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Movie rentals capture supermarket spotlight.

Supermarket sections for videocassette movie rentals are spreading like wildfire around the country. Almost all the major chains are at least testing them, and many independents are realizing that there's no reason they should be left out.

As of this writing, some of the large organizations that have progressed beyond the testing stage include: Safeway, Kroger, Lucky, Winn-Dixie, ShopRite (New Jersey), Pathmark, Wegmans, Dominick's, H.E. Butt, King Soopers, Publix, Albertson's, Alpha Beta, Schnuck's, Randall's Shaw's and Purity Supreme. The sections are strongest in the Houston and Los Angeles markets, with Dallas, Atlanta and Minneapolis not far behind.

So far, the sections appear to be most successful in larger stores with service counters and in stores of all sizes in rural areas. Conversely, there's little action so far in space-pressed supers in center-city locations where there is also heavy competition from video speciality outlets.

The bottom line is that movie rentals are a nice piece of extra business, with dollar volume ranging between $300 a week and $1,500 a week and gross profits averaging around 35% of rental income in serviced operations.

But sales and profits are only part of the inviting picture. Other positive points include:

* Consumer impact. Prerecorded videocassettes are new, exciting and hot. Most store operators are alert to such products and services if they fit supermarket requirements. The point is to be "with it" as part of the store image.

* One-stop shopping. While far from being a regular on the shopping list, movie rental is on the minds of many shoppers. Providing the rental service aids the one-stop shopping image and gives stores something of a competitive advantage.

* Two-stop visits. Like photo finishing and carpet cleaning equipment rentals, movie rentals require return visits. This solidified shopping patterns and encourages additional purchases.

* Personal contact. The interplay between employees and consumers with rentals--especially on entertainment items like movies--provides a contact opportunity that helps personalize the store.

* The affect on other lines and services. Movie rentals help strengthen the supermarket appeal of high ticket blank videocassette tapes, a big business in their own right. Blank tapes are often displayed in or near the prerecorded tapes. In a larger sense, movie rentals elevate the importance of the courtesy counter/service desk. The addition of the new line makes the service counter a more viable merchandising area, enabling it to support the addition or expansion of such product lines as cameras, costume jewelry, watches, appliances and photo finishing.

* Credit card purchases. Many movie rental programs make use of credit cards, which serve as secured deposits. With customers becoming more accustomed to using credit cards in supermarkets, they may be encouraged to use them for other high ticket non-foods items.

Gathering Momentum

Although movie rentals began in supermarkets about four years ago, they achieved little success until a number of factors changed the market.

First and foremost, purchases of videocassette recorders and playing equipment have skyrocketed as the prices of the machines have plummetted. New easy-to-install recording machines are available for less than $300 and prices are expected to decline even further next year.

At year end about 20% of all households with televisions will have videocassette equipment, up from 3% two years ago. And many industry sources believe it will reach nearly 50%, or 41.5 million households, by the end of 1987. Recording and playing machines are selling at an average rate of more than half a million units a month. With machine sales booming, prerecorded videocassettes have become a $1 billion a year business, with about 90% brought in by rentals, according to the Video Software Dealers' Association.

But even these optimistic forecasts for the video tape equipment and cassette business may be conservative. With supermarkets in the act, a large part of the market is being exposed to the new entertainment medium on a weekly basis. The player machine rental (usually part of the tape rental program) becomes, in effect, a sampling device. Plus, the excitement of seeing the films available may arouse the curiosity of large numbers of people who were not interested in videocassette recording or playing before.

The marketing of movie rental programs has become much more professional, providing a second factor favoring the market.

Paperwork has been streamlined, cutting customer waiting time and store labor costs. Deposits, a stumbling block in the past, have been virtually eliminated. Merchandising and promotional techniques have taken giant steps.

A third factor helping the rental business has been the new generation of better capitalized entrepreneurs who have been attracted to the video business. They offer a variety of practical programs designed for supermarkets.

