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HIVE EXCLUSIVE: Will Video Be Recession Proof?

13 Apr, 2001 By: Joan Villa

The common wisdom that video rental's low price tag makes it recession-proof may get put to the test this year if the nation's currenteconomic slowdown accelerates into an erosion of consumer confidence that drives down retail spending.

Already, UCLA's Anderson Business School's economic forecast issued this month raises the probability of a recession to 90% by the end of the year. That means two consecutive quarters of negative growth, beginning atthe latest with the first quarter of 2002, the report says.

So far, the growth slowdown has hit businesses without filtering through to consumers, other than in battered stock portfolios and the announcement of layoffs at a number of companies. While consumers have cut back on some major purchases, analysts expect far more belt-tightening by the summer.

Research firm Alexander & Associates predicts consumers will curtail spending by the third quarter as their savings in the stock market dwindle, and income and jobs seem uncertain.

"This is not a consumer-led recession," explains president Bob Alexander, who has been assessing economic trends and marketing strategies to help studios maintain critical sellthrough sales this holiday season. "This is led by the technology sector and spreading into industry first, so we haven't really seen yet what consumers are going to do."

Video traditionally has been exempt from this kind of downturn, however, and many in the industry believe this year will be no exception. Cambridge Associates' president, analyst Dick Kelly, says that when economies from the United Kingdom to Japan have suffered, video has done well. "You could argue that people would look at the cost of a movie and say let's go down to Blockbuster and spend $4," he explains. "The video business, with respect toconsumer activity, is pretty much recession-proof given its good value."

A downturn "should play well for us as cheap entertainment," agrees KenGraffeo, senior v.p. of marketing for Universal Studios Home Video. With acore audience of families, video "is perfect for them," he says. "I would expect it would help retail quite a bit."

Meanwhile, more than 16 million DVD players have sold through to consumers, according to the industry-funded DVD Entertainment Group, and another 17 million are expected to ship to retailers by the end of the year.

Alexander predicts DVD hardware's relatively low price will help futureadoption. While consumers have dramatically slowed their purchase of computers, "in the consumer trade-off, DVD is favored," he says.

Some independent retailers project DVD rentals will be 50-50 with VHS late in the fall, and even behemoth Blockbuster has pegged DVD as high as 25% of rental revenues by the end of the year.

So far, "DVD has proven that consumers have an appetite for this format regardless of the economic condition," notes Laura Abele, marketing manager for New Line Home Video.

For 22-store J.C. Flicks based in Joliet, Ill., business in the first quarter was up 6% to 8% from last year and there are no signsof slowing. Owner Chuck Grachan largely credits DVD for the upturn and forrevitalizing interest in renting movies.

Undoubtedly, DVD has boosted video rental and sales so any downturn might hardly be felt by retailers, according to several industry pundits, notunlike the short recession of 1991-92, when video rental was on such an upward trajectory that no one in the industry noticed any change in the trend line. This time, however, Alexander believes there are more entertainment-delivery alternatives vying for consumer attention, andretailers should start stressing value "right away."

"The video stores are not going to be exempt [from this year's downturn] but I think wireless, cable, satellite and subscription services will be hit harder because they present the consumer with a big bill every month," he says.

While video has the low-cost advantage, studios and retailers "can't take for granted people are going open their wallet and buy whatever you put on the shelf. You're going to have to work harder for that sale."

In the fast-growing Montana county where Doug Aita's Tape King is located, effects of a downturn are so far "nonexistent," but he has learned the lesson that advertising pays. He plans to combat competition fromsatellite and other entertainment by utilizing "aggressive" radio ads that position Tape King as the "movie lovers" store, with better service andselection.

Advertising "has to be out there consistently," he says. "People are bombarded with so many messages, if you're not blowing your horn you're lost in a crowd."

At 10-store Massive Video outside of Boston, chief operating officer Michael Richards believes that most consumers, faced with less disposable income, will "spend their money where there's a lot of value -- at the local video store." However, if the economy continues to slide, Massive will look to reminding customers of both the value and the convenience of controlling what they watch. One technique: "a comparison chart on the wall of what itcosts to take a family of four to the movies or even a McDonald's dinner compared to renting a video," he offers.

Public chains have the added pressure of showing higher year-over-year comparative sales -- a feat that will be difficult this second quarter versus last year, which saw the release of high-renters Star Wars -- Episode I: ThePhantom Menace and The Sixth Sense.

In a recent earnings announcement, Hollywood Entertainment Corp. projected a drop of 4% to 5% in same-store sales for the springperiod.

Movie Gallery, the nation's third-largest rental chain, has "not elected to do anything out of the ordinary" to prepare for a bumpy economy, according to chief financial officer J. Steven Roy. He says the second quarter will be difficult: "The titles just aren't there."

"Time will tell whether we really are recession-proof or not," he adds.

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