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Maxing Pre-Viewed Sales

20 Apr, 2003 By: Joan Villa

The growth in previously viewed product sales is pushing retailers to throw out old guidelines and fine-tune new techniques to maximize returns from this crucial category.

In a March 2003 study of independent retailers conducted by Video Store Magazine market research, stores with more than 10,000 units of rental inventory averaged 20.7 percent of gross revenue from sales of previously viewed VHS and DVD (see chart).

“The market for the sale of product matches the rental market,” said Mark Jasperson, CEO of 44-store West Coast Entertainment. “If you can't sell it quickly you're likely to miss the bulk of the demand for resale,” Jasperson said. “There's a window between the time we begin selling off and the time that people obligated to rev-share deals sell off, and that gives anyone not obligated to those deals an advantage.”

In fact, Jasperson believes DVD's strength is reflected in the fact that he can't entice many consumers to use a trade-in program initiated last year that pays $4 to $8 per DVD.

“We offer it in all of our stores, but it's not a significant component of income or supply of DVDs by any stretch,” he said. “Consumers are still building libraries and aren't willing to sell off yet.”

Interestingly, VHS is still outselling DVD in previously viewed, in terms of total dollar volume, according to VSM market research (see chart).

“What this tells us is that during this transition from VHS to DVD, retailers are still carrying VHS to meet customer initial demand, but then they're dumping much of that VHS inventory into the used bins and favoring DVD for their long-term catalog inventory,”said Judith McCourt, VSM's market research director. “As demand for VHS continues to drop, this scenario is likely to change in DVD's favor.”

To capitalize on the public's growing appetite for DVD, Tape King in Bozeman, Mont., has begun selling product on street date by posting shelf talkers with the message “Rent it or buy it.” Prices on day one are set at MAP through the first and second week after release, dropping after four or six rental turns to $14.99, and then landing at $9.99 “where most of the volume is,” according to owner Doug Aita.

“We wanted to get customers into the mindset that everything in the store is for sale rather than just for rent, that we're retailers now rather than just rentailers,” he said. “We shoot to meet demand within the first weekend. That's why we start selling so quickly, because I feel I'm not just competing against rentailers anymore, I'm competing against everyone.”

These days, Aita purchases more new-release DVDs because he knows he can sell them off. He carefully monitors their progress on the rental wall and hopes to further distance his Tape King store from the old VHS days by easing his customers into a new name: The Movie Lovers.

“When the business was all VHS, our previously viewed revenue only represented about 5 percent of our business total,” he said. “Now our previously viewed revenue is 15 percent, so it's three times more important than it was, say, five years ago. I imagine that will get more so.”

The shift is also evident at the top three publicly held rental chains. For No. 3 rentailer Movie Gallery, last year's combined previously viewed sales of VHS, DVD and games climbed to 10 percent of 2002's revenue of $529 million, or about $53 million for its 1,800 stores. That's up from just $17 million in 2001, when the chain had a store count of about 1,300.

No. 2 rentailer Hollywood Entertainment Corp., in its recently filed 2002 annual report, wrote: “Our ability to sell previously viewed movies at lower prices than new movies provides a competitive advantage over mass-market retailers.”

And at rental leader Blockbuster Video, combined domestic and international previously viewed sales ballooned 33 percent in 2002. That was driven by a 175.6 percent increase in previously viewed DVD that offset an 8.4 percent decline in sales of previously viewed VHS, the company reported. The 8,500-store (worldwide) chain said its 0.9 percent increase in 2002 same-store rental revenue worldwide was “primarily due” to increasing previously viewed sales.

All three companies stopped breaking out exact previously viewed product sales at the beginning of last year, opting instead to roll them into rental revenue as a conclusion to the rental cycle. However, analyst Tom Adams of Adams Media Research suggested one way to assess the clout of this growing category is through the volume of units shipped into the overall rental marketplace, which tripled over the past five years from about 40 million to 50 million units per year before 1997 to 140 million units last year.

“Clearly, not all of that is building up in stores,” Adams said. “A big chunk of it these days is being sold off previously viewed.”

Mass Merchants Feel the Pressure
All of these lucrative used-DVD sales may be contributing to “front-end pressure” at mass merchants, who feel the need to discount and sell new movies quickly before they have to compete with the rental stores' lower-priced previously viewed units, according to researcher Bob Alexander.

Based on weekly consumer research, Alexander estimates that previously viewed video captured about 9 percent of the total sales market in the fourth quarter, spanning some 27 million units and about $234 million in sales.

Used VHS still outsold DVD by about 8 million units during the holiday period, which Alexander defines as Oct. 8 to Dec. 31, 2002. But since DVD is more expensive, the gap closed on the dollar side to $129 million in sales for previously viewed VHS versus $104.5 million for used DVD, according to the Alexander & Associates “2002 Holiday Market Snapshot.”

The used-DVD market is expected to grow even more as consumers recognize the value of building their libraries with used product, he said. To capitalize on that growth, retailers like Mick Blanken, owner of Superhitz Moviez and Gamez in Delaware, Ohio, said he spends more time managing his inventory to reflect the new importance of used DVD.

“The old VHS standard is, we paid $70 a unit, and the fact that we got $10 for it three months later was icing on the cake,” he said.“Today, the $10 to $12 that we get we aggressively incorporate into our buy decision, we count on it. Back then, it was a night out; now it's a necessity.”

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