With 100 mil Americans shopping there each week compared with the 30 mil who pay for a movie ticket, Wal-Mart is the largest distrib outlet in the film biz

Wal-Mart used to be widely admired — a jumbo-warehouse version of the small-town store, where workers were friendly and bargains were plentiful. Now, with a string of complaints and lawsuits over its labor and import practices, people talk about the world’s largest retailer as if it’s the mega-shop of horrors.

Wal-Mart, formerly a close-to-the-vest operation, has made a big PR push to improve its image. But can Hollywood take advantage of this shift?

At this point, any progress would be welcome for the studios.

Wal-Mart accounts for an astonishing 37% of what Hollywood puts on DVD, a 3% increase in market share over last year, according to NPD Group, which measures the home entertainment market. But revenues from DVDs account for less than 2% of Wal-Mart’s sales — meaning Hollywood needs Wal-Mart a lot more than Wal-Mart needs Hollywood.

From the start, it was a relationship fraught with suspicion. But it was also lucrative. When Hollywood created a new product — the DVD — Wal-Mart brought it to the masses more efficiently than any distributor in the history of film.

Now the studios want more from Wal-Mart: better displays, more consistent pricing and more patience in giving new titles a longer shelf life.

The chain employs more people than the federal government; its 3,600 stores are by far the biggest distribution outlet for the film biz. Compare the 138 million people who walk into a Wal-Mart each week (about 60 million unique visitors) to the 15 million or so who pay for a movie ticket.

“Wal-Mart is definitively the most important customer Hollywood has in the world,” says former Warner Home Video president Warren Lieberfarb.

It’s no wonder that studio honchos make frequent trips to its corporate headquarters in Bentonville, Ark. DreamWorks honcho Jeffrey Katzenberg is famous for traveling there as often as once every two weeks.

But the Hollywood relationship is getting strained as DVD economics are changing. After several years of double-digit leaps, DVD sales are slowing dramatically. Year-to-date sales for 2005 were up only 2.5% by June.

And the DVD market is becoming more like the theatrical box office: A larger percentage of sales of new releases are being compacted in the first few weeks, a trend Wal-Mart has helped create by rotating films out of prime display spots as soon as sales start to falter.

Increasingly, a new title has a brief shelf life to prove itself. Studio execs say 60%-65% of a new DVD release are sold in the first three weeks on the shelves. Bob Alexander, home entertainment analyst at Alexander & Associates, pegs it at 80%.

“The fact that sales are compressed into those first three weeks actually reduces total sales. It’s a big problem. You are actually shrinking the market,” says Alexander.

Wal-Mart, which was once the champion and savior of the DVD, is clearing its shelves of titles faster than any other retailer. DreamWorks’ “Shrek 2” and Pixar’s “The Incredibles” were among the titles that suffered quick returns from Wal-Mart, generating huge accounting headaches.

Studio execs are also confounded by the retailer’s pricing, which can range from as little as $4.99 for bargain-bin titles (which often include some recent films) to more than $20 for a new release.

With so many sales and specials, there’s little ostensible logic to how much a consumer can expect to spend — or how much profit Hollywood can expect to gain.

Wal-Mart exercises its pricing power most aggressively on catalog titles, on which it demands steep discounts.

“They are always looking for good offers, so they shop for promotions around the studios,” says one former studio exec. (Wal-Mart has very little influence over the wholesale price of new releases, which it often sells at a loss to generate foot traffic in stores.)

As far as Hollywood is concerned, there is a good Wal-Mart and a bad Wal-Mart.

Good Wal-Mart is Hollywood’s best customer. It is painstakingly focused on maximizing the profitability of each inch of shelf space and provides invaluable real-time sales data to the studios.

“It is a critical outlet for Hollywood,” says Brian Mulligan, former co-president of Universal Pictures. “Wal-Mart is the channel to move frontline titles and a fantastic means to move high-margin catalog product. It is also beneficial for Wal-Mart, as blockbuster Hollywood product gets consumers into their stores.”

Bad Wal-Mart is close-minded about what America wants to watch and exerts chilling influence over what movies get the greenlight and which ones get the shelf space and promotion to succeed.

When studios weigh a greenlight decision on most films, there is almost always an analysis of how it will play in Wal-Mart Nation. As big as Wal-Mart is, its audience has a distinct profile; while it accounts for 37% of all DVD sales, Wal-Mart accounts for about 50% of sales of made-for-TV movies. Family and female-skewing films sell well, but not edgier TV skeins.

“Wal-Mart is not as big a player in the TV market as you might expect, because their audience is different from that of the hot TV properties like (Comedy Central’s Dave) ‘Chappelle,’ (HBO’s) ‘The Sopranos’ or ‘Sex and the City,’ ” says Russ Crupnick, senior analyst at NDP Group.

