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Taking the Sellthrough Plunge in Q4's Pool of Hits

24 Oct, 2002 By: Joan Villa

Faced with a new crop of DVD consumers who are purchasing many more titles than previous VCR households, rental chains are beefing up sales of new movies for the fourth quarter to capture a share of those dollars.

Blockbuster Video is leading the charge to retail, expecting to dramatically grow market share in new movie sales over the next three years, raising the bar for competitors and propelling the category out of a current status that CEO John Antioco in an earnings call last week termed an “afterthought” to the giant rental chain.

“We believe we can accommodate both types of transactions profitably,” he said.

Indeed, Blockbuster is looking to at least triple its 3 percent market share of the sellthrough movie business, “thereby taking a $400 million business today and growing it to 9 or 10 percent of what most people expect will be a $20 billion business by 2006,” he said.

“Until now, retail has been largely an afterthought for Blockbuster,” Antioco said. “Though we have more store locations, the majority of our customers have not perceived Blockbuster as a place to buy movies.

“That is going to change,” he said.

The aggressive move is perfectly attuned to a holiday season where major sellthrough titles captured more than $3 billion at the box office, and consumers are eager to pick up new DVDs for their home collections.

To a lesser extent, Movie Gallery and 270-store Rogers Video in Canada also hope to mine sales of the quarter's biggest hits, while Hollywood Video and Family Video view the trend cautiously.

Analyst Kavir Dhar of Jefferies & Co. praised those who are taking the sellthrough plunge as “opportunistic.”

“If your core bread and butter is video rental, you want to stick with that, but you also want to capitalize on an opportunity where sellthrough is going to be big in a particular quarter and participate in some fashion,” Dhar noted. “You know your existing customer is going to buy those titles, but they're just buying somewhere else, so to the extent you can keep those sales under your roof, why not?”

Movie Gallery is stepping into sales of the season's big hits “in a little more aggressive way than in the past” by carrying more titles and actively promoting presales in-store, said Bo Loyd, SVP of purchasing. “We are still proceeding cautiously and measuring the results as we go.”

The trick is to tap those incremental retail dollars without cannibalizing rentals or lucrative previously viewed movie sales, Loyd admitted. At the same time, the 1,680-store chain wants to take advantage of a convergence of factors: the increased movie consumption by new DVD households and the heightened advertising campaigns for home entertainment releases.

“The studios are spending so much money promoting their titles two weeks before release date -- that's one of the things we've seen as an opportunity. And we can take advantage of it by having a little more stock on hand for those particular titles,” Loyd said. “Our customers are convenience-oriented, and we don't want to put them in a position to go somewhere else to purchase their videos.”

Rogers Video is also boosting inventory to capitalize on growing DVD sales, explained Linda Sanderson, VP of purchasing. While new theatrical releases typically comprise 3,500 out of more than 12,000 total units per location, the 270-store Canadian chain is more actively advertising and promoting the full array of fourth-quarter hits and enticing sales with giveaways of free rental punch cards.

“The number of DVD SKUs we're carrying is double what it was last year at this time,” Sanderson said. “Our feeling is we don't want to give up market share on that to the mass merchants, or at least we want to try to get some of that back.”

Hollywood Video's CEO, Mark Wattles, is cooler on the potential for new-movie sales in the chain's 1,804 stores. Arguing that “rentailing is very different from retailing,” Wattles promised to devote resources to DVD and games rather than “low-margin categories that mass merchants will always excel in.”

“To a limited extent, we will continue to offer products such as new-release DVDs for sale just as we have with VHS in the past, but we do not plan on aggressively pursuing this 15-percent margin business,” he told analysts on a third-quarter earnings call. “Our experience has been that as people switch from VHS to DVD they increase their rentals.”

Privately held Family Video is also skeptical about the appeal of sales in a rental environment, noting that retailers who attempted to mix the two in the past have not fared well.

“We're in the rental business, not in the sale business,” observed company president Keith Hoogland. “It's two different businesses.”

The 269-store chain, based in Springfield, Ill., is happy to stick with brisk sales of used cassettes and DVDs, Hoogland said. Last year, Hoogland lobbied for price reductions on both VHS and DVD, and his chain reaped the reward of double-digit, same-store sales. Additionally, Family Video owns its locations, which further serves as a buffer against rental's peaks and valleys. Still, given the rapid changes in the video industry, Hoogland isn't ruling out the possibility of someday going to sellthrough.

“I'm not going to say never,” he added. “We don't feel like we need to do it right now.”

In the sellthrough arena, Blockbuster has an edge due to the sheer number of stores it can leverage to launch new movie sales compared to competitors Best Buy, Circuit City and mass merchants, analyst Dhar contends. But Dhar sees another motivation: the 8,000-store chain also has to drive growth at a time when it is on the brink of 40 percent market share, and new locations may be hard to find.

“They're a little more mature than Movie Gallery or Hollywood might be, and given you don't have the ability to grow at the same level through unit growth as you have in the past, how are you going to sustain revenue levels?” he said. “One idea is to expand your market outside the core rental.”

Senior reporter Enrique Rivero contributed to this story.

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