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Big Rentailers Gobbling Up More of the Market

2 Oct, 2003 By: Melinda Saccone


Market consolidation continued in the first half of the year, giving the top five rentailers an even bigger majority share of the video rental market, according to a recent survey conducted by Video Store Magazine market research.

The survey of a weighted sample of 2002's top 50 rentailers found the top five rentailers' market share grew by 7 percentage points, from 53 percent of the rental market at the end of 2002 to 60 percent at the midpoint of 2003.

The majority of the top 50 rentailers surveyed forecast stronger rental revenue for the second half of the year, while rental prices have inched their way up from the end of 2002 as DVD continues to replace VHS on rental shelves.

Each year, Video Store Magazine does an in-depth analysis of the top 100 retailers. To obtain a midyear snapshot of the biggest players in the rental business, Video Store Magazine market research conducted a survey on first-half performance of a weighted sample of Video Store Magazine's 2002 top 50 rentailers.

Store Growth Slowing
At the end of 2002, more than half (53 percent) of all rental transactions were conducted in the more than 10,000 stores of the top 50 rentailers. That figure will most likely rise at the end of 2003, as midyear results indicate top-tier rentailers are expanding their store bases.

However, this year, store expansion in the top 50 rental outlets occurred at a much slower rate than in past years. Fewer rentailers expanded their retail operations in the first half of the year than did so in the first half of 2002.

At midyear, 36 percent of the top 50 rentailers said they expanded the number of stores they operated since December 2002. By comparison, at the end of first-half 2002, 40 percent of the top 50 rentailers reported store expansions.

Those that expanded the number of stores in their rental chains in the first half of 2003 grew the number of outlets they operate by an average of 7.2 percent, down from an average of 15.5 percent at the midpoint in 2002.

Domestic expansion rates in the first half of 2003 in the top three public chains also slowed, averaging just 2.8 percent growth, compared with 13.7 percent in the first half of 2002.

Only 4 percent of the top 50 rentailers reported store closings, compared with 15 percent in the first half of 2002.

More Stores, More Market Share
The increase in storefronts of top rentailers translated into a bigger share of the rental pie. In the first six months of the year, 60 percent of the $4.79 billion consumers spent renting discs and cassettes was transacted in either a Blockbuster, Hollywood, Movie Gallery, Family Video, or as an online rental with Netflix.

With a Blockbuster on nearly every corner (6,244 domestic retail outlets at midyear), it comes as no surprise that the rental Goliath picked up market share.

At the end of 2002, Video Store Magazine market research estimated that one-third (34 percent) of all consumer rental spending occurred in a Blockbuster video store. At midyear 2003, Video Store Magazine market research estimates that nearly 40 percent of the $4.79 billion consumers spent in the first six months of 2003 occurred at Big Blue.

Hollywood Entertainment Corp., the nation's No. 2 rental chain, increased its domestic store base only 0.8 percent in the first six months of the year, to 1,846 outlets, as the rentailer focused on opening up new Game Crazy departments. Hollywood's share of the rental market in the first six months of the year remained relatively flat, at 11 percent, according to Video Store Magazine market research estimates.

Movie Gallery, the third-largest video rentailer in the United States, was the most aggressive of the top three in store expansions. Video Store Magazine market research estimates the rentailer expanded its domestic store base 6.2 percent, to 1,786 outlets, in the first six months of the year. In the first half of the year, 5.4 percent of all rental transactions occurred in a Movie Gallery outlet, up from 4.1 percent at the end of 2002.

Meanwhile, online DVD rentailer Netflix increased its rental market share in the first half of the year to 2.5 percent, up from 1.7 percent at the end of 2002. At midyear, the online subscription service boasted more than 1 million subscribers.

Demise of VHS
DVD continued to gain ground in the rental arena in the first half of 2003 at the expense of VHS. At midyear, disc rentals averaged 38.6 percent of gross revenue in the top 50 rentailer outlets, up from 25 percent at the end of 2002. Boosted by an expanding household base, DVD rentals are poised to break the $5 billion mark by year's end, according to Video Store Magazine market research estimates.

VHS rentals continued to decline in the first half of the year, averaging just 25 percent of gross revenue, down 10 percent from 2002 tallies.

