Video Independents Feeling the Squeeze : Convenience Stores, Big Chains Muscle Out Mom ‘n’ Pop

If anything could be done to keep a family-run video store profitable these days, Carol and Rudy Neely say they did it.

They distributed a monthly newsletter to customers of Video Shop, their Fullerton store, and handed out free popcorn--up to 500 boxes a week. They knew the top movie studio executives, bought an expensive computer system for inventory control in 1983 and kept abreast of new marketing techniques. Carol was president of the Southern California chapter of the Video Software Dealers Assn., and Rudy was on the national board. Rudy knew and greeted by first name just about all of their 3,000 to 4,000 customers, Carol said.

But last February, the couple closed their store. It was only the third such outlet in Orange County when it opened in 1981, but during the intervening six years 15 to 20 more video stores opened within two miles, forcing the Neelys to cut rental rates from $7 a night when they opened to $2.50 by the time they closed.

“We could no longer jeopardize our family assets by throwing money at this hungry monster, because I didn’t think it would return it,” Carol Neely said.

Their unfortunate experience is not unique these days. A long-predicted shakeout of small, independent video stores appears to have begun, analysts say, although owners of some solidly financed outlets emphasizing service claim they continue to thrive.

‘Business Falling Away’

“There’s a lot of concentration going on, people getting bought up by chains,” said Paul Eisele, president of Fairfield Group, a Darien, Conn.-based home entertainment market research firm. Eisele estimates that since June, 1986, the number of video specialty stores has slumped to between 25,000 and 27,000 from 30,000, as smaller businesses disappear.

“Business is falling away to major chains and to convenience stores,” said Sarah Stack, an analyst for Bateman Eichler, Hill Richards, a Los Angeles brokerage. By 1990, Stack estimates, independents will make up just half of all video rental outlets and sales, down from 70% of stores and 60% of sales today.

The disappearance of video stores became apparent first in the used videotape market, in which owners of new video stores buy second-hand tapes from brokers and owners of failing stores. Prices have tumbled 40% in the past two years, and 30% just in the past year, said Tom Nabhan, head of purchasing for Monrovia-based American Video Network, a major used videotape dealer. “It’s been accelerating. . . . There is an increasing number of inventories being sold,” he said, adding that film studios have contributed to the drop by cutting prices on re-releases of older films.

Lack of money to buy videotapes and reduced profits because of fiercer competition are usually blamed for forcing the sale or liquidation of video outlets.

“(Single-store operators) weren’t adequately capitalized even from the start,” said Jim Lahm, a Fullerton consultant, adding that “Many of them very foolishly followed these prices down . . . and in so doing they’re literally putting themselves out of business.”

“The concern is how to find a way to satisfy the demand for new releases without killing yourself with inventory,” said Stephen Roberts, an entertainment industry consultant in Century City.

As profitability shrinks, some pioneer video retailers have sold their stores and invested in related businesses. Jeff Leyton began renting videotapes in 1978 and built a small chain of three stores in Lomitas, Torrance and Long Beach. Last year, he sold his Lomitas store after seven other video stores opened within eight blocks, the seventh being a giant Wherehouse outlet. Now Leyton’s Torrance store is up for sale, and he spends most of his time trading used videotapes.

“When you were making so much and now you make half that or less, it’s not fun any more,” he said. “It used to be you could stand back and watch the people come in. You can’t do that anymore.”

Supermarkets, convenience stores and chains have all taken business from independents. Supermarkets have done best, raising their market share from near zero 18 months ago to between 10% and 20% now, Eisele said. About 27% of the nation’s 30,500 supermarkets--defined as grocery stores with more than $2 million in annual sales--now rent videotapes, said Glenn Snyder, senior editor of Stamford, Conn.-based Progressive Grocer, a supermarket trade magazine.

Convenience stores have also expanded their video rentals. About 800 of Dallas-based Southland Corp.’s 840 7-Eleven stores in Southern California do, along with 6,500 of the 8,000 7-Elevens nationwide, a company spokeswoman said.

Franchises and chains have multiplied. Franchising industry leader National Video, headquartered in Portland, Ore., had 697 stores by the end of last year, although it has since contracted somewhat. Springfield, Va.-based Erol’s, the nation’s largest chain with 133 company-owned stores, has opened nine outlets in September alone.

Surviving single-store operators say they have stayed in the picture by offering greater service--such as taking reservations--and by maintaining closer contact with customers in deciding which videotapes to buy and stock. “The one advantage we have is that most of us single-store operators are in our stores every day,” said Carol Pough, owner and manager of Video Cassettes Unlimited in Santa Ana.

At Highland Video in San Bernardino, customers pay $4 a night to rent some recently released videos. Services include a drive-in window and even free guaranteed reservations of rental videos up to a year in advance. Business is booming despite the presence within a five-mile radius of at least a dozen other video stores, several convenience stores renting videotapes and a Wherehouse store less than half a mile away, said Jon Gittleman, the store’s co-owner and manager.

“I imagine business would be better without them, but at the same time they make us shine,” Gittleman said.

“You get more service (at an independent) than standing behind somebody waiting to buy a lottery ticket,” said Rick Deason, Western regional manager of the American Video Assn., headquartered in Mesa, Ariz.

By buying new releases as soon as they become available and renting them for $2.50 to $4 a night, independents can protect themselves from slower moving cut-rate convenience stores and supermarkets, said Michael McIntyre, owner and manager of Rialto Video. “As far as convenience stores, you’re not affected at all. . . . We’ve already virtually paid for a new film within 30 days.”

‘Didn’t Want Service’

But Carol Neely, a registered nurse now working as nursing director at a convalescent hospital, is pessimistic about the future of full-service independent stores and customers’ demand for them. “They didn’t want service,” she said.

As home video has lost its novelty, she said, the average income of renters has plummeted, along with their willingness to pay more for service. Insurance and tax rates also work against the single-store operators, she added.

Last winter, the Neelys decided that to save their store they would have to invest $25,000 a year for two years, followed by a lump sum of $150,000--all without drawing any salary. “The Christmas season for the second year in a row never came for us. . . . Our business knowledge said, ‘forget the emotions, we can’t keep going on,’ ” Carol Neely said.