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Indies: Under Fire But Still Scrappy

6 Oct, 2005 By: Jessica Wolf

Independent retailers built the video rental market, but for longer than a decade, their share of the market has been crumbling.

Now, even the traditional rental business is in dire straits, with Blockbuster Inc. on the ropes and studio executives snubbing the whole concept of video rental.

One high-ranking studio executive said he'd rather take one sellthrough transaction than 14 rentals, even under revenue-sharing.

Another studio exec said that of the 1.1 million copies of a secondary title he recently shipped into the market, only 150,000 copies went to rental. Of those, 67 percent went to the big chains. Independents only bought 50,000 copies, or 4.5 percent, of the total title shipment.

The “bottom dropped out” of the rental market this spring and summer, said Todd Zaganiacz, president of the National Entertainment Buying Group (NEBG).

The only problem he sees in studios' calculation of ship numbers is they don't take into account “sideways buying” at Wal-Mart and other big discount chains, which typically charge less for new releases than the wholesale price.

What's clear, industry watchers agree, is that indies cannot rely solely on video rentals to stay in business.

“Especially over the past few years, indies have had to diversify, become more creative, find ways to generate other revenue,” said Ted Engen, president of the Video Buyers Group.

“I don't think there is anyone out there who is doing purely rental,” agreed Adrian Hickman of Philadelphia-based TLA Video and member of the Independent Dealers of Entertainment Association (iDEA) board of trustees. “I think everyone has something else to back them.”

Getting into sellthrough

An obvious answer to the question of how to survive in an increasingly sellthrough universe would be to get into sellthrough.

But that's tricky, Zaganiacz said, since indies lack the muscle to get lower prices and 100 percent return policies like the big chains enjoy.

“When you buy something for $19.04 wholesale and sell it for $19.99 — well that 95 cents doesn't go far,” he said.

Zaganiacz's store, Video Zone in South Deerfield, Mass., carries new sellthrough titles mostly as a convenience for his customers.

He's not making much money, though, selling DVDs.

That doesn't surprise Steve Scavelli, president of Flash Distributors, which services mostly indies on the East Coast.

Scavelli said it's easy to say that indies should get into sellthrough to help save their businesses, but it's a much harder strategy to execute.

Flash can only offer 10 percent to 20 percent returns, and often its wholesale costs are higher than Wal-Mart's first week DVD pricing.

“You should have some sort of a sellthrough presence,” he said. “Be very upfront and make sure customers know you can do special orders. But to be too much into the sellthrough business, you're going to get killed.”

Only 12 percent of respondents in Home Media Research's recent Internet survey of indie retailers said they plan on getting into new sellthrough in the next year.

One sellthrough bright spot is TV DVD, Zaganiacz said, because the margins on it are much better. The mass merchants don't seem to go as low, so shoppers are pleasantly surprised at the prices their local independent can offer, he said. And product can be easily opened and repurposed for rental turns if the demand is high enough, he said.

As good as new

Previously viewed sales continue to make up a lot of the rental shortfall for many retailers. Nearly all (98 percent) of the respondents in Home Media Research's indie survey said they sell previously viewed DVDs; 74 percent said they also sell used games.Using sites such as eBay and Amazon.com's marketplace to sell off inventory has turned Video Zone into a nationwide and international retailer, Zaganiacz said.

Selling on these sites takes the worry out of having an overstock of previously viewed product in the store, he said, and it doesn't cannibalize an in-store sale like a proprietary Web presence could.

Other retailers provide disc-cleaning, tape transfer and other services to their customers, as well as concessions, tanning and even cell phones and hardware.

More than half (52 percent) of Home Media Research's survey respondents said they offer disc repair, and 7 percent said they plan to get into it. Twenty-six percent of respondents said they sell DVD hardware in their stores.

Bob Marino and his staff at Scarborough Video in the upscale neighborhood of Scarborough, N.J., have taken that a step further. They have created a high-end home theater display in the store, sell packages of boutique items and offer home theater set-ups.

It's not something that would work for every market, but every indie needs to find something that does work, Marino told HMR early this summer.

“If you're relying on video rental, you've got a problem,” he said.

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