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16 Aug, 2002 By: Thomas K. Arnold

When Artisan's Family Home Entertainment president Glenn Ross recently boasted that Barbie in The Nutcracker had achieved a 94 percent sellthrough rate, marketers in other industries were likely green with envy.

Even the home video industry's traditional average of 75 percent sellthrough, or 25 percent returns, is a lot higher than in other industries.

National magazine distributors, for example, are quite content with a 35 percent sellthrough rate. The average sellthrough rate for paperback books is about 50 percent, according to industry sources. And the makers of the Resident Evil action figures recently issued a press release touting its “amazing” sellthrough rate of 50 percent in toy and hobby stores.

Can home video maintain its enviable sellthrough rate? Unlikely, experts say -- at least not for the big hits that are selling increasingly huge quantities.

As the home video industry moves into a commodity business -- DVD is turning consumers into avid buyers and collectors of movies -- the old principles of high sellthrough and modest returns no longer apply.

Harry Potter and the Sorcerer's Stone has been the biggest-selling DVD so far this year for Tower Records and Video, a 98-store audio-video combo chain based in West Sacramento, Calif. But while it's too early to tell -- Warner Home Video only accepts returns 120 days after street date -- VP of video purchasing John Thrasher said return shipments from Tower may also be higher than the industry norm of 25 percent.

“I think everybody's got a lot of Harry out there,” Thrasher said. He said sales could rise again as buzz builds over the next theatrical installment in the franchise, but first-month sales were below Tower's typical threshold of 80 percent. “We sold a goodly portion,” he said, “but not as goodly as we wanted.”

Analyst Tom Adams noted that when the VHS sellthrough business dramatically expanded in the early and mid-1990s, return rates rose as well, from an average of 15 percent to 25 percent. Since then, annual sellthrough shipments, fueled by DVD, have grown from about 600 million units to 1.1 billion units in 2001.

“I don't think it's tied so much to the overall size of the market in general as it is to how aggressive suppliers are feeling,” Adams said. “That's how you grow the market -- you expand distribution and you expand inventory at retail, so there's never a time when the customer doesn't find it on the shelves.”

Invariably, pushing so much product into retail -- witness the 43 million units of Harry Potter and the Sorcerer's Stone Warner Home Video shipped to retailers worldwide -- will result in higher sales, but there also will be more unsold product left on shelves.

“Especially on the bigger theatrical releases, everybody's trying to throw out as much product as possible,” said one studio executive who asked not to be identified. “But because the business is still growing, it's hard to gauge what the actual sellthrough potential really is. We're all still in the learning process.”

He noted that studios are actually targeting two audiences -- existing DVD households as well as those coming on line in the coming months -- so to play it safe they tend to ship higher quantities than initial demand would dictate.

“You've got studios who want to push out as much product as possible, and you have retailers who are bracing not only for the customer base that already exists, but for what potentially exists with the sale of more hardware,” he said.

Higher returns aren't necessarily a bad thing, said analyst Adams -- particularly if the alternative is potentially running out of product.

“The only time returns are bad is if you didn't plan for them and your profitability suffers,” he said. “It's a way to build the market, to take it from one level to the next.”

In a market growing as fast as DVD, Adams maintains, “you never want a shortage -- that's the disaster scenario, not returns.”

Jim Cardwell, EVP of North America for Warner Home Video, agreed. He said he's not worried in the least about returns on Harry Potter, noting that Warner purposely pushed a lot of product into the market to satisfy demand now and in the coming months.

“There are several more sequels to come, and a lot of pricing opportunities down the line, not to mention a huge expansion of the DVD base,” Cardwell said. “So even if we do get returns, we'll sell them -- maybe not on VHS, but on DVD.”

He said with DVD sales continuing to soar, “you expect returns -- it's part of the business. You reserve for them, you anticipate them.”

Cardwell, however, predicts the real ballooning in returns will occur on the VHS side, once the transition to DVD accelerates.

“It's going to be people getting out of VHS or cutting back on VHS,” he said.

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