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Squeezed But Surviving

18 Apr, 2002 By: Joan Villa

Distributors who have survived the past few tough and turbulent years will meet with studios this week in Los Angeles at the National Association of Video Distributors confab in a new climate of optimism.

Distributors have struggled for profitability in an era of copy-depth programs, lost large retail accounts to direct relationships with studios and watched competitors go out of business. But the five domestic wholesalers now remaining have tightened operational controls, courted a wider variety of healthy retail and Internet customers and emerged a profitable part of a vibrant new video industry thanks to the rapid adoption of DVD.

“We've had to make adjustments on what we do and how we do it, and do more with less,” acknowledged Bob Geistman, SVP of interactive media for Ingram Entertainment. “All of us who have survived have had to do tough things to make sure we survive.”

Ingram has found new business in Internet fulfillment, providing direct-to-consumer shipping for Web etailers who leverages the distributor's video inventory, content databases and its expertise in small-package shipping, Geistman noted. Those incremental sales add up, amounting to about 5 percent of the wholesaler's business, he said.

In addition, demand for DVD and games — other staple lines for Ingram — enables the wholesaler to cross-sell product lines to a variety of retailers and “opens doors as a second or third source of product for large retailers who buy direct,” he said. “We gain some incremental business that maybe we don't do in our day-in, day-out business, such as quick replenishment.”

Creating new revenue opportunities from existing product lines is crucial to success in an evolving industry. Wholesalers have always been “lean and mean, ” in the words of one long-time distribution executive. But today's lower margins on DVD vs. VHS — and the dramatic shift toward sellthrough and high volume vs. rental's higher price points and lower volume — are not problems that can be solved.

“It's an ongoing game of being more efficient,” the executive noted. Even in the best times, he added, “distributors always face margin pressures, because as long as there are two distributors, retailers will use one against the other.”

The solution for most has been to control operations and tightly manage inventory to contain costs. In the past few years, Baker & Taylor, for example, has cut distribution centers from 15 to four and trimmed four telemarketing offices to two. The operational adjustments mean wholesalers can ship more product at lower margins per unit and still turn a profit.

“What we're finding is the broad range of titles we stock is a key driver to our growth,” said Jim Ulsamer, president of Baker & Taylor, which sells “tens of thousands” of VHS titles and virtually every DVD, in addition to books and music. “By providing that broader range of titles, we can support e-commerce retailers, libraries and major retailers who want to use us for special orders and replenishment. We're also leveraging our familiarity with other retailers, such as music and bookstores, to bring video into those venues.”

With today's high volume, distributors have to carefully manage inventory, working capital and receivables, Ulsamer explained. His strategy is to expand video into new retail outlets and on the Web in direct-to-consumer fulfillment, where “we can add value to the video products we sell,” he added. “Chopping prices by 10 cents is not what we're interested in.”

New York-based Flash Distributors employs a similar value-added strategy, with an emphasis on personalized service, capitalizing on DVD's popularity to set up spinner racks in pharmacies, grocery chains and music stores. Because he serves a geographically compressed urban area, President Steve Scavelli can offer same-day service to replace defective units or approach local stores to pitch DVD movies containing language tracks in Arabic, Russian and Spanish to cater to the city's ethnic population.

“With DVD exploding, distribution is needed more than ever,” Scavelli said. “The distributor really needs to work with a retailer within his budget and with his demographics to get the best fit. Now we have to figure out how to get: a) the best films and b) the best mixture of VHS and DVD. I could be one dollar more than someone else, but if they get the right mixture, they're so much better off.”

Low-priced DVD also has boosted retail's profitability and enabled store owners to pay their bills, leading to renewed financial strength for wholesalers.

“DVD's been great for retail, and if it keeps them healthy, that's good for us and good for our business,” added John Reding, Ingram's SVP of sales.

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