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Grocers Like Video's Green

9 Jan, 2003 By: Joan Villa

Nothing beats the convenience of stopping off at the neighborhood grocery store for a quart of milk, the fixings for dinner and your evening video.

Supermarkets and video have always been a natural fit -- a premier “noncannibalizing” item that won't compete with food and fulfills the mission of one-stop shopping. But after a falling-out a few years ago when many stores exited video, scared away by complicated VHS revenue-sharing programs and slimming margins, the relationship is on the mend.

After several years of decline, grocery's share of the video market is starting to grow, according to research firm Alexander & Associates. Wholesalers that supply and rack supermarkets say their business also is expanding at a fast clip.

“Overall supermarket purchases just in 2002 increased over 20 percent,” observed Bill Bryant, Ingram Entertainment's VP of sales, who oversees the distributor's supermarket division.

“With the average cost of goods going down substantially, that shows there's a dramatic increase in the space allocated to the product,” he added.

Better margins and burgeoning enthusiasm for DVD are making video an attractive partner for grocery again, industry observers said. And as more children embrace DVD, supermarkets see they can please their primary shoppers -- moms -- with appropriate family fare.

Artisan Home Entertainment has had growing success with supermarkets with family-friendly titles like Barbie as Rapunzel and the upcoming Jonah: The VeggieTales Movie, to the point that grocery as a class of trade represents 9 percent of the studio's sales.

“Particularly with VeggieTales, we've seen a real interest and real support from the larger grocery chains,” said Glenn Ross, president of Family Home Entertainment and EVP of Artisan. “They understand they have a unique opportunity, in an uncluttered video environment, to target women with product they might want for themselves and their kids.”

Trying the Alternatives
Especially as they move heavier into DVD, many supermarkets are staying away from cutthroat new-release competition and trying out alternative categories, such as classic titles, on which margins are higher. Supermarkets both regionally and nationally are even looking at installing permanent video racks and endcaps, offering the occasional big box office hit at a slight discount as an impulse item and a convenience.

“In most cases, they're not prepared to go below cost, nor should they,” said Ingram's Bryant. “Electing not to play in that arena, they're turning attention to catalog VHS and higher-margin DVD where [suggested retail prices] are low. When someone is buying a lot of groceries, a $10 VHS or $12 DVD turns into an impulse item.”

In 1995's fourth quarter, supermarkets had a 6.8 percent share of the video sales market, according to Alexander & Associates. After steadily declining to a low of 3.1 percent in the fourth quarter of 2000, there was a turnaround in 2001's holiday period to 3.9 percent.

On the rental side, supermarkets' share climbed to 4 percent of VHS and 3 percent of DVD in the second quarter of this year.

“That's a real volume decline, because their share on the rental side used to be 11 percent about 10 years ago,” Alexander said.

However, Bryant said many stores that abandoned rental at the height of VHS revenue-sharing in 1999 and 2000 are jumping back in, and others are considering DVD-only sections.

“They're focusing on the one-stop shopping concept, and that's very important to supermarkets,” he said. “They want to fulfill all the customer's needs in a single retail location. That was the biggest driver years ago with VHS, and with the increased margins of DVD rental that again is the primary focus.”

One rental player is Iggle Entertainment, consisting of 106 well-stocked, 3,000-square-foot stores in Giant Eagle supermarkets, with separate entrances and a mission to compete with Blockbuster and Hollywood Video. The high-traffic departments are a good fit because they generate additional trips and sales for the grocery side as well, according to Chuck Porter, Iggle's director.

“We're truly trying to be a video store, not just a supermarket with a video department,” he said. “Our strategy is to look at video as a business unto itself and try to draw the video rental customer. We get ancillary benefits as a result of that.”

Back in 1999, when other grocers were abandoning the category, Pittsburgh-based Giant Eagle decided to jump in with both feet. It abandoned the traditional supermarket view of “video as convenience” and set a goal to satisfy consumer demand.

“We took a look at what was going on with competitors, the Blockbusters and Hollywoods of the world, and saw they were delivering better product than we were,” Porter recalled. “So we went out there and negotiated revenue-sharing deals to see if we could compete, and we found that we could. We really changed our model at that point to a model that would satisfy rental demand.”

Previously Viewed Titles Strong
Typical of other video stores, Iggle does a hefty business in previously viewed VHS and DVD, and rents everything that is rated, including series such as “The Sopranos.” That type of offbeat item has been less successful on the sellthrough side, however, as the chain grapples with theft and where to properly display video in the body of the 107 Giant Eagle stores that don't carry rental video, Porter said.

Giant Eagle isn't alone, say distributors who rack hundreds of supermarkets nationwide. In fact, theft and display are consistently named as the top two challenges facing all supermarkets seeking to renew their video ties.

“We still run into problems with theft or perceived theft of high-priced DVDs,” explained Greg Rediske, president of Video Management Co. in Tacoma, Wash., which racks 300 independent grocery stores. “We've seen a couple of large chains get in and get out again, because they'll get one or two stores with a massive problem and immediately pull it from everywhere.”

As a result, Rediske said he has more success with DVD “budget lines” of mainstream hit entertainment that have higher margins and lower price points. To solve the theft and display problems, he urges accounts to put titles up front, as close to registers as possible. Even with those problems, he's seen grocers who were out of video completely now getting back in both for sellthrough and rental, fueled by an “upswing” in DVD excitement.

“We've had more new-store set-ups than we've had for the last three years,” Rediske noted. “It's not so much what they're seeing financially, it's what they're seeing emotionally. People are excited about DVD, and they want to add incremental revenue. It's noncannibalizing -- they either get sales or rental dollars, or they don't. It's not going to take away from another purchase.”

Although supermarkets are in a “fantastic position” to take advantage of cross-promotional opportunities, most unfortunately don't, he added.

Artisan's Ross agreed that stores have to move away from unorganized “dump” bins and toward displays that take advantage of the video-grocery synergy.

“Grocery chains have to first understand how to market video in their environment before they can grow it,” Ross said. “They tend to go for mixed displays of cheap product. We had ‘Clifford' on the cover of Kix cereal for three months, but in most stores there was no video. It seems a natural to me that if you have something featured on a high-purchase item, you have the video there [and] you put a standee on the cereal aisle.”

Despite the growing pains, Giant Eagle's Porter insists that video has been worth the trouble.

“We look at it as an excitement generator and a destination item,” he said. “It's one more reason to come to Giant Eagle.”

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