COMPANY TOWN : Supermarkets Are Finding an Audience for Video Rental : Southern California Chains Enter One of Region’s Most Competitive Businesses

Barbara Carter, mother of two, steered her grocery-laden cart into the Ralphs video rental department.

“This place is always busy,” she said, checking out the other early-evening shoppers looking for the latest hits. “It really works for working parents; we’re always looking for one-stop shopping.”

In-store video rental departments like the one in the Irvine Ralphs are becoming more common in Southern California supermarkets, adding a potent new competitor for the local share of the $10-billion-a-year U.S. video rental business.

After testing video departments in Irvine and three other Los Angeles-area stores, Ralphs, the largest grocery company in Southern California, expects to open 20 more store-within-a-store video departments soon.

Smith’s and Albertson’s have also shown an interest in video rental.

“They’re going to take some business away from the video specialty stores--it has to happen,” said Bob Prudhomme, vice president of distribution and sales for Turner Home Entertainment. “I think they will also grow the video market.”

In other parts of the country, particularly the Midwest, supermarkets are major players in video. According to Adams Media Research, a Carmel-based consulting firm, supermarkets account for 18% of the industry’s rental revenues.

In fact, while video rental revenues are flattening out for the industry as a whole, supermarkets are the one outlet continuing to gain market share, analysts say.

Unlike free-standing video specialty stores, grocers have a built-in customer base. Industry studies say people visit their local market an average of 2 1/2 times a week, which makes video returns more convenient.

But video rental has been almost nonexistent in Southland supermarkets.

“Southern California is way behind,” said Dan Alaimo, who covers the video industry for Supermarket News, a trade publication.

Most Southern California grocers have been content to occasionally set up cardboard display cases offering current family hits and Disney films for purchase, taking advantage of the recent boom in tape sales. The number of videos sold in the United States has almost doubled in the last three years.

Video rental is a much more difficult proposition for grocers, requiring a commitment of floor space to stock titles, savvy management and labor to process transactions.

Southland supermarket chains have occasionally dabbled in video rental, but they’ve been reluctant to commit to it. Vons tried it a few years ago and then pulled out. Lucky has only six rental departments, all in semirural areas.

When evaluating video rental, the major Southern California chains, which declined to comment for this article, saw a market flooded with video outlets, industry observers say. For example, Longs Drug Stores has rental departments in more than 100 stores, most offering rentals for 99 cents a day.

The area is also packed with video specialty stores. In addition to an abundance of small, independent mom-and-pop stores, Blockbuster and Wherehouse have well-stocked rental stores in seemingly every strip mall.

“Southern California is drenched with specialty stores,” said Tom Adams, president of Adams Media Research. “It’s always been a tough market for anyone competing with those two chains.”

Older, smaller markets were unwilling to devote precious floor space to the enterprise.

“They haven’t had enough room to do it right,” said Gregg Wright, president of Video III, a Utah-based distributor that supplies video to several supermarket chains. “If you don’t have enough room for 1,000 titles, face-out, then you’re not going to have success with it.”

The unions representing grocery clerks have also been a stumbling block. In most configurations, union employees are called upon to work video counters for substantially lower wages.

“It’s just impossible to run a video department paying more than $5 or $6 an hour” to clerks, said Ron Berger, president of Rentrak Corp., an Oregon-based distributor and parent company of Supermarket Video, which is operating the video departments in Ralphs.

Supermarket Video is negotiating with local chapters of the United Food and Commercial Workers union, according to Sean Harrigan, director of the UFCW Region 8’s Western division. Smith’s and Albertson’s, which don’t lease out their video operations, are running their departments using general-merchandise clerks under the existing union contract, he said.

Ralphs has not set a time frame for its video expansion plans, but it is evaluating stores to determine if they can spare the space, according to Steve Berns, president of Supermarket Video.

The typical Ralphs rental department is a fully enclosed area of about 1,100 square feet, stocking about 4,000 titles.

Grocers these days are moving to diversify because of competition. According to a recent study by Management Horizons, a consulting division of Price Waterhouse, grocery supercenters, primarily mass merchants such as Wal-Mart, will grab a $65-billion share of food sales by 2005.

A typical Smith’s market includes a bank, photo department, bakery, dry cleaner and copying center, as well as a video rental department.

Salt Lake City-based Smith’s entered the Southern California market in 1991, vowing to open 60 stores by 1995. However, it’s held at 34 stores, and executives are reportedly considering pulling out of Southern California, citing competition and the region’s continued economic woes.

Like Ralphs, Smith’s offers video customers a store-within-a-store concept, with a security entrance and separate service counter.

Albertson’s video departments are smaller. Usually the sections are in front of the store, not enclosed and customers check out videos from a service counter.

The Boise, Idaho-based chain offers rental departments in 83 of its Southern California stores. It has been focusing its video expansion on remodeling existing stores.

Alberston’s plans to continue to add departments “where space permits as stores are remodeled,” according to a company statement.

In addition to convenience, Alberston’s, Ralphs and Smith’s can offer customers lower prices than video specialty stores. Some supermarket chains rent videos for as little as 49 cents, prompting other retailers to complain about unfair trade practices.

On average, supermarkets around the country rent movies for $2.25 a night, compared with $2.72 in video specialty stores, according to Adams Media Research.

Blockbuster, the country’s largest video chain, with 230 outlets in Southern California, rents movies for $3.25 a night.

“We have confronted every kind of competition and prospered,” Blockbuster spokesman Wally Knief said. “If there is an impact [from the supermarkets], it is going to be felt at the smaller-end stores.”

“Yes, [supermarkets] will impact me,” said J.R. Rushlow, general manager of Video Choice, a nine-store chain based in Torrance. “But eventually customers who want to be entertained and frequent renters will come back to us because they appreciate our service and movie knowledge.”