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It's a Wal-Mart World

23 Apr, 2004 By: Stephanie Prange

As it has so many other businesses, Wal-Mart in 2003 conquered the video realm.

For the first time, the mass merchant Goliath rose to the top of the video revenue generators chart, beating out the No. 1 domestic video rental chain, Blockbuster Inc., which saw flat year-over-year domestic video revenue in 2003.

These and other findings are part of Video Store Magazine's annual Top 100 report, published in next week's edition of the magazine.

In fact, the sellthrough Goliath's market share for 2003 nearly matched that of the two biggest domestic rental chains (Blockbuster and Hollywood) put together. Its revenue from video grew a whopping 27 percent from 2002 to 2003, according to Video Store Magazine Market Research which compiled the data.With its Sam's Club division thrown in, Wal-Mart actually exceeded the combined Blockbuster and Hollywood video market share.

The data confirms a significant change that has been coming since the inception of sellthrough-priced DVD — the consumer shift to buying video.

DVD sellthrough sales grew 36 percent from 2002 to 2003 — from $8.68 billion to $11.8 billion — after a whopping 69 percent leap from 2001 to 2002. The revenue explosion signaled that DVD sellthrough had gone mainstream and entered Wal-Mart territory. Consumers, spurred by low-priced DVD hardware and software, were buying more and more titles, mostly from mass merchants. More than half of the top 10 DVD sellthrough revenue generators in 2003 were in the mass merchant camp, with rental giant Blockbuster — which in 2002 announced grand plans to crack the sellthrough business — moving from No. 8 to No. 7 on the chart in 2003.

Rental Business Taking the Hit?
Meanwhile, the rental business, for some of the big chains at least, showed signs of shrinking.

In 2003, Blockbuster's domestic same-store movie rental revenues fell 3.4 percent. Same-store domestic movie sales showed a 7.1 percent revenue increase.

In a Wall Street Journal article focusing on declining rentals, Blockbuster CEO John Antioco said, “The market dynamics of home video have been significantly and permanently altered.”

Though VHS and DVD same-store rentals for the year weren't broken out, Hollywood's same-store rental comps, which include games, were down 2 percent in the fourth quarter (up 3 percent for the fiscal year).

Seemingly bucking the trend, No. 3 Movie Gallery's same-store rental revenue (which includes games) jumped 5.5 percent in the fourth quarter, and Movie Gallery CEO Joe Malugen cautioned analysts not to tar it with the same brush as competitors. He said the rental drop at Hollywood and Blockbuster was more complicated than analysts were acknowledging — a result of product shifts away from new release inventory.

“We do not believe there to be a deterioration in the rental business,” he said.

Notably, Movie Gallery, which has quietly grown in rural markets, somewhat insulated from big city pressures, at the end of 2003 had more stores than No. 2 Hollywood.

None of the big three were clear on just how much their rental numbers were goosed by growing sales of previously viewed titles — especially previously viewed DVDs — a business many independent retailers said was insulating them from any falloff in rentals.

Blockbuster acknowledged the growth in the used trade by initiating a policy to trade in any used title to buy a select new release at $12.99. The initial campaign was a success, executives said. Under the program, Blockbuster sold some 600,000 new DVDs and sold off 60 percent of the used discs it took in. It was a “pretty good first show at doing a trading venture,” Antioco said. Good enough for the chain to continue the program as a regular part of its business.

Setting the Stage for 2004
Still, doubts about the future of video rental in 2003 set the stage for this year's spinoff of Blockbuster by parent Viacom and for Hollywood going private. Speculation that Viacom would wash its hands of the video rental business grew in 2003 as the stock price never again reached the near-$30 heights of 2002 and Viacom chairman and CEO Sumner Redstone told analysts Blockbuster was not a “core brand” for Viacom. Hollywood, too, saw its stock slide from $20-plus in late 2002 to as low as $10.50 in the first months of 2004. Burned by the public market, the company this year announced it would go private through a buyout.

While the company wasn't among the top 10 video revenue generators for 2003, online DVD rental pioneer Netflix certainly made waves among the top video chains. The rental chains especially began to take the model seriously, announcing plans this year to adopt subscriptions. Blockbuster launched a major, multimillion dollar push into a modified subscription model incorporating both online and brick-and-mortar elements. Hollywood, too, announced plans to move into in-store subscriptions in the third quarter of 2004 with an eventual rollout of a Netflix-like online model.

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