There are, however, some cautionary notes that must be sounded.

competition for the movie rental business has turned fierce in many localities. This condition may worsen as specialty stores grow in number (already there are about 13,000 of them) and rental sources spread to all kinds of outlets besides supermarkets--drugstores, convenience stores, book stores, promotional department stores, movie theater lobbies, public libraries, hardware stores and who knows where else. The spread of full-time movie channels on cable television may also cool rentals.

As supermarket operators well know, overstoring brings with it a decline in sales per outlet and also tends to force price reductions, which erode profit percent margins if not profit dollars. This has already happened in some areas. In parts of New Jersey, for example, the one-day rental price has dropped to $1.99 from $2.50 as Pathmark and ShopRite make movie rental a pricing feature.

Comparing video games with movie rentals brings cries of rebuke. "They both employ video screens, but the comparison stops there," says Dan Griffith, president of Video Software, Los Angeles. "We're talking about family usage of devices costing up to $600, not a kid popping quarters to shoot at spaceships."

"There's no real analogy," says Bob Wunderle of Supermarkets General, operator of Pathmark, Woodbridge, N.J. "The video games always had an element of loitering and disreputability about them. A better comparison is with carpet cleaning rental, except that with video tapes the rental is for recreation, not work."

Ray Martin of Tom Thumb, Dallas, believes that there will "definitely" be a shakeout of tape rental outlets, but that well set up and staffed supermarkets "will come out on top." Unlike coin-operated games, movie rentals appeal to the supermarket's basic customers, he says, and "supers have the consistent traffic" that other types of outlets lack.

The idea that there may be a fad element in the whole business is worrisome to some. Others just shrug their shoulders. A chain executive's typical response is, "I think the bottom could drop out in a few years, but so what? There's no big investment involved for us, so we just tell our supplier to take it out. Meanwhile, customers love the service and it's making money. That's not too hard to take."

Even if the worst happens and sales and profits become marginal, movie rental will still be a service that brings people back to the store, says a GM director in Houston.

Greg Davies, who oversees movie rentals in four Dierberg stores in St. Louis, believes as many non-foods compatriots do, that the business is long-term. He sees any faddish nature being overcome by the constantly changing variety of material and by the growth in sales of videocassette recorders and players to the point they may soon be as common in homes as TV.

An obstructive element about the movie rental business is that it is highly capital intensive. With tapes costing about $50 each, jobbers supplying stores with a consignment program, fixture and materials have investments ranging from $8,000 to $20,000 per store. Some retailers with multiple stores have been unable to find a reliable distributor jobber big enough to start and maintain a consignment program.

A chain with a dozen stores offering movie tapes found itself left high and dry when the jobber decided to pull out. The supplier, like many others, works off a base from his own specialty stores and found he didn't have the capital to take care of both his stores' needs and the supermarkets.'

Ron Eisenberg, president of East Texas Periodicals, recalls how he pulled out of California despite a successful operation with two chains. His company, which was already supplying more than 400 supers and 1,000 other outlets in seven states, found that any move in depth in California would have taken more capital than it was prepared to commit, considering the needs of existing customers and growth in more contiguous areas.

The big investment needed has also deterred conventional non-foods service merchandisers and grocery wholesaler non-foods divisions from entering the field even though executives with organizations representing these two groups say there is a "certain amount" of interest. One wholesaler executive who did start a program found the investment began to get "scary" and pulled out. He and several others are seeking to find qualified movie rental jobbers for programs in member stores on a centralized billing basis.

There are other complications. Among them are: the multiple types of videocassette systems, which are incompatible and require different types of tapes and playing equipment; paperwork at the service desk can strain operations and hike labor costs; stockouts of the most-wanted films are inevitable and a source of irritation. Yet, considering all the advantages, supermarkets are plunging ahead.

Some Ins & Outs of TV Movie Rental

'Renting out prerecorded videotape cassettes is not like selling a can of beans." That's a favorite expression of rental suppliers. They point out that movie rental is a perishables business, requiring special abilities in buying, handling, operations and merchandising that often deviate from common supermarket practice.

