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DVD Takes On Packaged Goods Practices

24 Mar, 2005 By: Thomas K. Arnold

It was 5 a.m. on Aug. 31 of last year, the day The Passion of the Christ was coming out on DVD. Mike Dunn, president of 20th Century Fox Home Entertainment, was getting ready to go back to bed, having just gotten preliminary sales reports from the East Coast that indicated he was going to make his number.

“It was so nice,” Dunn recalled. “A couple of clicks on my Blackberry, and I pronounced success and went back to sleep until 7. It's not always that fast, though — I remember on Garfield, I had to wait until 11 a.m. before I could say, ‘OK, this is starting to hunt.’

To those who haven't been following the video business in recent years, an anecdote such as this might come as a surprise. After all, the business of bringing packaged movies into the home used to be dominated by thousands of mom-and-pop rental stores, and the few titles that studios did price low for direct sale to consumers were big gray areas in Hollywood's bottom line. Executives wouldn't know for weeks how many videos had sold through to consumers — not until a month or more after street date, when unsold cassettes were returned.

Today, the business is mostly sellthrough, and studio executives strive for, and generally get, instant gratification. The advent of DVD has not only changed the home video economy from renting videocassettes to buying discs, but also elevated the level of sophistication of business management. The studios' primary sellthrough customers are not a confederation of independent rental dealers, or even Blockbuster and the other big national video rental chains, but rather Wal-Mart, Target Stores, Best Buy and other huge discount and consumer electronics operations. To these retailers, DVD is just another commodity, and the way they manage their other commodities — from toothpaste to toilet paper — has rubbed off on the home entertainment world.

“It's become a very, very sophisticated business,” said Fox's Dunn. “Back in the old days, you sold some units into rental and let it sit right there. Today, it's all about the consumer and how you drive that business to retail. So everybody in the business is now running a very sophisticated packaged-goods company.”

“When you think about the data that's available today and the systems, the precision of understanding where sales come from and managing replenishment has really created a lot of efficiency in this business that was never there before,” added Thomas Lesinski, president of worldwide home entertainment for Paramount Pictures. “We've really been able to optimize the location of our product as well as the kind of product we're putting into locations.”

Bob Chapek, president of Buena Vista Home Entertainment, agrees. “The business has gotten much more refined, much more strategic,” he said. “Just what's happening in stores — it used to be, ‘stack it high and let it fly.' Now, it's very much into category management and very merchandising-centric. When I was back in packaged goods [Chapek worked for Heinz prior to coming to Buena Vista in 1993], it was almost an art form in terms of where your product sits in stores — eye level, below eye level, around the corner. None of that was even talked about my first seven years in this business. Only in the last three or four years has the sophistication of our in-store management begun to mirror what's happening in packaged goods.”

Instant Data From Retail
Much of this sophistication involves clear and direct channels of communication between suppliers and retailers.

“I think as the business has shifted from rental-dominated to sellthrough-dominated, we've tied our communication flow much tighter to the retailer,” said Craig Kornblau, president of Universal Studios Home Entertainment. “With most of our biggest retail partners, as they find out information, we find out almost instantly. We're not waiting for phone calls; we're tied into their computers, either through direct access or through a connection, so literally on an hourly basis we know how a title is selling. It helps us react, both with manufacturing and replenishing, and where to emphasize or de-emphasize our marketing, based on how it's working in a specific store or demographic area.”

A quick reaction time is critical, Kornblau noted. “In an industry in which you're doing 50 percent to 60 percent of your business in six days, you can't afford to slip up,” he says. “Execution is critical.”

As an example, he cited The Bourne Supremacy, which came out on DVD last December. “On the Tuesday it came out, we saw it was going to be even more explosive than we had thought, particularly in the Northeast,” Kornblau said. “So right away, we increased our media exposure on spot TV in certain parts of the country, and we made split-second decisions on Wednesday to make sure we'd be back in stores by Thursday.”

This sharing of sales data and other information goes beyond specific titles.

“When we released Blue Collar Comedy Tour Rides Again, the sequel, we targeted stores that sold lots of country music and cater to a more rural audience,” said Paramount's Lesinski. “We were able to analyze and identify those stores early on with historical sales. Ten years ago, that wasn't physically possible. It's the same with urban product. We put ‘Chappelle' where Chappelle fans are. In the old days, you put content like this on a mass distribution basis, but now we can be very precise, with content that fits their demographics.”

If DVD has made home video a commodity-type business, it's a commodity with a twist. What other business is there with six major competitors, and where the product changes every week?

“If you're managing Tide, each box of Tide is the same, so you're practicing a disciplined retail approach on a static product,” Buena Vista's Chapek said. “It's one thing to be disciplined in static product marketing, another in which your product changes every week.”

“Entertainment software will never be a commodity, as each title is unique,” added Jim Cardwell, president of Warner Home Video.

Indeed, according to The DVD Release Report, 10,740 DVDs came to market in calendar 2004, up from 9,983 in 2003. And since very few titles are discontinued, the total available DVD inventory, as of the end of 2004, stood at 40,009. Only 2,153 of the 42,162 DVDs released since the format launched in March 1997 have been discontinued.

