DVDs Bail Out Small Video Outlets

Small video stores fighting an uphill battle against industry giants such as Blockbuster Inc. are regaining some ground by renting and selling DVDs, a product for which the large chains have shown muted enthusiasm.

Retailers who rolled the dice and invested early in DVD are now cashing in as the installed base for players of the five-inch video disc has exploded, growing from 400,000 players to 7 million in just three years, according to the DVD Entertainment Group.

“I started out three years ago with four DVDs in my store and back then my customers thought they were some kind of new CD,” said Steven Disney, owner of Screenplay Video in the Atlanta suburb of Lilburn, Ga. “Now, I have more than 2,500 titles and DVD accounts for close to 20% of my total rentals.”

DVD was envisioned by studios as a new sell-through product to help revitalize a mature video market. VHS sales had flattened after several years of double-digit growth, and video sales as well as the rental model was under assault from competing delivery systems such as direct-broadcast satellite and multichannel cable offerings.

But while big chains such as Best Buy and Musicland quickly established themselves as leaders in DVD sales, independent video specialists did something the studios weren’t expecting: They began renting the discs, much like they did with VHS in the early days of home video.

“I never treated it as a secondary product. I created new fixtures and new sections for it when it first came out,” said Steve Gabor, owner of two-store Odyssey Video in Los Angeles. “Now, I have 3,000 titles and one-third of my stores are dedicated to DVD.”

Gabor, who started out as a music retailer in 1967, watched that industry move from vinyl to tape to compact disc in the space of 20 years. Those transitions, he says, moved at a glacial pace compared with DVD.

Although analysts aren’t predicting VHS will become extinct any time soon, they expect it to become secondary to DVD in both rental and sales by the middle of the decade.

“We’re looking at 2004 as the point when sell-through DVD will surpass VHS, and rentals will probably do the same a year or two later,” said Derek Baine, an analyst with Paul Kagan Associates in Carmel. “We project that by the end of 2002, there will be 27 million DVD players in American households,” Baine said. “And by then, DVD will represent close to half of the rental market.”

The early success small retailers have enjoyed with DVD is due in part to the fact Blockbuster, the biggest video rental chain in the world, has been slow to embrace it. Although the 4,800-store chain has succeeded in stockpiling new VHS releases, guaranteeing rentals and dominating the new-release market, Blockbuster only dabbled with DVD in small test markets for two years before rolling it out nationally in September 1999.

Retailers were quick to pick up on this gap, particularly those in direct competition with Blockbuster and weren’t faring too well.

“I’ve had it in my store from day one and now it accounts for about 8% of my total revenue,” said Dave Stevenson, whose two-store Big Picture Video chain in Liverpool, N.Y., recently lost its two other stores to direct competition from Blockbuster. “It’s now my third-biggest revenue source next to new releases and adult product. It even generates more money now than my video games.”

DVD is also an inexpensive product that provides a quick return on investment. Unlike traditional VHS, which has two-tiered pricing in which rental-priced titles retail for more than $100, the cost of DVD has remained around $20 to $25.

That price allows small stores to buy deep. “I’ve always brought in lots of copies of the big hits and that’s helped me build my business,” said Tom Paine, owner of two-store Video Factory in Woodinville, Wash. “When ‘The Green Mile’ came out recently I bought 17 copies on DVD because they were so affordable.”

The low price has encouraged retailers to branch out and get customers into the habit of buying and collecting. “We have a huge section of new DVDs we’re selling for $9.95,” Gabor said. “They’re mostly old catalog and adult titles, but our sales are very high because nobody else around here is doing this.”

“I wouldn’t go so far as to say DVD was a savior for me but, at the very least, it provided a huge boost because it brought back an energy and excitement into our business,” Disney said.

*

Doug Desjardins is a senior editor with Video Store Magazine.