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How Stuffed Is the 4Q Video Stocking?

6 Sep, 2002 By: Joan Villa

As consumers clamp down on spending and more mass market retailers issue earnings warnings for the remainder of the year, home video will soon test its mythic reputation as a recession-proof business.

“It may be recession-resistant, but it's hard to believe it will be recession-proof -- there is a difference,” warned retail analyst R. Scot Ciccarelli of Gerard, Klauer, Mattison in New York. “It comes down to a consumer traffic issue. You're just not getting enough bodies into stores.”

Best Buy's warning of a soft July reflected a slowdown across all categories and geographies, he noted, including sales of big-ticket home theater systems that in the past few years have spurred DVD player sales.

Industry observers believe the holidays could easily see video sales fall below what they fear are inflated studio expectations for individual titles, which are all competing amid a glut of compelling product. With every stripe of retailer telling the same story of slowing sales -- including food stores that are pinning their low revenue on the economy -- Ciccarelli doubts anything will escape a consumer pullback, if indeed one is looming over the holiday horizon.

Too Much of a Good Thing?
“There aren't enough endcaps and waterfall racks to display all the hit products going to be released this fourth quarter,” said John Marmaduke, CEO of Hastings Entertainment, which operates more than 130 superstore locations primarily in the South and Midwest. “Every year, a number of really good movies get murdered at Christmas, and no one owns up to it.”

While consumers had been spending freely during most of the year despite a battered stock market, they are turning more cautious as the effects of large-scale job layoffs filter through the economy, Marmaduke said. Even when family finances aren't an issue, he believes cannibalization -- particularly among hit titles -- can impact holiday sales up to 50 percent.

“If you have the No. 3 action-adventure title, they're going to buy No. 1 and 2, but not No. 3,” he said. “There's only so much room on the shelf, and they only have so many dollars in their pockets.”

Marmaduke wishes studios would take a lesson from last year's first-quarter success story, The Fast and the Furious, and spread more product into January and February. However, the glut may ensure a strong selling season overall for video.

“The retail adage is, ‘As September goes, so goes Christmas,' so we'll have to wait and see,” he concluded. “But I can't imagine we're going to have a weak Christmas with the lineup of great video hits and video game hits this year.”

With DVD just filtering into many of the small- and midsized markets that are the focus of Minneapolis-based Video Buyers Group, president Ted Engen also anticipates a robust holiday for the industry overall, but maybe not for every title.

“Can we meet each studio's goals?” he wondered. “We're going to set some all-time records but not as high as some of the studios are telling me we have to do.”

Player Sales Holding Steady
Robert Alexander, president of New York-based research firm Alexander & Assoc., sees a strong holiday for software based on his recent survey showing more than 27 percent of non-DVD-capable households are “somewhat” or “very” likely to purchase a DVD player before December.

Although this reflects a higher purchase intent than a similar survey from last year, actual fourth-quarter player sales may only keep pace with the 2001 holiday season because now there are fewer households lacking DVD-capable devices such as a computer or a game machine, he said.

But with 30 million consoles already in U.S. households, the bulk of software sales are not dependent on new purchasers of DVD, he explained. “You've got a good base of DVD players, and that base can support a pretty healthy sales volume.”

Further, Alexander expects the weak economy may take a bigger toll among families who already own a player and would forgo buying a second or third. Nonetheless, the clustering of so many high-profile movies into the holidays could pose a problem for studios with high hopes for a specific title, he said.

“Suppose you have six or eight really good titles, each with collectible merit. You're asking people to spend $120 or $150, and that's a big-ticket item, even if you spend it six weekends in a row,” he explained. In recent years, video has become increasingly less dependent on a narrow fourth-quarter sales window, which represents 25 percent of the days in the year and about 35 percent of the industry's total sales, “so it's not nearly as distorted in the video business as it is, say, in the toy market,” he added.

But while software sales aren't hitched to the fourth quarter, player sales are heavily reliant on the gift-giving holiday, noted Ralph Tribbey, editor of the DVD Release Report. If U.S. household DVD player penetration dropped even two to three points below the 40 percent projected for year-end, that could shave software sales by 13 million units and $50 million to $60 million in lost retail sales, he estimated. However, he's not panicking over the prospect.

“If you see DVD sales totally tank, then we would be in the Great Depression, because I would think that would be the last to go,” he said.

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