The merchandise itself is very costly, and right off the bat that creates a situation supermarkets find hard to swallow: the inevitable out-of-stock on the items most in demand.

When a hit movie first becomes available for cassette rental, there's usually a consumer rush that depletes the few units the store or supplier can afford to stock. With tapes costing about $50 each, how many pieces can a store have on hand, especially when demand will simmer down in a few weeks and later may die off entirely?

One "answer" to stockouts of best sellers is to carry a wide variety of other popular tapes so that disappointed customers have plenty of good alternative choices. Some stores buying their own tapes will risk carrying as many as 10 units of a high rental movie to at least mitigate the situation. Attempts are also being made to find a practical system for taking reservations and alerting customers when the wanted tape is in.

The movie rental business heavily concentrates on releases of box office favorites. But there is a solid product mix including children's films (a very popular line in many stores), classics, music video and a growing interest in how-to and educational tapes.

While some supermarket supplier programs limit inventory to the top 40 to 60 best movies, a typical initial offering is between 150 and 300 titles with multiple copies of the most wanted films. In larger stores, the selection tends to build up to 600 or more titles.

Arguing against a best-seller-only inventory, Ron Eisenberg of East Texas Periodicals, a leading supplier, takes this view: "If you're doing any business at all you'll find that with 50 titles you'll be blitzed every weekend, the cupboard will be bare and customers will be disappointed." He says his research shows that "most people do not come in with a specific title fixed in mind. If they're inclined toward 'Raiders of the Lost Ark' (still a good seller) and it's out, the chances are they'll go for something else. You need a big selection to tempt them."

One temptation supermarkets do not deal with is X-rated movies. They're definitely out of bounds and some stores do not carry R-rated films or even some PG flicks they deem unsuitable for their area or policy.

Demand appears centered among the middle income and high-middle income population. The reaction of low-income families has not been explored much yet chiefly because stores inn poorer areas tend to be too small for tape displays and administration through service desks. Yet at least one experienced rental supplier thinks there's a lot of potential there. "I know that low-income people rent tapes like crazy in video stores; they would in supermarkets, too, if they had a chance," he says.

A supplier in Texas says his business is very strong in supermarkets with heavy Hispanic trade and in areas where "people certainly are not in the higher-income brackets, but are good food store customers and apparently are movie and TV addicts like everybody else."

In terms of age groups, the accent for rentals is on up-to-early middle-aged adults with children, according to the few suppliers who have made informal surveys. Elderly people seem disinclined toward movie rentals, probably reflecting a distrust in new things or perhaps feeling they can't cope with the hookup. "That's a shame," says Joe Wright of Video Enterprises in Tampa, Florida. "They're perfect customers in terms of having leisure time available. I think there's an educational problem here that will be solved eventually."

Stores in rural areas have a particularly receptive audience, because of less competition from other outlets. Richard Matson, general manager of Hudson's in Chiefland, Fla., has several stores in small towns that are doing a good business in movie rentals. He says, "Small-town people are starving for entertainment. Many towns do not have a movie theater, much less a movie rental store, and there aren't restaurants and other places to go to."

In Hersher, III., a town of 1,300, Hersher IGA does about $300 a week in rentals in a store of 7,000 square feet. Operator Lyle Giles, who rents movies at $5 a day, says he wishes "groceries would be as profitable."

Men alone and men and women shopping together have been found to be good rental customers as are parents shopping with children. Supermarket suppliers say that over 50% of rental customers rent two or more tapes at a time and that it's not unusual for at least one of the tapes to be for the children.

Seasonality is a factor. Most specialists say rentals are best in cold weather months, starting with September. Others say summer is a good time for rentals made for youngsters, including high school and college students on their summer vacations. The summer inventory mix can reflect this with more movies of the teen-age thriller type or with musicals like "Annie."

