Fast-Forward Market : Video Stores--a Record Explosion

Lyle Schatz readily admits it: “I’m a vidiot.”

He rents at least 10 movies on videotape a week. He liked videotapes so much he started a video service business. And he lives in video heaven--Los Angeles’ Westside.

On one particular Saturday, the prime day for video rentals, Schatz was visiting VideoRave, a small, independent video specialty store in Westwood. Within a mile’s drive, video titles could be scanned at a Wherehouse record and video “superstore” that carries thousands of tapes, a Music Plus superstore, a Leo’s Stereo consumer electronics outlet and a Vons supermarket. And, if Schatz had felt like staying home, the new Video Valet service could have delivered cassettes right to his doorstep.

Videos are being hawked just about everywhere. Gasoline stations sell and rent them; so do book shops and movie theaters. Racks of videos are showing up in some of the strangest places: At a post office on Maui, at a tackle shop on southern Puget Sound in Washington.

Cities Nearly Saturated

Some areas--cities such as Los Angeles, Chicago, New York and parts of the Pacific Northwest--are nearly saturated with video stores, but even small towns are seeing the video explosion.

Consider Madrid, N.M., and environs, population about 250 and VCRs numbering about 10 at most. Greg Neutra runs Playing Hard to Get in the office of an abandoned coal mine in the New Mexico desert town, surviving primarily on a mail-order business focusing on music videos. “I don’t have a whole lot of foot traffic here to support me,” he said.

For consumers such as Schatz, the proliferation of video stores has brought better selection and lower prices.

But for the independent business person who pioneered the industry, it has meant headaches and the specter of business failure.

Struggle to Survive

The video store has been the corner grocery store of the 1980s, creating business opportunities for cash-short entrepreneurs. But just as relatively few independent grocers remain, some experts contend, the video industry is headed for a time when small operators must struggle to survive.

Video superstores and large chains of franchised video shops are bringing massive financial muscle to the market. The new, tougher competition is raising the ante, forcing small video-store owners to invest more money in their inventories of tapes, and to devise imaginative strategies for success.

“Each time I see a new store open, I just sigh,” said Candy Piscitelli, co-owner of Tujunga Video. Piscitelli must vie for business with three other stores within two blocks in a neighborhood where her shop was one of the first when it opened in mid-1984.

Richard Sohn, owner of Video Fox in Eagle Rock, a community in Northeast Los Angeles, said, “It’s getting tougher and tougher.” Eight other stores have opened nearby since Sohn started Video Fox a year ago. “Business is not as good as I expected,” he said.

So far, however, there has been no slaughter of small video stores. Some experts, such as Paul Eisele of Fairfield Group, a marketing consultant in Darien, Conn., contend that a shakeout has been under way for the past three years, eliminating the weak video stores while others have opened up. Still, the failures could increase.

Small operators aren’t likely “to capsize like little sailboats in a storm,” Eisele said. “It could be the death knell. . . . But it remains to be seen whether these new stores, which have a limited amount of shelf space for video, can meet their profit objectives.”

As recently as 1981, stores that rent and sell videotapes were a rarity. Die-hard customers drove miles to peruse a small collection of cassettes. But video stores blossomed as video enthusiasts multiplied at an incredible rate. About 30% of the nation’s TV-watching households now own videocassette recorders, which were introduced only 11 years ago. Fast-forward to 1990, and VCRs will be in an estimated 70% to 80% of the households.

There are about 30,000 video stores today, contrasted with 7,000 stores in mid-1983, Fairfield Group calculates. The stores had estimated rental and retail revenues of $4.5 billion in 1985, up from $1.05 billion in 1983.

Of the 30,000 stores, about 20,000 are video specialty stores. The rest are a wide range of food, drug and convenience stores and shops that carry other products, a category that has expanded rapidly in the past 18 months.

‘Stores Will Diminish’

But the pace of video store openings has slowed. The recent poll by Fairfield found that 9% of the stores surveyed had been open less than one year, contrasted with 14% in 1985. The number of VCRs in 1990 will support about 44,000 video stores, which leaves some room for growth but not the explosive kind seen so far, Eisele estimated.

