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Video's Biggest Customer

4 Apr, 2002 By: Thomas K. Arnold

Wal-Mart is generating headlines with the announcement that its $219.81 billion in sales for fiscal 2001 make it the world's biggest company on the Fortune 500 (in the upcoming April issue of Fortune), replacing Exxon Mobil Corp.

Wal-Mart has been the No. 1 video customer for Hollywood movie studios for more than five years, with an estimated 25 percent share of the DVD market and 35 percent of the VHS market, according to studio sources.

"Wal-Mart for years has been a leader in VHS sellthrough and when DVD came around has taken an aggressive leadership role as well, particularly in bringing DVD to the mass consumer," said Thomas Lesinski, EVP and GM, United States, for Warner Home Video. "They are extremely important to us, as they are to every video company."

Privately, studio executives say Wal-Mart's importance will grow even more should Kmart fail to survive its bankruptcy reorganization, as many believe it will. Kmart's share of the combined VHS and DVD market last year was about 6 percent, but since the chain's much-publicized financial woes has fallen to 4 percent, sources say.

"Most people think Kmart will be around for another two years and then that's it," said one studio executive who asked not to be identified. (Kmart insists it will weather the current crisis and vows to emerge from bankruptcy by July 2003.)

Kmart already has announced plans to close 284 of its stores, or 13 percent of its storefronts. Morgan Stanley analyst Bruce Missett recently told Forbes that historically, Wal-Mart typically scoops up half the sales of each Kmart that is closed.

Like Blockbuster Inc., Wal-Mart has been known to flex its muscle with suppliers -- and sources say suppliers are only too willing to bend. Some studios have the same attitude toward Blockbuster, while others, most notably Warner Home Video, are defiant when the big video specialty chain tries to exert its buying power.

Sources said Wal-Mart is largely responsible for the rapid price reductions on both VHS and DVD catalog product, as well as the growing number of DVD movies released in full-frame rather than widescreen.

"Wal-Mart wanted separate SKUs for full-frame and widescreen, and Wal-Mart got what it wanted," said another high-ranking studio executive.

Wal-Mart executives won't talk numbers, but according to the business magazine Business 2.0, video has shot past diapers, cigarettes and toilet paper to become the Bentonville, Ark.-based mass merchant's single biggest product line, worth $1.56 billion last year, according to estimates attributed to ACNielsen.

Studio sources, however, said the actual number is much higher. They peg Wal-Mart's contribution to studio revenue at $2.3 billion. They estimate consumers spent nearly $4 billion on video software at Wal-Mart in 2001. Of that total, 65 percent was VHS and 35 percent was DVD, studio sources said.

In a report dated April 2001, video industry analyst Bob Alexander of Alexander and Associates concluded that Wal-Mart now "writes the biggest check" to the Hollywood studios' nontheatrical divisions. Based on 2000 numbers, Alexander estimated that Wal-Mart's total video software expenditures totaled $1.9 billion to second-ranked Blockbuster Inc.'s $1.7 billion. At the time, he estimated Wal-Mart's share of the sellthrough market at 28 percent.

Wal-Mart has historically provided little public detail about its business. Spokesperson Susanne Decker acknowledged home video's obvious importance to the company, but declined to offer any details on the giant retailer's approach to one of its most important product lines. "We do not discuss strategy," she said.

Studio sources and analysts, however, say Wal-Mart has done a lot of things right with video, including its aggressive push into DVD with low-priced catalog titles, its refusal to abandon the cassette at a time when many other big retailers have all but given up on the format, and a clever cross-merchandising program with its online subsidiary, Walmart.com.

In its stores, Wal-Mart clearly targets impulse buyers with a vast selection of under-$10 cassettes and DVDs displayed in merchandisers in high-traffic aisles throughout stores. This past fourth quarter, the mass merchant took aim at the rental market with bins of cassettes selling for $6.44 topped with signage that read: "No Late Charges ... You Own It!" The bins and the signs are still there.

The latest: Select Wal-Mart stores have erected "dump bins" of VHS cassettes priced at $4.88 and DVDs selling for $5.88. Some DVD titles available at that price range include vintage "Three Stooges" and Lassie films to the 1996 Tom Arnold starrer Big Bully and 1994's Corrina, Corrina, a $20 million box office hit with Whoopi Goldberg and Ray Liotta.

DVD, in particular, is a "phenomenal growth area" for Wal-Mart as well as other discounters, said David Lichtman, an analyst with Merrill Lynch who covers retail. "That's why you see the focus on them in their TV campaigns -- Wal-Mart is the place you can go to get DVDs."

Lichtman said DVD "is such a strong category and has been driving a lot of sales at discounters, so it would be foolish for [Wal-Mart] not to capitalize on [it]. The goal of a store like Wal-Mart is to bundle up as many trips as you would have formerly made to other stores, into Wal-Mart. They aren't making huge margins on DVD, but it's another reason to get people to the stores, to save them a trip to Blockbuster."

Lichtman isn't surprised that videocassettes retain high visibility at Wal-Mart stores -- nor that the chain is selling them at such low prices.

"It's another way they can use their purchasing power to provide their customers with great values," he said.

Another analyst noted that while studios are selling catalog cassettes to Wal-Mart for as low as $5 or even less, "it's better than selling them to a liquidator."

While its stores may cater to impulse buyers, Wal-Mart is using its online subsidiary, Walmart.com, to broaden the net and satisfy collectors -- not just in video but also in music and books, said Cynthia Lin, media manager for Walmart.com. The week before the Oscars, the site's home page was topped with a banner ad that read, "Choose From Over 10,000 Movies!"

"This is an excellent example of how we are able to complement Wal-Mart stores," Lin said. "The stores have limited floor space in terms of titles they can carry, but online we don't have those kinds of limitations -- we have unlimited shelf space.

"We are meeting the needs of those customers who are going to our store and looking for certain titles our stores don't carry," she said."

Unlike brick-and-mortar stores, Walmart.com also lets consumers buy movies in advance. The hot ticket since its Feb. 5 release announcement is Harry Potter and the Sorcerer's Stone, which ships May 28. Wal-Mart's price is $19.95, $7 off the list price, and that includes shipping. Wal-Mart promises the video will arrive via UPS at the buyer's address on or the day after street date.

"That's another great way to create greater value for our customers, because you can't preorder videos in our stores," Lin said. "Online, it's becoming increasingly popular among our customers."

Lin said customers can expect more synergy between brick-and-mortar stores and Walmart.com in the future.

"One thing we're starting to do is create an integrated shopping experience for the customer, so whether they shop online or in stores or in kiosks, they will have this seamless shopping experience," Lin said.

She added there's an ongoing move toward more in-store signage to make store shoppers aware of the Web site, which already is prominently featured in monthly circulars.

And when it comes to the VHS vs. DVD sales issue, while videocassettes continue to outsell DVDs in Wal-Mart stores, at Walmart.com it's the other way around, Lin said.

"DVDs are a stronger category for us," she said.

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