Meanwhile, while very few rentailers know if and when they will stop carrying VHS, new product purchasing habits show it may be sooner rather than later.

Only 5 percent of the top 50 rentailers had plans to discontinue carrying VHS, while 95 percent either didn't know or had no plans to discontinue carrying the format for rent. But actual purchasing patterns tell a different story.

At the end of 2002, 79 percent of the top 50 rentailers planned to scale back their cassette inventories in the coming year, while 93 percent planned to increase their DVD inventory in 2003.

Therefore, it should come as no surprise that in the first six months of 2003, disc inventories increased at the expense of cassettes. At the end of June, on average the top 50 rentailers purchased 63 percent of all new releases on disc, up from an average of 45.1 percent at the end of 2002.

The midyear snapshot showed that 100 percent of the top 50 rentailers planned to further decrease their VHS rental inventories in the next six months, while 92 percent planned on increasing the amount of discs they carry for rent.

Product Diversification Boosts Rentailers' Bottom Lines
In the past few years, increased competition in the rental market has sent rentailers looking to alternative revenue streams to boost their bottom lines.

Game rentals and PVT (previously viewed title) sales have gained ground as a source of supplemental revenue. While movie rental revenue still constitutes the majority of video retailers' revenue, the category as a percentage of gross revenue has been on the decline.

At the end of June, DVD and VHS rentals accounted for 64 percent of gross revenue in the top 50 rentailer outlets, compared with 68 percent five years ago.

Previously Viewed Profits
Sellthrough-priced DVD product has allowed rentailers to increase copy depth. More units in the rental pipeline has translated into strong PVT sales, as many retailers have found a way to combat mass merchants' loss-leader sellthrough pricing while satisfying consumer demand at the rental counter.

This category has become a growing source of revenue for the top 50 rentailers. Midyear estimates peg PVT sales at 9 percent of gross revenue in the top 50 rentailer outlets, up from 8 percent at the end of 2002. As the summer theatrical blockbusters hit the rental pipeline in the fourth quarter, Video Store Magazine market research estimates that this category should grow to 10 percent of gross revenue by year's end. PVT sales are poised to break the $1 billion mark at the close of the year.

Game Rentals Remain Flat for Most
While last year, 72 percent of the top 50 rentailers planned to increase their game rental inventory in 2003, the category remained relatively flat in the first six months of the year.

At the end of June, game rentals in the top 50 rentailer stores averaged 7 percent of gross revenue -- on a par with last year.

However, that figure should grow by year's end as hardware prices are expected to fall in the fourth quarter and next-generation video game penetration is expected to near 50 percent of U.S. households by the end of the year, according to NPD Funworld.

Meanwhile, it is quite a different story in the top three U.S. rentailer outlets. Video Store Magazine market research estimates that game rentals at Blockbuster expanded to 8.3 percent of their gross revenue in the first half of the year, up from 6.2 percent at the end of 2002.

Hollywood has been the most aggressive in expanding its presence in the game rental market. In the first half of the year, the nation's No. 2 rentailer expanded the number of Game Crazy departments in its outlets to 483, up from the 273 at the end of 2002.

Video Store Magazine market research estimates that at the end of the first half of the year, game rental revenue accounted for 15.1 percent of the chain's gross revenue, up from 12.6 percent at the end of last year.

Rental Price on the Rise
According to the midyear review of the top 50 rentailers, the average price of renting a video is up. At the end of June, the average price for a new DVD/VHS rental in a top 50 store was $3.84, up 3.2 percent from $3.72 at the end of 2002.

The cost of renting a game in a top 50 rentailer store posted the highest increase of all, jumping 22.4 percent, to $5.30.

PVT product was the only category to post declines in average price. PVT discs dropped to $10.96, down from $11.03, and PVT cassettes dipped 2.5 percent, to average just $7.48.

Retailer Optimism Abounds for the Second Half of the Year
Sixty five percent of the top 50 rentailers have high hopes for the second half of the year. These optimists say they expect their rental revenue to post gains from the first six months of 2003. On average, they think rentals will bring in 11 percent more revenue than they did in the first half of the year.

Fifteen percent of rentailers think their second-half rental revenue will remain the same as the first half, while 20 percent expect their rental revenue to decline in the second half of the year.

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