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Survey: Retailers Not Optimistic About 2004 Rental Rebound

17 Jun, 2004 By: Melinda Saccone

Rentailers are feeling the bite of increasing DVD sales and are not optimistic about the prospects for a rental rebound in the last half of the year, according to a survey conducted by Video Store Magazine Market Research at the end of May.

Of the 200 independent rentailers surveyed, nearly two-thirds (62 percent) expect their rental revenue to remain the same or decline in the next six months compared to the previous six months of this year.

While the box office strength of new video releases in the first six months of 2004 were up a slight 2.2 percent from the comparable period last year, it has not, thus far, translated into more dollars at the rental counter. As of June 13, consumer spending at the rental counter was off more than 10 percent from comparable 2003 tallies, registering $3.85 billion.

Stronger product in the rental pipeline may not help rentailers' bottom lines. As consumer buy rates remain strong, and DVD household penetration has breached the 70 million mark, increased competition from disc sales has had more of an impact on rentals than the title lineup.

The majority of rentailers surveyed do not see demand picking up in the second half of the year, and 20 percent of rentailers surveyed believe their rental revenue will be lower in the second half of the year compared to the first half. On average, in the last half of the year, they are expecting a 19.9 percent decline in their core business compared to the first six months of 2004.

As the absolute cost of DVD ownership versus rental continues to decline, more consumers are opting to buy versus rent. The margin between purchasing versus renting narrows when consumers add in ancillary rental costs, such as late fees — which on average account for more than 10 percent of rentailers gross revenue — and the time it takes to pick up at rental and return it.

Consumers' disdain for returning movies and paying late fees has helped give rise to the success of Netflix, the nation's No. 1 online rental subscription service. In 2003, Netflix generated $272.2 million, which accounted for nearly 3 percent of all consumer rental spending and their rental business is growing.

Further enticing consumers to eschew the traditional model are the advantages and convenience of buying, including the added value from DVD extras and the relatively low prices and convenience of purchasing discs at mass merchant and discount stores, which provide many consumers with one-stop shopping. According to Video Store Magazine's Consumer Entertainment Survey, discount stores are consumers' purchase destination of choice.

However, some rentailers foresee a stronger second-half for rental, with 38 percent of the retailers surveyed taking that position. While historically, the majority of rentals have occurred in the final six months of the year — accounting for an average of 60 percent of annual rentals — that figure has been on the decline as sales have exploded with DVD.

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