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TOP 100: Video Specialists Look Beyond Rental

30 Apr, 2004 By: Melinda Saccone

Last year, video rentals pulled in $9.3 billion compared to $14 billion for the video sellthrough business. Since 2000, consumer video sales have consistently outpaced rentals, challenging rentailers — which make up the vast majority of video specialty retailers — to find new ways to grow their bottom lines.

With DVD sales ($11.8 billion) generating more than twice as much revenue as disc rentals ($5.2 billion) and overall rental activity remaining relatively flat, some of the most successful rentailers in the business sought to augment their rental income by aggressively selling previously viewed discs and flirting with new release and catalog sellthrough.

Top 50 Video Specialty Retailers Gain Rental Market Share

The top 50 video specialty retailers last year earned a new distinction: for the first time ever, they accounted for the lion's share of the rental revenue pie.

More than half (58.4 percent) of the $9.3 billion consumers spent renting movies in 2003 flowed into the cash registers of the 10,927 storefronts operated by the top 50 video specialty retailers.

These top retailers have grown their storefront presence by 12.5 percent in the past five years and boosted their share of the rental market by 13.6 percentage points.

Public Chains Still Dominate

While it comes as no surprise that the top three public chains continued to dominate the video rental scene in 2003, the success of online rentailer Netflix turned heads.

Last year, the nation's No. 1 online DVD rentailer outperformed the industry in growth, posting a 76.8 percent increase in its subscription-based online disc rental revenue.Overall DVD rentals were up 63 percent for the year.

In just four years, Netflix has grown its DVD rental revenue 656 percent, to $272.2 million, up from $36 million in 2000. Netflix now commands 2.9 percent of the overall rental market and 5.2 percent of the DVD rental market.

Meanwhile, the top three public chains — Blockbuster, Hollywood Entertainment Corp. and Movie Gallery — have steadily gained consumers' loyalty and rental dollars over the past five years. In 2003, these three chains accounted for more than half of all consumer rental spending, or 50.5 percent, up from 39.1 percent in 1999.

Blockbuster continued its reign as the top video specialty retailer in the country, with 34 percent of all domestic movie rental revenue, up from 28 percent in 1999.

Blockbuster has expanded its domestic presence by nearly 1,000 outlets in the past five years and now has 5,670 rental stores in the United States alone.

Hollywood Entertainment, the nation's No. 2 rentailer, improved its position slightly last year, earning 12.1 percent of all movie rental revenue, up from 8.4 percent in 1999. In the past five years, Hollywood has expanded its store base by nearly 20 percent, to 1,920 outlets.

Movie Gallery has been on an expansion curve for the past five years. In 1999, the nation's No. 3 video rental chain had fewer than 1,000 domestic brick-and-mortar storefronts. By the end of 2003, Movie Gallery had expanded its store base by 107 percent to 1,988 stores, primarily through acquisitions. In 2003, the Dothan, Ala.-based chain grabbed a 4.8 percent rental market share, up from 1.8 percent in 1999.

Product Diversification Keeps Top 50 Strong

The survival of the industry's strongest video specialty retailers was not pegged to rental market-share gains alone. The top 50 have continued their mainstay as the industry's top players by diversifying their product lines and introducing a hybrid of services into their retail models.

At year's end, movie rentals accounted for less than two-thirds of gross revenue in the top 50 video specialty stores, averaging just 61.3 percent, down from 73.1 percent five years ago.

DVD Dominates

In 2003, DVD truly went mainstream, with more than half of all U.S. households having some type of DVD playback capability. Retailers were ready for the new wave of DVD hardware owners.

Last year in the top 50 video specialty outlets, sales and transactional rentals of DVD collectively accounted for 52.1 percent of gross revenue.

By comparison, cassette sales and rentals dropped to 26.9 percent of gross revenue. Disc rentals were the engine for whatever rental growth retailers may have seen in 2003, as the format became the dominant rental format last year, accounting for 56 percent of total U.S. consumer rental spending. For the first time ever, DVD rentals became the primary source of revenue in the top 50 video specialty outlets.

Last year, disc rentals accounted for nearly 40 percent (38.5 percent) of gross revenue in top 50 retailer video specialty outlets. By comparison, in 2002 disc rentals accounted for 25 percent of their overall revenue.

Previously Viewed Disc Sales Soar

Not only has DVD been a rental success, it has given rise to a significant new revenue stream in previously viewed disc sales, which, in turn, have given retailers a cost-effective way to effectively compete with mass merchants' cutthroat pricing on new DVD sales.

Last year, previously viewed title (PVT) sales (DVD and VHS) generated an additional $1.3 billion for rentailers. Leading the growth were previously viewed disc sales. PVT DVD sales exploded in 2003, generating a whopping $859 million, a 128 percent increase from 2002.

Of that amount, 41.1 percent was generated in a top 50 video specialty outlet. Last year, PVT disc sales doubled at the top 50 video specialty retailers, accounting for an average of 5.6 percent of their gross revenue, up from 3 percent in 2002.

Previously viewed cassette sales were down for the year, as many retailers decreased their cassette inventories.

PVT VHS sales accounted for an average of 2.9 percent of gross revenue at the top 50 video specialty stores, down from 5 percent in 2002.

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