Prices cut as DVD sales rocket - Mar 01- Neil Shoebridge

The DVD software market has been one of the fastest-growing consumer product categories over the past three years. Sales rocketed from $69.6 million in 2000 to $798million last year. But aggressive, relentless discounting by retailers is threatening its future.
DVD prices have dropped 20 per cent during the past three years and DVD distributors are worried that price cuts of up to 50 per cent on new-release DVD titles are conditioning consumers to believe that no DVD should be priced at more than $30.
New DVD titles, which carry recommended retail prices of about $45, are routinely discounted to $30. The main culprits are mass merchants such as Coles Myer's Kmart chain and Woolworths' Big W, which use DVDs as loss leaders to generate customer traffic.
At this stage, the price cutting is not affecting distributors' wholesale prices, revenue or profit margins, as retailers are carrying the cost of the discounting.

But it is making some retailers reluctant to devote precious in-store display space to new-release DVDs and prompting some to focus harder on selling old titles, which are less profitable for distributors.
"It's crazy," said one DVD marketer. "Consumer demand for DVDs is exploding, but the retailers are slashing prices to the bone and destroying their potential profits.
"There's no need for such deep discounting. People would still buy DVDs if they were priced at $35. The longer the heavy price cutting goes on, the more DVDs will become devalued in the minds of consumers."
Releasing its December-half results on February 19, Brazin - the owner of the Sanity and Ezy DvD chains - said that although Sanity's sales were stronger than expected, the "competitiveness of the DVD market has compressed gross margins".
Compressed is an understatement. Many DVD retailers are making no margin on new-release titles, as the price cutting by Big W and Kmart - and, to a lesser degree, other retailers such as Sanity, HMV and Coles Myer's Target - forces other retailers to follow suit.

Columbia TriStar Home Entertainment released the DVD of Terminator 3 in December last year with a recommended retail price of $46. The mass merchants immediately started selling it for just below $30.
"That sort of pricing worries us, as it sets up the belief among consumers that all DVDs should be under $30," said Dominic Remond, Columbia TriStar's marketing director.
"Recent research showed that people are starting to believe that. And the deep discounting makes some retailers reluctant to devote display space to new releases, which are the drivers of the market's growth."
With DVD players now found in half of Australian homes, most DVD distributors expect the software market to keep growing. How much it will grow this year depends on the depth of price cutting by retailers.
DVD software sales jumped 249.2per cent in 2001, 106.7 per cent in 2002 and 58.7 per cent in 2003.
According to DVD marketers, the rapid growth was driven by the collectability of DVDs - which consumers regard as easier to collect than videotapes - good sound and vision quality, the appeal of special features such as out-takes and interviews with a movie's cast and crew, and broad retail distribution.
But the enthusiasm with which mass merchants have embraced DVDs - and the resultant price competition - is a double-edged sword.
"The discounting is a very short-sighted strategy on the part of the retailers," said one distributor.

"Yes, it drives volume growth and pulls people into their stores. But over time, it devalues the category. Weaning consumers off such deep price cutting will be very, very difficult."
Kmart expects the DVD market to grow between 30 per cent and 40per cent this year, driven by new products, the collectability of DVDs and price cutting.
Mark Clark, divisional general manager for entertainment products at Kmart, said the DVD sector was one of the most competitive in retailing at the moment.
"It's very hard for a retailer to differentiate a DVD," he said. "We can't add value, so discounting is about the only thing we can do to get a point of difference.
"We know that low prices on DVDs will make people switch retailers."