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Loss Leadering Leads to Loss

30 Jun, 2006 By: Thomas K. Arnold

By deep-discounting new DVD releases their first week out just to drive traffic into their stores, the mass merchants have changed the business.

Consumers have gotten used to the fact that they can buy virtually any new release for less than $15 at Wal-Mart or Target, and as a result first-week sales are huge — typically accounting for as much as 60% of a title's total sales volume.

But now this practice may be coming back to haunt us. The DVD business is mature, and consumers aren't buying as aggressively as they used to.

Fox's Mike Dunn tells me that while week one is still big, he's noticed consumers are buying later in the week than they used to — and if they don't buy in that first heavily discounted week, they hold off until the title gets repriced, if they buy it at all. “Weeks two to four have gotten very soft,” Dunn says.

Here's my take on what's happening: If consumers are, indeed, hitting the video departments later and later, it's a fair bet at least some are waiting until the week after street date — which is precisely when the mass merchants typically jack the price back up close to list.

And a consumer who is used to buying DVDs for $14.77 isn't going to spend $25 or more for the same title; he's either going to wait until it comes down in price again or he's going to buy it used somewhere else.

This theory fits in nicely with the fact that we're not seeing the sky-high sales numbers on blockbuster theatricals that we used to. And it also underscores the feeling we've all had that so much deep discounting, compounded by the omnipresent $5 dump bins at Wal-Mart and other mass merchants, has seriously devalued DVDs in the consumer's mind.

I've never really liked the notion of retailers selling certain products for so cheap, even at a loss, just to get people into their stores to hopefully wander around and pick up something else with better margins. But the practice of loss leadering, as it's called, has been around forever, and DVD is just the latest victim of this retail pimping and pandering.

But I don't know how many times before now, if ever, that loss leadering has actually led a loss in business.

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