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Rolling the Pure-Play DVD Dice

7 Mar, 2003 By: Stephanie Prange

How fast will DVD overtake VHS?

Some video store owners aren't waiting to find out. From veterans to newcomers to former laserdisc niche players, select retailers are going pure play and opening DVD-only stores.

The advantages, they say, are low-priced product, higher previously viewed sales and a stock that's less bulky and easier to put into a small space.

“There's no way I would buy VHS now,” said Ron Alsheimer, a veteran who sold out to Blockbuster in the mid-1990s and recently re-entered the business with a DVD-only store chain, DVD Dot. He thinks it's “inevitable” that DVD will take over VHS.

Alsheimer, who opened his first store Dec. 6 and is working on his third, is using the compact nature of DVD to open small stores, from 1,200 to 3,100 square feet. He can accommodate more than 10,000 discs, with some DVDs arranged vertically, spine out.

“We're even looking at 625 square feet,” he said.

The concept is to “be a neighborhood store in large cities,” where space is at a premium, he said. His first store was in Buffalo, N.Y; his second is in a Buffalo suburb. Rates are $3.79 for two days on new releases and $2.99 for five days on catalog. He's also looking at $1-a-day rentals for older titles.

More DVD-Only Stores Opening

Alsheimer isn't the only veteran trying a pure play.

Tony Arlyn has been in the video business since 1979. At one time he had a chain of six stores that eventually shrunk to one. Now, he's expanding again with a DVD-only store, DVD World, in the small town of Corvallis, Ore., near Oregon State University and Hewlett Packard's headquarters.

“Having been in the business for such a long time and weathering all the ups and downs, I see a real opportunity to be competitive,” he said. “The cost of product is down” with DVD, which allows him to do away with revenue-sharing, which he dislikes, he said.

The new store, which opened in November, not only has a new product focus, but a new attitude. The design is “high-end,” he said, with dark wood and a 60-inch Zenith plasma TV. “The feel of our store is a marriage between Borders and Starbucks,” he said. Clerk terminals are connected to the Internet, allowing them to do special orders for customers, which provide a “nice margin,” he said.

The new store is less than half the size of the old one, 1,500 square feet versus 3,500.

“We can do the same amount of business,” he said. “The space advantage is tremendous.”

The small DVD size also allows Arlyn to rent entire sets for $6 for three days. Singles rent for $3 for three days or $1 a day.

Arlyn is so enthusiastic about the new concept that he plans a half-dozen more stores by year end, and hopes to sell the concept to others.

“It makes me feel like it was back in the 1980s,” Arlyn said.

Mike Handorf, 21, probably isn't old enough to remember the 1980s, but he's the new owner of Video Biz, which was converted to DVD-only less than a year ago, right before he bought the Menomonie, Wis., store from Gary Scholfield, who wanted to retire. The store also has a tanning salon.

Handorf used his savings to buy into the business.

“I was sick of working for someone else,” he said.“We've just started out, and we've been making money.”

Although the store is across from a Mr. Movies that does a brisk business, Handorf is able to make a tidy living, grossing $25,000 a month. “Because we are all DVD, we've kind of got a niche,” he said.

Despite being new to the business, he sees the advantages of DVD.

“We were thinking about doing VHS, but DVDs take up a lot less space,” he said. “It's kind of a no-brainer. By [the time he took over], the VHS customers were already gone and DVD players were cheap.” The disc has quickly made inroads in his small town. Players “are at Wal-Mart for $60,” he said.

He saves space on catalog product with flip racks. New releases are stored face out. Rates are $3.50 for three nights and $2.50 for three nights for members.

Pure Play Ideal For New Owners

Todd Zaganiacz, owner of Video Zone and president of the New England Buying Group, said DVD is the way the business is headed and the DVD-only concept is ideal for those just entering the business or opening new stores.

“If you're a DVD-only store your costs aren't going to be as heavy as with VHS,” he said. But it's a “double-edged sword” for existing stores that carry VHS

“You don't want to alienate VHS customers,” he said. What dual-format retailers are seeing, like their DVD-only counterparts, is the enormous upside potential of previously viewed DVD sales.

“Previously viewed DVD is through the roof,” Zaganiacz said. “It's like nothing I've ever seen on VHS.”

Many retailers sell previously viewed DVDs within a month of — and sometimes as little as two weeks after — street date.

The sweet spot price is about $10, retailers said, and previously viewed sales are another advantage of the DVD-only concept.

“Basically, it's like a brand new movie for $10,” Handorf said. “We'll order just a ton and two weeks later we'll sell off. Customers can either go to us to buy it for $10, or they can go to Wal-Mart for $20.”

“There's a very big market in previously viewed,” agreed Arlyn. “We have a philosophy in our store. We don't compete with Walmart and Kmart on new releases.”

Instead, by the time his cheaper previously viewed titles hit the shelves, he said, Wal-Mart has already raised its prices on those titles.

Alsheimer calls it a “substantial” part of the business. His store also does DVD trading, which he said “is almost considered a long-term rental.”

“Previously viewed sales are just hot,” said Chad Harr, owner of the three-store DVD-only Backlot DVD chain in Washington, which he started in 2000 and is generating about $40,000 to $60,000 a month in sales and rentals. He sees a problem, though, with the new sellthrough business, which isn't doing as well as he'd hoped, faced with competition from discounters.

New Release Sellthrough Not Working

If there is one downside to the DVD pure play, it may be in the new sellthrough arena. In fact, many aren't in that business.

“I don't like the margins,” said Alsheimer.

Dave's Video, The Laser Place —one of the many laserdisc retailers that switched to DVD — had to call it quits, a victim of shrinking profit margins fueled by rampant discounting on new sellthrough DVD. “With DVD, there wasn't a destination point anymore,” he said. “You could go to the grocery store and buy them.”

But Paul Ramaker, president of DVD Planet, another store originally devoted to laserdisc, said he's confident it can survive as a niche player. He's also optimistic about the growth of DVD, despite the burgeoning competition. “They'll probably be more customers for us to enjoy,” he said.

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