Embracing Dvd

Spurred by record sales and rentals of DVD and VHS movies and music-and household penetration of DVD players expected to reach nearly 50% of U.S. homes by the end of 2002-retailers uniformly reported that video was a bright spot in the home-entertainment market.

DVD sales and rentals were on track to top $10.6 billion, a 50%-plus increase over the prior year, with VHS contributing another $6 billion, based on a consensus of industry sources. More than 19,000 titles were available for the holidays, with at least 10% being music DVDs.

Through October, figures released by the Consumer Electronics Assn. (CEA) showed year-to-date sales of DVD players were up 30% to nearly 11.8 million, with more than 13 million forecast through December.

This sampling of year-end highlights from leading retailers reinforces the positive impact of DVD on the bottom line, although it cuts both ways due to narrower margins. Retailers sampled include Blockbuster, Hollywood Video, Best Buy/Musicland Group, Circuit City, TWEC/FYE, Hastings Entertainment and Tower Records & Video.

MAKING SPACE

Along with its encouraging third-quarter and nine-month financial report, Blockbuster announced it had completed the retooling of its 4,412 company-operated U.S. stores. For the holidays, all locations featured clearly defined retail and rental sections, color-blocked in-store signage and enhanced product selection. The company also expanded existing games sections.

"Our mission is clear: to be the complete source for our customers for movies and games, in the format of their choice, rental or retail, new or used," says merchandising executive VP and chief concept officer Nick Shepherd. "We created this new layout and new look to make the in-store experience more convenient, more enjoyable and give the customer no reason to buy or shop anywhere else."

Hollywood Entertainment, owner of No. 2 video chain Hollywood Video (1,804 outlets), also had a good third quarter and first nine months through Sept. 30. Among reasons cited by founder Mark Wattles, who returned full-time as president in 2000, is a strategic relationship with leading "e-tailer" Amazon.com, linking over 1 million monthly visitors to the chain's Reel.com Web site. Also noted was an aggressive expansion of Game Crazy, launched in 1995 as a store-within-a-store. Another 101 departments were added from January-September, for a total of 169, with 185-plus projected by year end.

"Video sales year-to-date [through mid-November] are over 25% of total revenue, compared to 15% a year ago," observes TWEC merchandising and marketing executive VP Fred Fox. "While we've seen double-digit DVD increases, better-margin VHS is holding up, and the slowdown is only half what we anticipated."

The 870-store chain, including about 650 FYE outlets and 20 Saturday Matinees, plus Strawberries, Coconuts and Planet Music, is supporting DVD growth by shifting product to front of store and end-caps and has added DVD players and portable units. "We're already seeing a good return on investment," adds Fox.

DRIVING SALES

For the 145 Hastings Records, Video & Books outlets, purchasing VP Steve Hicks reports explosive growth in DVD and games. "Driven by DVD, video has exceeded our expectations in both sales and rentals," Hicks says.

Adds video operations director Victor Fuentes, "We've expanded DVDs at the expense of VHS rental space and have seen sales go from a 60/40 VHS ratio a year ago to an anticipated 70/30 DVD share through the holidays. In the same period, rentals have gone to a DVD share of 55/45 from a 70/30 VHS lead in 2001." The chain pursued an aggressive "missing titles" catalog program, promoted budget product and built on its base of used-CD experience to find huge sales of used DVDs.

"Moving DVD to the front of the store and increasing space allocation for DVD has seen video sales up 40% this year," says Tower's video sales VP, John Thrasher. "This past year, video represented about 25% of total business, compared to only 10% in 2001." He credits a number of new merchandising and marketing efforts, including full-line studio sales programs tied to megahits, such as Harry Potter and the Sorcerer's Stone and Lord of the Rings with Warner/New Line, Spider- Man and Black Hawk Down with Columbia TriStar, and a complete MGM catalog program sparked by the 7-DVD James Bond 007 boxed set. The chain also relaunched games in about 40 locations before the holidays and will add the others during the first quarter.

Total sales at the 516 domestic Best Buy stores increased 14% to $4.26 billion for the second quarter ended Aug. 31, reflecting the addition of 76 stores over the past 12 months and comparable store sales gains. The 3.4% comparable store sales decline to $380 million at Musicland Group outlets resulted from similar softness in music sales, partially offset by increases for lower-margin DVD software and video games. Included are 830 Sam Goody, 400 Suncoast, 76 Media Play and 16 Magnolia Hi-Fi outlets.

"Among the fastest-growing product categories at Best Buy stores were entertainment software, with continued double-digit sales gains in DVD movies, as well as video-game hardware and software," notes Enterprise Entertainment Group senior VP Joe Pagano, "which more than offset continued softness in prerecorded music sales. We take great notice of our customers' needs and have seen video sales about equal to music revenues this year, while music had about 60% of revenues in 2001."

Circuit City was the first national chain to eliminate VHS products earlier this year at its 609 superstores and 17 mall-based Express outlets, although the products are still available online. The completion of video-department remodels at 301 superstores, nine relocations and eight new outlets were cited by chairman, president and CEO W. Alan McCollough among key factors for a 10% increase to $6.76 billion for nine-month sales through Nov. 30. Comparable store sales gains in November were particularly encouraging, with a single-day sales record for the Friday after Thanksgiving. April-November earnings were not available at press time, but, through the first half ended Aug. 31, overall business generated a significantly narrower loss of $12.4 million, a 47% improvement from the prior year period. Spokesman Jim Babb confirms continuing strong sales in the more self-serve product selections, including traffic-driving-though lower-

margin-DVD software and video-game hardware, software and accessories, and entry-level DVD players.

LOOKING AHEAD

All retailers were excited about the commitment of home-video labels for top titles to kick off the new year. Included are XXX from Columbia TriStar on New Year's Eve and Barbershop from MGM on New Year's Day; Signs from Buena Vista, Jan. 7; The Bourne Identity from Universal on Jan. 21; and My Big Fat Greek Wedding from HBO/ Warner on Feb. 14.

For Hollywood Video, Wattles was targeting a bullish 10% increase for comparable fourth-quarter store sales. Looking ahead to fiscal 2003, the company is forecasting a rise in comparable-outlet revenues in the range of 12% to 14%.

"We see continual growth into the new year," TWEC's Fox says. "Our strategy is to have incremental space allocations to DVD and games, but not at the expense of music." He sees a big boost from the new listening and viewing-

station program that will see kiosks in all stores by March. "We're encoding video trailers just as fast as the studios provide them, and the Otry to buy' program really has built sales," he adds.

With Hastings video sales projected to hit 27% of total revenue by year-end, up from 24% a year ago, both Hicks and Fuentes are very enthused over the first-quarter release program. Home-video buyer Danny Smith was quoted (Billboard, Nov. 16, 2002) as saying, "We've been telling [studios] for years that it's important that we have [good] releases during [this] time."

Tower's Thrasher sees video continuing to thrive for the chain in the new year. "A DVD player was the electronic gift of choice for the holidays, and with over 50% [household] penetration very soon, that's a lot of new DVD buyers for the entire catalog," he observes.

For Best Buy, finance executive VP and CGO Darren Jackson says, "For the fiscal year ending March 31, based on Oeven' comparable- stores sales for the second half, we anticipate a 17% increase in total sales of $22.9 billion."

Adds Pagano, "With about half of homes without DVD, we see a lot of potential movie and music-buyers for continued growth." Based on encouraging third-quarter sales through November, Circuit City's McCollough adopted a cautious but optimistic outlook for the fourth quarter through Feb. 28, as well. And virtually all retailers expect another banner year for DVD in 2003.