Knowing what titles to purchase and in what quantities is a trickly business even for experienced buyers.

Craig Odanovich of Odonavision in Corpus Christi, Texas, says films' track records in the theaters are available and helpful, but not always the last word. "We found 'Terms of Endearment' wasn't as big a rental property as we had thought," he says. "Perhaps most people had already seen it, or it appeals to an older, limited audience. On the other hand, we did well with 'Road Warrior,' which wasn't a box office smash."

Another supplier suggests that movies in the second tier of box-office success may do well in rental by attracting people who weren't inclined to payfor it at the theater but were interested in seeing it at the lower rental price and in the convenience of their home. It's believed that a lot of rentals are for group viewing--with family or friends in a home setting where popcorn and liquid refreshment are plentiful and cheap.

Most suppliers tend to "buy light," knowking they can replenish quickly if needed, and they favor films with a broad appeal. They also find that there can be wide variations between individual stores in what rents best. Rotation of titles between stores has been found necessary to maintain interest, and newly released titles are entered at the rate of about two a week--more for larger installations. Keeping good records is a must for good inventory control.

Yet another complication in movie rentals is that the two leading types of video-cassette recorders/players, the Beta and VHS formats, do not accept the other's tapes. VHS accounts for about 75% of the market, but most suppliers carry both kinds of tapes.

While nearly 20% of homes have videocassete recorders (VCRs), another 80% do not. This huge share of the population obviously will not rent tapes if they can't rent the necessary attachment that enables them to show the tape on their TV screen.

For this reason, most stores offering tapes also have some VCR equipment on hand for rental, too. Some stores eschew rental of VCR machines because they are expensive to purchase ($350 and up for models suitable for heavy-duty use), can suffer breakdowns or damage, occupy space and complicate the rental process.

Bruce Davidson of Rent A Movie Machine says that while offering machines is not "vital" in tape rental, it is desirable. He believes most stores should have about four available and that with three rentals per machine per week, the return on investment eventually becomes satisfactory. He estimates that up to 20% of tape rentals results from machine rentals.

Other suppliers say that having equipment for rental is particularly important for tape-renting is particularly important for tape-renting stores in rural and low-income areas where customers are less likely to own their own reorders because of the cost. A Kroger merchandiser says he thinks having VCRs for rental is so important that many of his stores have 10 on hand for the weekend rush.

Dale Lightcap of Dillon's, Hutchinson, Kan., says 20 VCRs, purchased by the company, got the movie rental program off to flying start in the chain's first installation. He says, "Machines are to tapes as razors are to blades"--that is, you can't sell the consumed product without the equipment (disposable razors presumably are an exception). He adds that "the way things are going," the machines will be paid for in less than a year.

Phil Curless of Day & Palin IGA, Lewistown, Ill., says the company's four stores, which range up to only 15,000 square feet, have from five to 15 VCRs and that "since they are always out, we got our money back in less then six months."

Supermarket rental rates for VCRs range from $5 a day (the price at Hannaford Bros. rental installations in Maine) to as high as $13.95 on weekends. (Many stores have a $3 or $4 differential between weekday and weekend rates.) To encourage non-VCR owning customers "to get started" in cassette movie watching, some stores are offering one free tape rental with each rental of the equipment.

Several merchandisers point out the ease of hooking up VCR equipment, but convincing customers of this is another matter. That's why low machine rental prices, good education materials, and, perhaps, store demonstrations are considered important. Once customers try it, suppliers say, "they'll be back for more." Breaking that first-time doubt is the key.

Problems with machine durability have been alleviated thanks to new VCR and player-only equipment and cases that have been specially designed for the rental market. Yet abuse can damage them, so their durability is of top importance if excessive downtime is to be avoided. As more and more customers buy their own equipment, the whole issue about equipment will dissipate. Some feel the demand for machine rentals will drop sharply within three or even two years.
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Publication:Progressive Grocer
Date:Nov 1, 1984
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