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THE TOP 100: DVD's Momentum Drives Growth

29 Apr, 2002 By: Kurt Indvik

This week, Hive4Media will bring you Video Store Magazine's Exclusive Annual Research bonanza, the Top 100. Two parts of this unique research series will appear every day this week in this space. Today we begin with an executive summary and the industry's top revenue generators. To view supporting charts and tables, see your copy of Video Store Magazine!

It was the breakout year for DVD, and those retailers who were positioned early to take full advantage of the enormous consumer shift toward the platform in 2001 were the clear winners.

Blockbuster continued to hold the top spot among Video Store Magazine's Top 10 video revenue generators, listing with an estimated 2.4 percent growth in DVD and VHS revenue, to $3.55 billion in the United States (including VHS/DVD rentals, sales and late fees but not franchise revenue or video game and other ancillary revenue). Wal-Mart's estimated video revenue leapt by 58.4 percent and threatened to unseat “Big Blue” from its leadership position.

The home video retail business was, in a word,“spotty,” said Blockbuster CEO John Antioco.“There were a lot of variables in the mix in 2001,” he said. “You had DVD gaining tremendous momentum, VHS declining precipitously and the retail factor of DVD playing a major role in consumer behavior.”

Blockbuster responded to DVD's surging popularity with a massive remerchandising of its stores to remove about one-quarter of its VHS inventory and focus on DVD. That resulted in DVD transactions rising 160 percent in 2001, according to the company, and an increase in DVD rental and sales revenue to more than $800 million, according to Video Store Magazine market research. The company's approximate $2.68 billion in VHS rental and sales revenue represented a 9 percent decrease from 2000.

Antioco noted that the company's rental revenue was less than expected due to “retail cannibalization” of DVD. This was most evident, he said, in the fourth quarter, when a combination of a boom in DVD player sales and a strong slate of films made what could have been a stellar rental period less so, since consumer behavior began to move toward a buy vs. rent model. Antioco did attribute DVD's higher margin potential as a significant contributor to his company's net income turnaround in 2001, when corporatewide the company had a positive net income of $12 million, compared to a $57 million loss in 2000.

“[Blockbuster's] biggest challenge, as always, will be to get into the sellthrough game, which is where we think the growth will be over the decade ahead,” said Tom Adams, president of Adams Media Research. He thinks the company is nimble enough to respond quickly now. “They've really shown the kind of flexibility that's required in times of technological change,” Adams said.

“We really did not know how to compete against retail DVD in 2001,” Antioco concurred. “I think we have now figured that out, and you will see that reflected in our results for the balance of 2002.” The company has a multiedge plan, with new- release and previously viewed sales strategies, and a marketing/promotions campaign that will address this, Antioco said.

“All that will grow in 2002,” he said. “We will be making some significant and innovative changes in the way people access Blockbuster for movies and games.”

Besides these programs, Antioco also cited 2001 as a year when the company improved internal operations, speed and quality of customer service to position itself well against the mass merchants.

Blockbuster opened 183 stores in the United States in 2001 and is forecasting about 150 new U.S. stores in 2002, along with 150 new international outlets, where same-store sales experienced double-digit or near double-digit growth, Antioco said. Total stores worldwide in 2001 numbered 7,981.

Wal-Mart embraced home video -- and DVD in particular -- in an even more dramatic way in 2001. Its dominance in the sellthrough side of the business was illustrated not only by its growth in consumer dollars, but by studio estimates that Wal-Mart was their largest customer in dollars in 2001, accounting for as much as 25 percent of the studios' DVD market and 35 percent of their VHS business. Home video is reportedly Wal-Mart's single-largest product line, even as the world's biggest company continues to aggressively drive catalog prices down on VHS and DVD, and drive up volume.

Hollywood Entertainment's financial prospects and stock price rebounded in 2001 after a difficult 2000 that prompted the company to put a moratorium on new store openings. It enjoyed an 8.7 percent rise in revenue in 2001, and net income that year was $100.4 million, compared to a net loss of $393.7 million in 2000. Hollywood Video's response to the sellthrough business will be its aggressive push into the previously viewed DVD business, according to president Mark Wattles, who oversaw his company's issuance earlier this year of 7 million new shares of common stock, raising capital for a projected 200 new stores in 2002.

Kmart, 2000's fourth-largest generator of home video revenue and the second-largest seller of home video, may have been the biggest story of the year, as its financial meltdown and uncertain prospects in its current Chapter 11 state continue to loom over the home video business, which counted a number of studios as the retailer's largest creditors. The company's market share in home video sales, estimated last year to be 6 percent, according to Video Store Magazine market research, will likely fall as the retailer shutters a reported 284 stores and lays off 22,000 employees.

As DVD player penetration into U.S. households grows in 2002 and perhaps crests 40 percent or higher by year's end, DVD promises to play an even larger role in the retailing economy than it has in its short, meteoric history and may result in a nonspecialty store chain becoming the leader in home video revenue for the first time in the history of the VSM Top 100.

To read about the Top 10 DVD Sellthrough Revenue Generators, click here.

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