Supermarkets rule the U.K. DVD scene

Big grocery chains control 40% of Britain's retail sales

LONDON — You won’t find them pontificating on panels or mingling at parties in Cannes, but the DVD buyers for the U.K.’s supermarkets are now among the most important players in the British film and TV business.

Following the demise of DVD stores and retailers such as Woolworth’s, the big-four grocery chains — Tesco, Asda (owned by Wal-mart), Sainsburys and Morrisons — control around 40% of the U.K.’s $2.8 million DVD retail market. That puts them in pole position to influence what consumers buy, how much they pay, and what kind of margin, if any, distributors can hope to earn. But some distribs complain that these grocery giants often have little knowledge of the products they are acquiring, and less interest in the long-term sustainability of the sector.

It makes for a fractious relationship, with the studios and supermarkets engaged in a constant round of battles and boycotts, while indies scrap for attention.

“The supermarkets are the most influential commercial players in the U.K. film industry, and bizarrely, they couldn’t care less about that status,” says one frustrated indie. “It’s all canned carrots to them. There’s no emotional connection to film; they are just interested in pushing down the price.”

Another indie CEO says the dominance of Tesco and Asda, the two biggest players, isn’t good for the marketplace, since they use DVD sales as a loss leader. “There’s a massive pressure on pricing, but if they don’t stock your DVD, you lose a big chunk of the market,” he says.

Recent films being sold below wholesale price included “The Hunger Games” at £9.99 ($16.10) and “The Avengers” at £8 ($13). “Harry Potter and the Deathly Hallows: Part 2” was virtually given away by one chain for £3 ($4.85) to shoppers who spent £50 ($81) on groceries.

“It’s a difficult subject to discuss publicly,” notes one indie, “because they are our partners, and we make a lot of money from them.” In fact, such is the power of the supermarkets that all distribs quoted in this article requested anonymity.

Still, not all comments were negative. Some distribs noted that however tough the supermarkets may be to deal with, they are keeping the DVD alive by pushing it under the noses of customers who only set out to buy bread and milk. “The supermarkets are purely about impulse buying,” says one studio topper. “I love the fact that they are committed to this category. They are still opening lots of stores, and that gives us the chance to sell DVDs.”

The supermarkets are also expanding into the digital space. Tesco led the way last year by acquiring the Blinkbox VOD service, which is now integrated with its physical DVD retailing operations. Sainsburys will launch its digital store around the end of this year, and both Asda and Morrisons are expected to follow.

Distributors hope that the supermarkets will become more sophisticated strategic partners when they are no longer limited by the physical space of their stores. Tesco has even experimented with financing direct-to-video production, and striking exclusive retailing deals for specific indie titles. The weak results of such efforts, however, indicate that store managers haven’t quite caught up with corporate ambition.

“The supermarkets aren’t great at selling everything,” says a studio exec. “They are great at big hits, but not at higher value items like TV box sets or Blu-ray.”

While limited shelf space and narrow range are tough on catalog titles and indie fare, the stores’ instinct for consumer tastes sometimes can create surprising DVD hits, driven largely by eye-catching covers.

Animated movie “The Reef” became Warner’s best-selling catalog title of the year in Tesco, because of its superficial similarity to “Finding Nemo” and “Shark Tale.” The enthusiasm of supermarket buyers also fueled a fad this year for found-footage films about TV crews disappearing in haunted asylums, including “Episode 50” and “Grave Encounters,” which sold 150,000 units apiece

“At the low end of direct-to-video, if a supermarket buyer likes the sleeve, they will give it a chance. If it outperforms, all the other supermarkets will buy it too,” says one indie. “They literally sit around holding up sleeves and asking, hot or not?”

In the past couple of years, the collapse of traditional DVD retailers such as Woolworth’s and Zavvi, and the retreat of WH Smith from home entertainment, have left only dedicated entertainment retailer HMV in the brick-and-mortar universe, and Amazon online, as significant alternative outlets for distribs.

The grocery giants are notorious for bullying suppliers in all product categories, and DVD is no exception. This year’s recessionary trading conditions, which led voraciously expansionist Tesco, the U.K.’s biggest retailer, to report its first drop in profits in 20 years, has only made the company more aggressive about squeezing costs.

On the other hand, the steady decline in the DVD market, down 10% again so far in 2012 in the U.K., has made distribs more determined to fight for every inch of ground, including the practice of playing one supermarket off another when making deals. It’s impossible to be friends with all four supermarkets at any one time, says one studio topper.

Moverover, with the sector in decline, the majors are working to claim as much supermarket shelf space as possible.

“In the past, some years we were more focused on selling (the supermarkets) our big releases, and other years we’d focus more on catalog,” says a studio exec, “but now everyone is focused on selling everything they own. (For independents), it must be quite a challenge to get in the door.”

Indeed, one indie complains that wholesale prices over the past 18-24 months for straight-to-DVD titles have been slashed in half, to about $8, to deliver a $12 shelf price.

And disputes aren’t just about price, but also such contentious deal points as co-op and consignment. Co-op, or co-operative advertising, is an upfront, non-recoupable cash fee that supermarkets charge distributors, nominally to cover the cost of promoting a DVD in-store and to guarantee a certain amount of shelf space. This can be more than 50% of the value of the first shipment, and distribs say it’s getting more expensive, even though it’s hard for them to know what the money is actually being spent on.

And supermarkets increasingly are buying more DVDs on consignment, refusing to pay for stock until it is sold. That improves the store’s cashflow, but the distributor is forced to assume all marketing and retail risk.

“It affects the level of minimum guarantees we pay,” says one indie. “It means we’re looking at less midrange foreign and independent films, at least until digital becomes meaningful.”