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The Wiz, Wherehouse Are Just the First Dominoes in the Chain

28 Mar, 2003 By: Thomas K. Arnold

We're in the midst of another round of retail consolidation, but this time it's not Blockbuster and the other big rental chains swallowing up the independent rental stores. Rather, we're seeing big chains take some pretty hard hits in the gut, while the mass merchants appear to be gaining clout — and market share — in what is increasingly becoming a DVD sales market.

Granted, the struggling retailers of today — The Wiz and Wherehouse Music are at the top of the list, with the former shutting down and the latter liquidating many of its stores — are in their fix largely due to slumping CD sales. But that's hardly the sole reason for their troubles. The mass merchants are clearly determined to triumph in both music and video software and, while downloadmania has certainly triggered an overall decline in music sales the remaining market share is tilting toward the big chains and their rampant and often below-cost discounting.

That's why I believe further hardships are on the horizon for other home entertainment specialists, Blockbuster included. Already, Big Blue and its peers are realizing the future of home video is in sales, but that's a whole different ballgame from rental. Even if Blockbuster and the other big rental chains successfully transition from a rental to a sellthrough environment, they're going to be hard-pressed to make money, given that the big discount chains routinely lose $1 to $3 on every hot new release they sell for less than $15.

What's more, the specialists are under fire from the rear, as well. Rental's salvation, in an increasingly sellthrough universe, has always been breadth of copy and selection, with catalog playing an important role. But not only are the mass merchants devoting more and more shelf space to DVD, they are pressing the studios for more, and cheaper, catalog product.

Their strategy is to make up for their losses on the new-release front by pumping out huge quantities of catalog “filler” to DVD buyers. And if they sell enough to impulse buyers attracted by the huge dump bins in high-traffic aisles, they just might succeed. It might not seem there's a lot of money to be made by selling DVDs for $5.88, but if the wholesale cost is $4.50 or $5 the margins are a whole lot better than on new releases — particularly if those new releases, which wholesale in the$16 to $17.75 range, are priced below $15, as they inevitably are their first week in stores.

But I digress. The bottom line is the mass merchants are aggressively shoring up their home entertainment software inventories, music as well as video, and they're determined to snatch more and more market share in both industries. Music retailers will suffer the most, since losing market share in a slumping industry is a recipe for failure.

But even video retailers need to look over their shoulders. The high growth rates we're experiencing are bound to level off and if the mass merchants continue to gobble up market share, there's not going to be much business left.

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