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HIVE EXCLUSIVE: Flying the Co-op

15 Jun, 2001 By: Joan Villa

Video retailers facing the steady erosion of studio co-op advertising dollars are scrambling to develop strategies for keeping their stores front-and-center in customers’ minds.

Most studios that still give co-op have trimmed allotments to 2% of retail purchases from a high of approximately 6% a few years ago, sources say. The result is that some retailers have stopped advertising altogether, while others team up in buying or marketing groups to pool theirfunds into a sum substantial enough for effective campaigns.

Even large players such as 1,800-store Hollywood Entertainment Corp. arenot exempt. The chain recently opted to eliminate expensive televisioncampaigns in favor of less costly direct mail that can be targeted to its customer base. “They did not get the bang for the buck that they wanted in branded ads for radio and TV,” explains analyst Jennifer Jordan, who follows Hollywood for Wells Fargo Van Kasper.

Buena Vista Home Entertainment is the only studio that carries co-op “onevery piece of product they sell,” says Phyllis Hicks, advertising manager for distributor ETD. Other major studios such as Paramount HomeEntertainment, Warner Home Video and Columbia TriStar Home Entertainment only offer co-op on one or two main titles per month and policies vary on whether those funds cover both DVD and VHS. Twentieth Century Fox HomeEntertainment, for example, is paying co-op only on the Cast Away DVD released last week — a likely reason why most of the title’s early commercials focused on the DVD with no mention of VHS availability.

“Co-op is almost a thing of the past,” Hicks observes. “There are 31 newrelease titles for June and, of those, nine have co-op, and that’s a prettygood average.”

Even six-store TLA Video in Philadelphia, known for successful self-promotion, struggles with co-op allotments of “$45 for one title and $65 for another” that can’t be combined into a single ad, says chiefoperating officer Claire Brown-Kohler. As a result, TLA’s new tack is to reward studios that give support. “The more flexible the studio, the more weadvertise their product,” she says.

Buying groups, too, have trouble meeting studio-imposed restrictions onco-op and its more liberally distributed cousin, market development funds, or MDF. “Co-op and promotional funds are becoming more and more controlled and constrained,” reports Stephen Bissette, co-manager and buyer for First Run Video in Brattleboro, Vt., and active member of the 35-store New England Buying Group. “Where we used to be able to easily put together large campaigns with studios, now that’s getting harder to do.”

MDF is still available to independent retailers, but “the parameters thateveryone has to live with for MDF have gotten much smaller,” says Ted Engen,president of Coon Rapids, Minn.-based Video Buyers Group, which developsmarketing and ad materials for its 2,000 member stores. DVD provides more flexibility, Engen says, “because the format is out of the chute but notnecessarily at a point where we can sit back and do nothing.” As a result, “the studios do a lot more advertising on DVD and are willing to fund programs that are more DVD-oriented.”

Online DVD rentailer NetFlix launched its own seven-week test of televisionadvertising last Dec. 26. Although NetFlix experienced “60% to 170% uplift in traffic as measured by subscriber signups,” the rentailer decided television “doesn’t make sense” in 2001, explains marketing v.p. Leslie Kilgore.

“In 2002, we’ll reevaluate our feelings for television and radio,” she adds. For now, NetFlix will utilize co-op for print advertising inpublications such as Entertainment Weekly and Movieline “where we thinkthere’s a high likelihood we’re reaching a DVD player owner.” To keep awareness high, the e-tailer also averages 20 e-mail contacts with its customers a month, she says.

Retailers who have all but given up on their own advertising disagree overwhat effect competitors’ ads have on their businesses. As part of an ongoing lawsuit brought against Blockbuster Inc. and the studios for unfair competitive practices, a group of independents claims that the No. 1 rentalchain gets substantial advertising dollars and other incentives that unfairly lower its product costs. Blockbuster has denied the charges.

Retail consultant John Farr of The Power Group believes that Blockbuster’s ad blitz three years ago trumpeting copy depth and guaranteed rentals drained studios’ co-op budgets. “When the studios are giving Blockbuster that kind of money, it dries up the money they can give to independents,” he asserts.

Rather than abandon advertising, however, Farr advises his clients to “bitethe bullet and take 2% to 3% of their gross” for advertising that delivers consistent, year-round messages. For one six-store retailer in Pennsylvania with $3 million in annual revenues, Farr developed a $75,000 ad budget with $45,000 of that earmarked for radio. He negotiated with themarket’s top two stations, offering free rental giveaways and other on-airpromotions and gained a year’s worth of spots that averaged much less thanthe going $200 rate.

At this point, retailers must self-promote because Blockbuster’s ad campaigns emphasize brand and don’t spill over to the rest of the industry, says research analyst Robert Alexander, president of Alexander & Associates.

Blockbuster “has more strategic alternatives in terms of how to advertise to strengthen their brand and increase their credibility,” he says. “So if you’re John Doe Video Store somewhere, you’ve got a lot of troubleadvertising. And if the studios are not advertising, you’re losing a share to the guy who has greater brand awareness.”

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