Wal-Mart crowned DVD king

Retailer main source for Disney discs

NEW YORK — There’s a new king in Hollywood, but few studio execs dare utter the name publicly.

Wal-Mart, the “everyday-low-prices” retail juggernaut, today rings up a hefty 37% of all new DVD purchases in the U.S., according to a new survey of video consumers, and easily writes the biggest check to Hollywood every year.

And if that doesn’t get the studios’ attention, its ramifications should.

Some studios are more dependent on the retailer than others. Some 39% of all Disney-produced DVDs have been checked through a Wal-Mart cash register, as have one out of two copies sold of “Haunted Mansion.”

In any other consumer product sector, that kind of concentration in a single retailer spells danger in the form of wholesale pricing pressure. But Hollywood, eager to rule the kingdom itself, wants the retail giant to know that it has plenty of tools in its arsenal when and if the honeymoon ends.

Certainly Wal-Mart isn’t the only show in town. Best Buy is gnawing at the chain’s heels with 14% of all units sold, according to new findings by NPD Research. Target, Costco and Circuit City combine for 13% of sales.

Movie mavens, rapt by the DVD golden goose, for now are playing a polite polka with these pivotal retail players for good reason: Discount retailers are feeding America’s insatiable appetite for DVDs with prices 10% below average — at around $15.00 per disc.

Sure, the selection at the local Wal-Mart superstore is largely mainstream, with plenty of family fare alongside bargain-basement B-movies, but those sales are driving a $25 billion a year video biz that is supporting the movie industry through an era of ever-rising production and marketing costs.

And so far, everyone seems happy. Wal-Mart is content to use the discs as loss leaders to drive volume sales of blue jeans and puppy chow and the studio “manufacturers” are lapping up the dough and basking in the glow of their best new retail friend, having been squeezed by their previous best buddy, Blockbuster.

But this precarious balance of retail power won’t last forever.

Wal-Mart has a funny way of shifting the industry to its way of doing business once it’s got a supplier in a vulnerable position.

Consider “Bob the Builder” producer HIT Entertainment, whose share price fell off a cliff last month when it disclosed that a “major U.S. retailer” (believed to be Wal-Mart) cut back on shelf space for the bestselling kids title. Premium denim brand Levi Strauss, desperate for the kind of sales boost only Wal-Mart can provide, was forced to develop a whole new line of lower-cost jeans to meet the chain’s strict terms.

For now, Wal-Mart and its peers seem OK losing a few bucks on every disc sold. But that may not be the case forever, and invariably Wal-Mart will insist on a wholesale price cut that could eat into those juicy DVD margins at precisely the time overall disc sales start to slow.

Today’s loss-leader — like the chain’s upcoming push for a cut-price “The Passion of the Christ” — could be tomorrow’s new retail benchmark. And with $245 billion worth of goods sold annually and 21,000 separate suppliers, Wal-Mart is in a position to call the shots. It may have nothing to lose in challenging its studio suppliers to a wholesale pricing duel.

Hollywood video mavens beg to differ. Unlike pickles or pantyhose, movies are a constantly changing packaged good with ever-evolving platforms and technology that keep its manufacturers in the driver’s seat.

Studios reckon they can eventually dangle VOD over any Wal-Mart pressure to cut prices. Or they can re-embrace rental as a counterbalance to rising retail leverage. They’re also counting on the high-def DVD format to generate new demand.

Disney video chief Bob Chapek insists Hollywood still has the upper hand.

“Large retailers may be able to go offshore and produce their own private label of plasticware or cat litter and sell at a 30% discount, but the last time I checked they weren’t setting up a movie studio,” says Chapek.

Still, as suppliers from Levi Strauss jeans to Heinz ketchup have learned, the mega-retailer has a funny way of turning goodwill into powerful negotiating leverage, forcing down prices and dictating terms of sale.

For instance, the firm is now requiring all its suppliers, including Disney, to put RFID (radio frequency identification) tracking tags on each shipment to facilitate its inventory control system. Disney apparently is complying.

So what happens when the DVD golden goose stops laying so many eggs in the next three years after consumers stock all their favorite library titles?

Studio vid divisions are crossing their fingers that high-def discs, with better quality and more extras, will inspire a new spending wave. Innovation, say successful Wal-Mart suppliers, is key to keeping the retail monster at bay.

The real gravy isn’t even in “destination” top-shelf products like “Finding Nemo,” but in lesser-known catalog titles that might catch a shopper’s eye if strategically placed at the front of the aisle at Best Buy.

“The leverage a Wal-Mart has is not so much the front of the catalog, but for more impulse buys like a “Cold Mountain,” says Sanford Bernstein analyst Craif Moffett.

He notes that the power to dictate shelf space and positioning can have a huge impact on what sells. Indeed, according to NPD’s survey, a quarter of all buyers cited “found the title while browsing” as their motivation for purchase.

Moffett is nevertheless circumspect about whether Wal-Mart would wield its retail power to extract better terms from Hollywood.

For one thing, DVDs are so cheap to produce that the chain can’t hurt the studios by demanding huge inventory (a tactic that has hurt the toy industry). And as long as Wal-Mart DVD buyers keep filling the carts with other goodies, the status quo could reign for many more years.

But two factors studios should bear in mind: With its most attractive marquee titles already in the market, movies — especially back catalog — are quickly becoming a commodity product. Moreover, reluctance to develop VOD (for fear of losing DVD riches) may make Hollywood’s talk of technological leverage look like a hollow threat.

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