The ‘Category Captain'
No wonder, then, that the studios and some of the biggest mass merchants have gone beyond traditional vendor management, in which suppliers work with retailers to make sure their own product is optimized, and adopted a “category captain” arrangement. Instead of the retailer having separate relationships with each supplier in a category, one supplier, generally the category leader, takes on a significant role in managing that retailer's entire category of products, including the brands of competing suppliers.

Kmart was the first to go the category captain route, tapping Warner Home Video in 1998 (the relationship has since been severed). Today, Warner is category captain for Wal-Mart, the country's single biggest retailer of home video software, and Best Buy. Twentieth Century Fox Home Entertainment became category captain of home video at Target Stores in December 2003.

Warner president Jim Cardwell praises the category captain arrangement. “We believe that more efficient management of video as a category is beneficial for studios and all participating retailers,” he said.

Cardwell won't discuss details, however, and other studio executives are reticent to talk on the record about any aspect of the category captain arrangements. One high-ranking executive, however, agreed to talk on the condition his name not be used. He said the primary goal of a category captain is to help the retailer with the “heavy lifting,” analyzing data and making recommendations on product mix and placement.

“Analysis is done to look at every SKU and every fixture in the store and look at how you can improve performance,” he said. “You then provide the chain with key reports on when to cut titles, when to move them to different fixtures, which stores are out of stock, which stores have too much stock, how to balance inventory — it's all very complicated.”

Ultimately, the studio source said, retailers are concerned with only two things: What is their market share (in the category), and how well did a certain title do? “Retail is all about driving market share higher,” the source said, “and they need somebody in the middle who can share this data with them. The category captain's special privilege is that he is close to the market and the closer you are to the market, the better you can manage the business.”

Category captains also are charged with forecasting, and as Kornblau noted earlier, huge first-week selloffs mean there's little margin for error.

“There's a big problem right now because retail pricing is all over the place,” said the studio executive source. “Pricing changes the market share of that retailer, and if I'm at the wrong price point, I just overbought.”

In addition to managing their own category, studio category captains have to be cognizant of other merchandise as well under the big retail chains' “market basket” approach strategy — which holds certain titles will drive sales in other product categories.

“For example, you say, ‘If Shrek 2 sells well then what else do I sell — a box of cereal and a bundle of bananas, OK, and bakery sales also go up 5 percent,’ the studio source said. “So you take all that stuff into consideration and end up bringing in two towers of Shrek 2, one in the back by the bakery and another by the toy department, because the retailer might actually sell a toy with twice the margin.”

The category captain arrangement is not without its detractors. Eyebrows have been raised about potential antitrust issues across the board, in all industries, since the category-captain concept began with the food industry in 1995.

In 2001, the American Antitrust Institute began “calling attention to the anticompetitive potential of the new category captain relationship that has blossomed in consumer goods industries,” according to an essay from the nonprofit watchdog agency. “First, the hub and spoke arrangement that brings all relevant information to the category captain … is a structure that can facilitate tacit collusion. [Secondly] the category captain system also facilitates exclusionary practices.”

While the category captain is generally “too sophisticated” to get the retailer to drop the No. 2 supplier, the essay notes, he can easily make “more subtle suggestions” that could improve his own positioning, raise rivals' costs or exclude rivals' product completely. “A brand that is represented by a category captain, therefore, has a large advantage over other brands in the category,” the AAI concludes.

The home video executive disputes this. “There's a firewall between the supplier and the supplier's category management group, and specifics never go through that firewall,” he said. “The category captain's role is to maximize video performance at the retailer — the video category, as a whole. If you don't do that, you'll be kicked out.”

Closer Ties With Theatrical
The growing sophistication of home entertainment isn't limited to the retail-studio connection.

Fox's Dunn says one big change is the growing interface with theatrical, in large part a product of shorter theatrical-to-video windows.

“You armchair quarterback theatrical releases like never before,” he says. “You're really integrated with the theatrical group, while they're making the trailer, while they're testing the film. And a large part of that is because of the condensed window. After the first weekend a film plays theatrically, we have to be real familiar with a title to get it out in a quick manner.

“So we have to have a real good understanding of what the movie did when it launched, we have to analyze how the commercials are being tested and how the movie is being tested, we have to know what markets are accepting the movie and what markets are rejecting the movie, and we have to understand everything about the PR campaign and how we can build on it, so when the movie comes out of theaters we're ready to go.”

Home entertainment marketers also do their own research, analyzing consumer demographics in markets where the movie was successful and creating their own commercials that, if a movie bombed, sometimes completely reposition the film.

“We have focus groups testing various aspects of marketing and consumer propositions, from advertising campaigns to key art to intent-to-purchase to sales velocity, on a constant basis,” said Benjamin Feingold, president of Sony Pictures Home Entertainment. “We also have extensive marketing meetings about advertising expenditures for every title we release.

“Ten years ago we did not have that, because we were not in the retail sellthrough business like we are today.”

“Our business model has changed to a fast-moving consumer product,” added David Bishop, president of MGM Home Entertainment. “DVDs will never be a true commodity product like soap or peanut butter, but they are a very strong impulse buy, more like magazines or books.”

In other words, it's not your grandfather's business anymore. Or even your dad's.

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