The seeds of Wal-Mart’s dominance were sewn in the early 1990s when the VHS rental market began to mature and the cost of tapes came down. Wal-Mart devoted huge shelf space to pre-recorded videocassettes back when the retailers that would become its major competitors, Best Buy and Target, scarcely existed.

In 1998, after DVD developed, Warner Home Video president Warren Lieberfarb offered major rental chains like Blockbuster a revenue-sharing arrangement similar to the 40% split for rental VHS tapes. But Blockbuster CEO John Antioco felt it would be better-off buying DVDs (typically much lower priced than videocassettes) wholesale, so Warner aggressively courted Best Buy, Target and Wal-Mart to carry DVDs at sell-through prices.

The big-box stores achieved enormous clout, thanks to their shelf space and their sales of DVD players.

But Wal-Mart trumped its competitors by identifying Chinese companies that could supply DVD players more cheaply than those from Japan or Korea. It appointed Warner Home Video as “category captain,” to manage things, optimizing its DVD business while milking the waning VHS.

As Hollywood’s biggest customer, Wal-Mart began dictating its own terms as it does in other retail categories in which it’s achieved a dominant position. Robert Greenwald, one of the retailer’s staunchest critics, encountered its hardball tactics first hand, when the chain balked at the 55% discounts offered on his 2004 documentary about the Iraq war, “Uncovered,” demanding (and getting) discounts of 70%. “Those were their terms; it was take it or leave it,” says Gary Baddeley, president of Disinformation Co.

Greenwald is getting his payback. His new doc is a scathing take-down of the retail giant, “Wal-Mart: The High Cost of Low Price.” Released on DVD by Ryko Distribution, it’s being sold on-line and at select retailers — but not at Wal-Mart.

The stores are also declining to carry the pro-Wal-Mart doc “Why Wal-Mart Works and Why That Makes Some People Crazy,” but the latter film got distribution from Fayetteville, Ark.-based Hannover House, a distributor with close Wal-Mart ties.

The mounting criticism of Wal-Mart has led the retail giant to hire veterans of the Gore and Kerry campaigns and to retain the services of PR firm Edelman.

The maker of “Why Wal-Mart Works,” Ron Galloway, believes he understands why it’s under fire: To its detractors, he says, Wal-Mart has come to represent everything they fear about a global economy. “Wal-Mart represents a fear of accelerating economic change,” he says. “They are just getting hammered.”

Of the many film executives contacted by Variety who log regular trips to Bentonville, every one of them describe their Wal-Mart colleagues as professional, fair-minded and smart. Contrary to one of the prevailing Hollywood myths, none said they saw any sign of vindictive decision making in business.

But, they add, the mindset is a little provincial. In Bentonville, execs complain, it’s impossible to find a copy of the New York Times. The Wall Street Journal has only recently been introduced. Variety? Fuhgeddaboutit.

Wal-Mart rotates its DVD buyers every few years, as it does in other categories. “You do not form long-term relationships with these guys,” said one exec. But armed with staggeringly comprehensive national sales data, even Wal-Mart’s newcomers quickly become savvy marketers.

“They have created a very efficient marketplace,” says Classic Media prexy Rob Friedman, who does a big seasonable business with titles like “Frosty the Snowman.” Wal-Mart sales data is so precise, he says, he uses it to track the effectiveness of advertising and promotions in different communities.

In some ways, Wal-Mart is a victim of its own success. Industry types say their Wal-Mart counterparts are having trouble assimilating with a company that’s grown so fast.

The execs have a mania for keeping costs down, and as the company has grown, that’s created headaches.

“They have tremendous power right now that has sort of snuck up on the industry over the past four years,” says media investor Harold Vogel. “In a sense, they are the tail that wags the dog.”

Being big and powerful, as Wal-Mart is finding out, can make you a symbol of a lot of things, and not all of them good.

But just as eagerly as Hollywood execs board the next flight to Bentonville, some now express private glee at Wal-Mart’s attempts to manage its image. “I’ve got studios calling to congratulate me (on the doc) but they say they can’t get anywhere near it,” Greenwald says.

The company’s well-meaning agents now return calls in double-time, but even Wal-Mart’s new, sophisticated spinmeisters can’t change the culture of secrecy in Bentonville, which has positioned itself as the crucial arbiter between Hollywood and middle America.

As the DVD retail business enters its next phase, Hollywood’s fortunes will remain tightly bound to those of the world’s largest retailer. Even more, perhaps than in the past. Wal-Mart’s scientific focus on margins for every inch of shelf space is ideally suited to a future of micro-marketing that is segmenting rapidly.

“These guys are masters at this stuff,” Crupnick says. “When DVD started out, it was like they invented ice cream; there were no bad flavors. Now that theatrical has started to struggle, you have to be more selective and more targeted toward your consumer base.”

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