“Our best guess is that the number of dedicated video specialty stores will diminish, but they will be bigger stores,” he said. “It could be conceivable that the number of good video stores could become like the number of good record stores and good book stores, and there are about 10,000 each of them.”

Entertainment industry consultant Stephen Roberts, former president of 20th Century Fox Telecommunications, noted that video specialty stores’ “percentage of the pie will get reduced, but the pie will be growing” as more homes install VCRs and the awareness of video products increases.

More consumers are becoming video enthusiasts because the price of videocassette recorders has dropped sharply. The average wholesale value of a VCR is about $390, contrasted with about $830 in 1981, according to the Electronic Industries Assn. In addition, more prerecorded tapes are available.

Although some are skeptical, the price of buying tapes also could decline. The price breakthrough may have been the wildly successful release last Christmas of the “Beverly Hills Cop” videocassette at $29.95 by Paramount Home Video, the industry leader in price-cutting since 1982. In comparison, RCA/Columbia Pictures Home Video released the “Ghostbusters” videotape at $79.95 at about the same time, and some analysts contend that many of the major studios are resisting price-cutting for popular new titles.

As the competition among video rental stores increases, the per-day rental price for a videotape has dropped below $1 at some stores but can range as high as $5 at others where discounts are only offered to those who buy club memberships. Five years ago, renting a tape for $8 or $10 a day wasn’t unusual, while X-rated tapes could fetch $20.

The competition is “absolutely” better for the consumer because of improved selection and price, said Darryl Solomon, president of VideoRave in Westwood. But Solomon contended that prices “are getting to a ridiculous level” and driving some store owners out of business.

All sorts of retailers have jumped into video in the past two years, but the effect of the new competition on small video stores varies.

Instead of renting videotapes, mass merchandisers and book stores generally sell tapes--usually low-priced, how-to videos, classics not covered by copyright and children’s tapes. Video specialty stores make the bulk of their money through tape rentals, not sales.

Biggest Threat

The biggest threat, experts say, may come from supermarkets, convenience stores and drug stores, which offer convenience but little selection, and video superstores, which have huge inventories of tapes but often fall short in customer service.

According to Progressive Grocer, a trade publication, video rentals could be found in 27%, or about 8,200, of the nation’s grocery stores last year, contrasted with only 12%, or 3,600, in 1984.

El Monte-based Vons started renting tapes a little more than two years ago “because we believe it’s a service to our customers who make high-frequency trips to the supermarket,” said chief executive Roger Stangeland. The chain rents tapes in 59 of its 179 stores. “The demand is clearly there.”

But Vons and other grocery chains have learned lessons that video specialty stores learned some time ago: Renting means inventory problems. Strong consumer demand for a film may last only 90 or 120 days. Stangeland said Vons is investigating new technologies, such as video vending machines, that would allow the company to offer tapes for rent in its stores without actually having to manage the inventory.

Low rental prices also mean lower profits for retailers. “We don’t expect it will become a high-margin business,” Stangeland said.

Elsewhere, Southland Corp. is introducing videotape rentals into some of its nearly 7,500 7-Eleven stores. About 1,500 stores, including only a few dozen in California, rent videos, and the company is expanding the program “slowly and cautiously,” a spokesman said.

Circle K Corp. plans to put its “QuickFlick” video rental program in about 75% of its nearly 3,300 convenience stores by April. Circle K, with overall revenues of $2.1 billion, expects video rentals to generate $25 million in the first year of operation.

Among major record store chains, Wherehouse Entertainment was one of the first to recognize the potential of video. In 1983, the Gardena company began supplementing its records and cassettes with videotapes and computer software. Now, according to chief executive Louis Kwiker, Wherehouse stands as the largest renter of video movies in the nation. Videos are rented in 108 of its 157 stores.

Wherehouse has begun specializing in “superstores,” with thousands of titles in each store. The company doesn’t carry videos in its smaller stores in enclosed malls because returns are inconvenient for customers, Kwiker said.

Small stores with good locations can offer convenience, but they can’t match the selection that Wherehouse and other large stores boast, said Ron Rotter, an analyst with Seidler Amdec Securities in Los Angeles.

“All things being equal, most people would rather deal with the mom-and-pop store,” Rotter said. “But all things aren’t equal and the larger stores, because of purchasing power and promotional power, are able to offer more.”

