Can a distributor of DVDs expand and diversify its 3PL business?
Technicolor—the name is well-known to moviegoers, especially those who like to sit through the credits.
A large public company based in the Paris suburb of Issy-les-Moulineaux, but with extensive operations in the United States, Technicolor is organized into three major areas:
- Entertainment services, a group that supports the movie industry and creates enough cinematic magic that 19 films Technicolor worked on were nominated for Oscars last year.
- A “connected home” unit that designs and manufactures set-top boxes and gateways for cable and satellite television providers.
- A technology unit that performs research, develops new products, and manages and licenses a large patent portfolio.
The entertainment services group used to have a large business distributing films to theaters and still delivers hard drives with movies loaded on them to some theaters. Increasingly however, with digital projection, theaters get their movies via satellite transmissions.
It also has a big business manufacturing and distributing DVDs and Blu-ray discs. Clients include four of the major Hollywood studios—Warner Bros., Disney, Paramount, and Universal. In addition, the company distributes games on discs such as those played on Microsoft’s Xbox.
Technicolor is a sizeable business: in the first half of 2014 the company made and distributed 458 million standard definition discs and another 107 Blu-ray discs.
Kevin Sullivan, vice president strategy and development for home entertainment services at Technicolor, said the company believes discs will continue to sell for many years, but in declining numbers as consumers increasingly stream and download their movies and games from the Internet.
It’s a trend that has been seen in other media:
- Billboard said in February that 2014 might be the year digital album sales surpass those of physical albums. (The trade journal explained in 2013 CDs represented 57.2 percent of the album market, while downloads were 40.6 percent, with a small number of vinyl records and cassettes sold. Of course, with the rise of services like iTunes, many consumers buy songs one at a time, and if “track equivalent album” sales where 10 downloaded songs equal one album are figured in, digital albums have exceeded physical albums since 2011.)
- The big video game company Electronic Arts forecasts the amount of money it receives from digital games will exceed physical games starting in 2015.
- The Financial Times reported e-books now represent about one-quarter of book sales in the United States.
- Many software companies have consumers download programs over the Internet.
“Because we are a significant contributor to the group’s revenue and profit, we are being challenged to figure out ways to stem or hopefully offset that decline,” Sullivan said. “One of the things we are doing is diversify and grow in what we call supply chain services—whether that be distribution-type activity or transportation management activity.”
Disc sales are “not going to fall off a cliff tomorrow,” he noted. They actually grew last year. However, while this year Disney made its movie Frozen available for purchase and rental digitally before it was available in disc form, Technicolor still manufactured 30 million discs of the movie for the studio, making it one of the most successful packaged media products ever.
“There is an ability of these things to exist together. They are not necessarily a direct substitute, one for the other. There is a pretty long future in this, we think,” Sullivan said.
Many consumers like the convenience and reliability of DVD players; not all have access to cable or satellite systems that can provide reliable bandwidth; and some people just love owning a physical DVD that may be loaded with special features.
The company has benefited from sales of discs used by the new Xbox system. Blu-ray sales are still growing. There is an ultra-high definition video format called “4K” that’s just being rolled out that will exacerbate the bandwidth issue. Time will tell whether consumers want to buy new disc players and televisions just to play 4K movies, but it could create demand for a new type of disc.
Not ‘RidingThe Tide Down.’ While there may be a significant business in making and distributing discs for another decade, “we don’t just want to ride the tide down,” Sullivan said. “We want to try to leverage the skills that we have developed in this business and apply it to other segments. Part of what we have done really well in serving the major studios is in the distribution and transportation-related services.
“We started out as purely making discs, and then slowly evolved into distributing discs,” he said.
Unlike a true distributor which buys and resells product, Technicolor has never owned the content or discs. Instead its distribution arm acts as a third-party logistics provider, albeit one that for most of its life has had a highly specialized set of customers.
Technicolor’s distribution and freight business has revenue of about $300 million per year—two-thirds of which comes from distribution activity within the four walls of a warehouse—activity such as picking and packing, inventory management, and reverse logistics. The other third of its revenue comes from managing transportation services—Technicolor is a non-asset-based transportation company.
