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Thursday, January 9, 2014

Today's business model vs. the 2014-2015 Strategy?

As we enter into a new year for Hannover House - and a new era - some shareholders have asked for clarification on the company's "release slate direction" for the coming years.  Rather than go into voluminous detail and analysis of industry trends, sales histories and title specifics, someone suggested that we go with the visual-aide-route of visible presentation.  Accordingly, to help demonstrate the merits of our release-strategy thinking for 2014 and 2015, we submit below a snapshot of a portion of the New Release video shelves this week at Walmart Supercenters in the United States.

Specific DVD titles in this image are small and hard to read.  But if you look real closely, you'll see that on the second-row-up from the bottom, on the left hand side of the endcap, is a placement for the Hannover House new release horror-title "AMITYVILLE ASYLUM."  This item is holding one shelf keeping unit (SKU) with a single, product facing.  This item happens to have been stocked with ten (10) units per "A" store, whereas many of the other items in this endcap were stocked with only four-to-eight units, based on sales forecasting models.

Now, look to the right-hand side of the end cap.  Probably the most prominent item (besides the "Butler" signage), is that they have given a five-SKU placement for "Despicable Me 2."  Each of these skus holds ten (10) units; additionally (and far more significantly), there is a 1/2-pallet "displayer" at most Walmarts for this item, holding an additional 600 units of assorted "Despicable Me 2" format videos.

Avg. WM WM Retail
Location Units Price Value
Amityville Asylum NR Mod 10 9.96  $                   99.60
Despicable Me 2 NR Mod 50 19.96  $                 998.00
Despicable Me 2 Spl. Display 600 19.96  $           11,976.00
Sales performance of 100% depletions of "AMITYVILLE ASYLUM" generates
less than 1% of the revenues that WM would see from a similar turn rate
of "Despicable Me 2."

While Hannover House can (and HAS) built a nice business with programming comparable to "Amityville Asylum," there is very clearly an upside limitation.  These lower-profile titles rarely merit a "second sku" placement; as such, the likely upside (unless sales are replenished), is the 8-to-10 units initially placed per Walmart location, multiplied by 2,500 to 3,200 stores (depending upon title genre and competitive releases).  If Hannover can carefully program our release DATES and "GENRE" assortments, it's possible to get two or three "New Releases" each month into Walmart.  So the "upside" of this core business is fundamentally limited by shelf space and consumer demand.  Granted, there are many other accounts in addition to Walmart.  But with a 52% market share in the USA, how Walmart goes generally sets the tone for a title's response across all accounts.

So what's the solution?  Bigger titles like Hannover's massively expensive experiment in 2010 with  "Twelve?"  No, actually, movies like "Twelve" fall into what some retail buyers call a "no man's land."  They can be far higher profile (and expensive) than most of the items that make it onto the Walmart New Release shelves... but they tend to not be "big enough" to merit a second sku, or any sort of premium video placement or displays.  In fact, statistically, mid-level films like "Twelve" sell no better than genre-specific, direct-to-DVD items like "Amityville Asylum."  They just cost the distributors a lot more, and therefore can be a lot less profitable to their bottom line.

The answer is to follow-the-leaders with respect to the sort of "higher-end" films that are genuinely connecting with consumers.  A movie like "Despicable Me 2" can satisfy a very broad range of market tastes... from young kids who like the animation, colors and quirkiness... to adults who appreciate the double-entendre humor and sophisticated plot lines.  This is why a movie like "Tim Burton's Alice In Wonderland" connected with multiple age-demos and went on to over $1-billion in worldwide box office.  It's also why a movie like Hannover's "Mother Goose: Journey to Utopia" is as ideally positioned for huge upside, as a film like "Chronicles of Narnia" or even "The Hobbit."  Broad appeal, accessibility, name-awareness, star power and quality. 

Best of all, and unlike the "Twelve" structure, the bigger films that Hannover is pursuing for 2014 and 2015 are being financed with outside capital, to remove downside risk for the company without unreasonably diluting the company's upside revenue potential.

The goal over the next few years will be to have major new Hannover House titles transform the company's profile, stature and revenues - much in the way that "Twilight" transformed tiny distributor SUMMIT, or the way that "Tyler Perry" transformed fledgling LIONSGATE.  Hannover House is positioned in a comparable mode to Summit and Lionsgate "just before" their transformative hits.  With the right product, it can (and should) happen for HHSE.

Meanwhile, the core business - the monthly placement of titles like "Amityville Asylum" and "Blues for Willadean" into Walmart and other USA retailers, will continue to fund the HHSE operations.  In fact, there's always the chance that some of these specialty-level releases will "take off" and outperform a single-sku revenue depletion.  But as we enter into a new year, take a look at HHSE, where we have been, where we are now, and where we are going.  The direction is positive, the aim is specific and the strategy is sound.  We thank you for joining us on this exciting journey.