Clash of the Video Merchants

By Stephen Koepp

Owning a video store, which not long ago seemed like a can't-miss way to make a living, is getting to be as nerve-racking as sitting through a Steven Spielberg thriller. Last week videocassette retailers were in an uproar over the disorderly debut of the home-video version of Spielberg's Indiana Jones and the Temple of Doom. Disgruntled shopkeepers claimed that some stores belonging to such giant chains as K mart, Wal-Mart and Waldenbooks had taken an unfair lead on competitors by putting the popularly priced ($29.95) Paramount blockbuster on sale as much as a week before its official release date. The chain stores denied purposely jumping the start, but irate competitors consider the episode just another example of the cutthroat tactics that are sweeping the home-video business (estimated 1986 sales: $7.2 billion).

The high static over just one tape signals the intense level of competition that is coming soon to the video store near you -- or has already arrived. The number of outlets that rent or sell videocassettes has surged from as few as 10,000 in 1981 to more than 35,000 today. Everyone from car-wash operators to grocers to American Express has got into the act of dispensing tapes. The array of new outlets is bringing lower prices, wider selection and greater convenience for consumers, but it is also beginning to squeeze out many of the mom-and-pop operators. "A little fellow's got no chance," says Larry Rodriguez of Salinas, Calif., who lost a $40,000 investment last year when his son's video shop failed because of the tough competition.

During the early 1980s, video shops were the hottest gambit for do-it- yourself entrepreneurs. "It seemed to be an easy-to-operate business, and the amount of money needed to establish it wasn't that great," recalls Walter Rosselle of North Hollywood, Calif., who is planning to sell his shop after 2 1/2 years in business. Because of newly arrived competitors, his daily tape rentals have dropped from 130 to about 75. A survey of 1,200 video stores conducted in January by the trade publication Video Store showed that 28% of the merchants were dueling with another store on the same block. The competition has forced down prices from an average $4.75 for an overnight rental two years ago to $2.40 today, and 99 cents specials are commonplace.

While many small, independent shops are still thriving because consumer demand continues to grow, the large national chains have started to grab most of the new business. National Video of Portland, Ore., which opened its first outlet in 1981, has 776 franchises in the U.S. and opens an average of 15 new shops every month. The convenience-store chain 7-Eleven plans to offer its MovieQuik rental club, which has no membership fee, in 7,000 of its 7,636 outlets by the end of the year. MovieQuik's feature attraction is speediness; because each member's account data is stored on a computer, rental transactions take only 15 to 20 seconds.

Other rental emporiums attract customers with monstrous selections. California-based Tower Records has opened a series of video superstores that stock 10,000 movies, compared with the 2,000 titles in a typical neighborhood shop. With so many alternatives, few consumers feel any loyalty to one store. If the movie they want is out of stock, they simply drive a few blocks to a competitor's shop.

The independent video-rental shops have been pinched as well by the falling prices of prerecorded cassettes. Movie studios have drastically lowered prices < in the hope that consumers will purchase tapes rather than rent them. According to the Fairfield Group, a market-research firm, the average price of a prerecorded cassette has fallen from $51.60 in 1984 to $27 this year. Many classic movies now sell for only $19.95, and children's films often go for $14.95. This has prompted many mass merchandisers, notably Sears, to start selling cassettes in their stores. Mom-and-pop shops, which started out in rentals only, have been slow to adapt to the trend. One reason is the higher cost of selling tapes outright, since the stores must pay for large inventories. Big retail chains tend to get better wholesale terms from the movie studios and therefore are able to offer lower prices to consumers.

Potentially the most prolific tape dispenser is the video vending machine, which will accept a charge card for payment and deposit. More than 20 companies are developing devices with names like Le Bijou and the Movie Machine. U.S. Video Vending of Iselin, N.J., has already installed 100 soda- machine-size devices in apartment buildings, supermarkets and malls. One manufacturer predicts that 60,000 video vendors will be in operation by 1995.

Many mom-and-pop cassette shops believe they can compete by offering more personal service and refined video titles. Husband-and-Wife Entrepreneurs Brad and Leslie Burnside of Evanston, Ill., who plan this month to open their third Video Adventure store, attract an upscale clientele by stocking foreign titles and films featuring dance and opera. Unless other neighborhood video shops find such niches, they could conceivably go the way of the malt shop and the soda fountain.

With reporting by Scott Brown/Los Angeles and David E. Thigpen/ New York