convenient locations of kiosks. Some will appreciate the depth of selection and ‘all you can eat' pricing of online subscription services. Still others will embrace the instant gratification of online video rental. And we know that many consumers use more than one of these options. So there is a place for all of these rental channels.”

CHAINWIDE ROLLOUT

Giant Eagle, Pittsburgh, has made a strong commitment to DVD kiosks. The chain began transitioning to Redbox kiosks from its Iggle Video rental departments in the fall of 2007. All 222 Giant Eagle locations host a kiosk, with 30 locations equipped with two kiosks. In addition, nearly 30 of the retailer's GetGo fuel and convenience store locations also have a rental kiosk.

“The popularity of Redbox rentals continues to grow, as customers are drawn to the convenience and value of the offering,” said Giant Eagle spokesman Daniel Donovan. The chain includes Redbox in the promotional mix through its weekly circular, online via GiantEagle.com, and in email communications.

“We believe that Redbox will be a valuable service for customers in the foreseeable future, and look forward to making the offering available to as many customers as possible,” he said.

Publix, which had never offered video rentals in the past, considered Redbox and other kiosk providers, but selected Blockbuster Express last year, installing the kiosk in 988 stores. “We felt the Blockbuster name had strong brand name recognition with our customers.” Brous said, adding, “Publix is pleased with the success and results of the kiosk.” The chain uses “window clings” and promotional coupons to draw attention to the kiosks, she noted.

Beginning late last year, Tedeschi Food Shops, a convenience store operator based in Rockland, Mass., has installed the Blockbuster Express kiosk in 114 of its 190 stores, which average about 2,500 square feet. The chain expects to offer kiosks at 90% of its stores when the rollout is completed, said Joe Hamza, its vice president of sales and marketing. Some locations may situate the kiosk outside the store.

Tedeschi was attracted to NCR/Blockbuster kiosks because of NCR's long history in retail and the Blockbuster brand, which would continue to be used regardless of what happens to Blockbuster's retail stores, noted Hamza.

During the first few months, rental sales grew between 20% and 30% month-over-month, and continued double-digit growth in the first quarter of 2010, Hamza said. “We expect that to continue as people find it and establish a habit.” The kiosks have attracted a small number of new shoppers, he added.

Tedeschi promotes the kiosk via its store employees, who are expected to “talk it up with customers,” said Hamza, adding that NCR emailed free rental offers to consumers in Tedeschi's marketing areas.

Sometimes, especially on Friday evenings, the stores experience congestion around the kiosk, Hamza acknowledged. However, with the touchscreen technology of the kiosks, transaction speed is “pretty sufficient,” he said. NCR has gotten better over time at forecasting how many new releases to stock at each kiosk location, he added. “The more history you have, the better you can forecast.”

While observing the appeal of downloading movies at home, Hamza argued that “people will always get out of their house to buy something. And if they're in the store anyway, the kiosk makes sense. It's affordable, convenient and quick.” Reserving a DVD online and picking it up at a store — which the NCR and Redbox kiosks allow — “enhances the convenience,” he said.

Hamza expects video games to eventually be available through the kiosk. “The nature of our customer base is that we have a lot of young people between eight and 15,” said Hamza. “If we can deliver [video games] conveniently and affordably, the kiosks would have a new life.” Redbox tested video game kiosk rentals for $2 per day at locations in Nevada and South Carolina last year. Another chain using Blockbuster Express is Harps Food Stores, Springdale, Ark., which installed them in six of its 64 stores earlier this year. Based on initial results, the chain plans to put them in other locations, said David Ganoung, marketing specialist for Harps.

Harps also operates a conventional video rental department in 13 stores, but “the odds are that in-store departments are going to be less likely for us in the long term,” said Ganoung.

DIFFERENT PROVIDER

B&R Stores, Lincoln, Neb., has kiosks from Prairie Video, in seven of its 18 stores since last July, and has video departments in eight other stores. Bob Gettner, junior category manager for B&R, said he initially approached Redbox but “got tired of pursuing them,” while Prairie Video “was more responsive.” Harps' Ganoung said that “it was an extensive time before Redbox gave us a proposal.”

Asked if Redbox preferred to work with larger retailers, Spokesman Chris Goodrich said the company has a wide range of large and small grocery partners. “Redbox receives numerous requests each week from business and store owners interested in putting a kiosk at their location,” he said. “The company is continuing to grow and tries to respond to these inquiries in a timely manner.”

Gettner noted that while Redbox (and Blockbuster Express) allow DVDs to be returned to any of their kiosk locations, Prairie Video requires the DVD to be returned to the kiosk from which it was rented. “For us, that's OK,” he said. “We don't want people to go elsewhere; we want them to come back to our stores.”

Prairie Video has run a special month-long, every-Thursday promotion for B&R in which all DVDs were available for 50 cents rather than $1. The promotion was repeated at one store to drum up rentals there, said Gettner.

The Prairie Video kiosks, which take up a three-foot-by-three foot area and hold about 600 DVDs, have met B&R's expectations, “both for sales and service,” said Gettner. Prairie Video delivers and picks up DVDs at all of the kiosk stores except one, where they are shipped via UPS and handled by a store employee. “Given the amount of labor it takes, this is a no-brainer for our company,” he said. “It doesn't take many rentals to be profitable, even at $1 per day per rental.” The average rental last 2.3 days, he noted.