To Ron Berger, president of the National Video chain, “franchising is the only solution” for the small entrepreneur who lacks the financial muscle and expertise to compete with the big players.

Unusual Variations

National Video, the nation’s largest franchise video chain with slightly more than 800 participating stores, offers training, store design and advertising support for investments ranging from $39,500 for stores inside supermarkets to $350,000 for superstores in major cities, Berger said.

The video business has attracted a number of unusual variations on the standard video specialty store, all of which mean still more competition for the independent video retailer.

Employees of some firms are finding that they can rent a videotape at work and return it either to a vending machine or to a counter in an employee services department.

Direct Photo of Whittier is experimenting with video rentals at two major companies where it also offers photo processing.

Home Delivery

“The key to the whole thing is they don’t have to take it back to the video store,” said owner Pete Folliott. “Everybody has to go to work.”

Some videophiles demand even higher levels of convenience: Home delivery. To pamper that segment of the market, Video Valet opened its Westwood doors in April and began motorcycle delivery on Los Angeles’ Westside for annual fees running from $35 (not including tape rentals) to $800 (unlimited tape use).

“There’s a segment of the population that really does watch a lot of movies and for them it’s a hell of a bargain,” said Barie McCurry, who owns the service with partner Jay Marshall Knight.

“There are others who prefer the privacy of it--celebrities and people like that who don’t want to go to the video store,” McCurry said.

A not-so-obvious combination might be the movie theater and the video store, and yet these seemingly competing forms of delivering entertainment are teaming up in lobbies across the country.

Theater Gets Into Act

At the independent Rainbow Theater in Tujunga, owner Mitchell Thomas noticed that some of his regulars were dropping in on Saturday nights to buy a tub of popcorn but weren’t visiting the big screen. It turned out they were renting videos from a crop of new stores in the neighborhood, and Thomas felt the need to retaliate by opening Videobow in his lobby.

“I really love my Rainbow Theatre and I don’t want to see it die,” said Thomas, who sells club memberships that push free and discount tape rentals and trips to the big screen every month. “Videocassettes scare me and I saw it as a good market to get into.”

The cable television industry has long been trying to battle the incursion of home video, and some see pay-per-view services as an important weapon, allowing consumers to bypass a trip to the video store for recent releases.

‘It’s Not a Threat’

Instead of paying a flat fee for cable programming, a viewer using the fairly new pay-per-view technology can order a film at the same time or before the film reaches the video store and general cable systems, paying each time the film is watched. But only a small percentage of cable households are able to receive pay-per-view films now.

“It’s not a threat” to video stores, said Jim Lahm, a video consultant in Fullerton. “Pay per view doesn’t offer the selection, and about the only way that it would be practical is that it gets the new releases early.”

More than anything, the video business is still a neighborhood business, and many specialty store owners say they are counting on individual service to give them an edge. Many stores let customers reserve tapes weeks in advance, and some will call customers when movies they know will appeal to them arrive.

Benefits of Small Stores

“With a small shop you can cater more to the needs of your community,” said Loran E. Bloice, owner of Video Safari in Santa Monica. “A small shop where there is a friendly atmosphere, where they are known by name, where their tastes are known . . . they appreciate that.”

Said Piscitelli of Tujunga Video: “What I try to do is if people get a lot of movies, I’ll give them one. If I know it’s their birthday, I’ll give them one. I’ll tell people, ‘Don’t waste your money, that movie stinks.’ ”

Navendu Trivedi, owner of Video Variety in Northridge, isn’t worried by the appearance of competitors with more substantial financial resources.

“It doesn’t disturb my sleep in the night that 7-Eleven is carrying videos,” said Trivedi, who started a discount perfume and gift store a year ago with video as a sideline. Video rental is now the main business.

‘Little Guy Hurts Himself’

“People go to gas stations to put in the gas. They go to Vons . . . to buy groceries,” he said. “They cannot compete with us in terms of selection and service.”

Consultant Lahm, who once owned his own video store and now helps others open shops, said that many times the small video-store owner creates his own problems by failing to give good customer service, to merchandise properly and to bring enough capital to the business.

“Basically, the little guy hurts himself more than he is hurt by the big stores,” Lahm said.