Wal-Mart's Captain of Home Video16 Apr, 2002 By: Thomas K. Arnold
Wal-Mart's home video strategy, observers say, can be neatly summed up like this: Push DVD as hard as you can, and blow out cassettes as cheaply as possible, the rental market be damned.
If this strategy sounds a lot like Warner Home Video's, don't be surprised. Warner is “captain” of Wal-Mart's video category, and while the supplier doesn't run Wal-Mart's video departments as a turnkey operation, it certainly is more involved with video at Wal-Mart than any of its studio peers.
As part of the arrangement, in which Warner essentially serves as a consultant to Wal-Mart's video buyers, the supplier is privy to confidential sales data and other information Wal-Mart likes to hold close to the vest.
Indeed, Warner is charged with compiling and analyzing sales data and issuing advisory reports on what types of product to buy.
Warner executives expressly deny it, but rival studios say this gives Warner an inherent advantage. They point to the disproportionate DVD sales the supplier reportedly enjoyed last year thanks to DVD merchandisers Wal-Mart introduced several months before Warner became its category captain. Warner executives, however, say there's no connection, maintaining that the fixtures went up in the fall of 2000 and the category management decision wasn't even initiated until after the first of the year.
John Quinn, the Warner executive who wears the category captain's hat not just at Wal-Mart, but also at Kmart, said the Warner category management process is completely removed from day-to-day sales and marketing activities of Warner Home Video.
“In a simple statement, we assess consumer demand and then help align the product assortment to match that demand,” said Quinn, Warner Home Video's EVP of global supply chain management. “We help a retailer determine who is most likely to shop a particular store and what types of products they are most interested in.
“We spend a lot of time on what is the right mix of titles for each particular store. We jointly go through, with Wal-Mart, the decision process, and Wal-Mart then makes the final decision on the strategy and which products align with that strategy.”
So what's in it for Warner? “If a retailer is executing properly, growing the business as best he can, then we benefit by our natural market share,” Quinn said. “A rising tide raises all ships. Plus, we believe we have the best overall library, and we benefit from it being rationally managed at retail.”
No other studio executives would talk on the record about Warner's “consultancy.” One privately said the arrangement makes him uncomfortable, although he conceded, “It's a different way of doing business than we're used to, but to be honest we haven't noticed a negative impact on our business. Obviously, Wal-Mart is not going to do anything that could be detrimental to their sales, so they're not going to agree to keep something that's not moving just because it's from the category captain.”
Wal-Mart is also very open about what it and Warner come up with in relation to video. Last January, sources said, the chain hosted a meeting in Los Angeles with each of its video suppliers to communicate its category management findings and strategic plans for 2002.
The category captaincy arrangement originated with the food industry in the mid-1980s. It takes the concept of vendor management — in which a supplier manages his own particular product line, meeting certain criteria established by the retailer — one step further.
Category management focuses on a certain class of products, with the category captain — generally, but not always, the leading supplier — receiving from the retailer all information pertinent to the category, including sales, turnover, placement and promotions.
The captain each year conducts a comprehensive analysis of this information and works with the retailer to develop a strategic plan. This plan includes recommendations on which brands should go where, how much room to afford each brand, what new brands to bring in, what old brands to cut back on or dump and various promotional strategies. (It should be noted that video is not a branded category; it is a title-driven category, so this exact scenario does not apply in home video.)
The retailer has the ultimate decision-making authority, but according to the American Antitrust Institute essay “Divestiture and the Category Captain: New Considerations in Merger Remedies,” “retailers almost always accept the proposals of the category captains.”
According to the institute, the category captaincy system “facilitates exclusionary practices” because the category captain, in effect, serves as a gatekeeper to the retailer. “While the category captain is generally too sophisticated to urge the retailer to drop the No. 2 supplier,” the essay maintains, “there are many more subtle suggestions that can not only serve to improve the category captain's own positioning, but can raise rivals' costs or entirely exclude rivals from the retailer's shelves. A brand that is represented by a category captain therefore has a large advantage over the other brands in the category.”
Warner became Wal-Mart's first category captain for video in April 2001. The two had had a direct buying/selling relationship since 1995; Warner is also credited with helping steer Wal-Mart toward DVD and then helping the retailer stake a bigger claim in the burgeoning digital market through the placement of several budget DVD merchandisers in high-traffic aisles in the fall of 2000.
Warner executives won't discuss the category captaincy in detail or disclose how much it cost them, but sources say it works like this: Wal-Mart shares historical sales data with Warner, and Warner then analyzes this data to create an annual report. The two parties then meet and jointly develop a strategic “go forward” plan, focusing not on brands but on genre and product.
Say, for example, that the average Wal-Mart store has 16 linear feet allotted to video. Based on historical point-of-sale data and a demographic profile of the store's customers, Wal-Mart and Warner executives come up with a suitable mix of product for that particular store: out of, say, 1,000 video units, how many comedies, how many Westerns, how many Spanish-language titles, and so on.
Each studio then issues its own product recommendations, based on these guidelines and factoring in its own sales projections. At that point, the negotiations begin. Said one insider, “If I've got a title I think will sell 5,000 units in one week and I come in with a replacement I believe will sell 15,000 units, Wal-Mart might say, ‘We don't think it will do 15,000, but it might do 10,000. However, we've got another title from another studio we think will do 12,000.’
Wal-Mart executives would not comment for this story. But sources said the company was a relative latecomer to the category captain system, noting that Warner became category captain at Kmart three-and-a-half years ago.
Wal-Mart and the other mass merchants used to buy videos from rackjobbers. In 1995, the big discount chains began buying directly from the studios and gradually got out of their rackjobbing deals with Handleman Co., Lieberman Co. and others. They began managing their own video departments.
In the last few years, the big discount chains have begun moving toward category management in the hope they would benefit from partnering with someone familiar “with the ins and outs of the product category,” according to analyst Tom Adams of Adams Media Research. “Given the intricacies of the DVD transition in the video category,” Adams said, “it was good timing.”