Three years ago, Technicolor launched an effort to move into distribution and transportation of products other than packaged media, and that segment has grown to about $20 million in annual sales, a little less than 10 percent of distribution and transportation revenue. Customers include retailers, some of which sell DVDs, consumer electronics companies, companies that make accessories for smart phones, and printers that, for example, print DVD inserts, and apparel companies. For companies that are not in packaged media, most of the revenue is from arranging transportation.
Sullivan said Technicolor is looking to handle products moving to retailers, and targeting products that have similar characteristics to its DVD business, meaning they are time-sensitive, have some security requirements, and are valuable.
In some cases Technicolor arranges shipment direct to stores, while in others it delivers to distribution centers.
Sullivan said the company’s DVD business breaks down into two major categories—new releases, sometimes of blockbuster movies where 10-15 million finished units are being distributed and catalog replenishment work where a store in Tulsa, Okla., for example, may need two copies of Top Gun and one of Pretty Woman and similar quantities of dozens of other movies.
He believes Technicolor’s expertise at launching big new “tent pole” movie releases could be attractive to some shippers. In addition to making sure that big retailers like Walmart, Target, and Amazon have the latest blockbuster movies on the day they’re released on disc (and Sullivan estimates those three companies sell 60 percent of DVDs), Technicolor also has to know how to stage product in advance so that smaller retailers have movies to sell on the same “street date.”
While products can move quickly through the big retailer supply chains, Technicolor might need to ship discs weeks in advance to distributors such as Alliance Entertainment, VPD, and Ingram Entertainment that buy discs and then resell them to pharmacies, grocery stores or video stores. (At the end of June, Ingram announced it had purchased substantially all the assets of VPD.)
The transportation requirements can be quite different for those two categories of business. With a new release, there may be a need for movement of more truckload and less-than-truckload quantities, and the discs may be accompanied by marketing materials such as display units that are set up at the end of store aisles. For replenishment work, the company relies more on parcel companies—tellingly, Technicolor has a major facility in Memphis, Tenn., where it can bring product to Federal Express.
Technicolor usually has about a 12-16 week window from the time it receives a master disc until it’s released for sale in stores.
Individual discs are stamped out like coins, and the company’s Guadalajara, Mexico facility has 100 DVD and 50 Blu-ray lines that can each turn out about 20,000 discs a day. More time consuming is the actual packaging of the discs—inserting the sleeves into the plastic cases that hold the discs in addition to other brochures.
The company has about 4 million square feet of packaging/distribution space spread across several facilities in Memphis, as well as about 1 million square feet of space in the Detroit area and a facility in Mexicali, Mexico, near the California border where some of the more labor-intensive products are prepared—for example, multi-disc packages of entire seasons of television programs. It also has facilities in Mexico City and Toronto which serve the Mexico and Canadian markets, respectively. Packaging and distribution activity is concentrated in the United States for both legacy reasons and improved lead times.
Locating packaging facilities in the United States also helps to reduce transportation costs. While the discs can be shipped densely from Guadalajara on spindles, several hundred thousand in a truckload, by the time they are placed in cases, they take up much more space and become increasingly expensive to transport.
“We’ve looked at the math, the tradeoff between labor versus increased freight if we did the actual packaging in Mexico, and it does not necessarily work” to locate packaging work in a lower cost location, Sullivan said. Replenishment times, he noted, are particularly short—two or three days.
“We could not do that if it was done in Mexico, Vietnam or China,” he said.
There’s a significant amount of return logistics in the DVD business. When discs are returned, they may be held for inventory replenishment, sold to a liquidator who will, in turn, sell them overseas or to a discounter like a 99-cent store, or destroyed.
DVDs are sold in dozens of different packages and, while it’s sometimes suggested that packages could be smaller or more uniform, Sullivan said the marketing departments of studios want to display their product in the most attractive way possible, and he added many companies have eliminated waste by reducing the amount of plastic they use in packaging, employing cut-outs or mesh-like material in constructing boxes.
Technicolor uses about five to six companies for internal movement of product, mostly truckload and some LTL. When pressed for time, the company will use air carriers. It has used intermodal only sparingly.
“Predominantly we have been working with national carriers,” Sullivan said. “As we have branched out into different segments we have learned that there is a lot of value potential in working with some of the regional guys and building that stable of carriers to a larger number and that is an ongoing effort,” Sullivan said.
As Technicolor adds 3PL customers, he believes the company’s “sweet spot” will be serving shippers doing major product releases, for example, arranging ocean freight (the company is a non-vessel-operating common carrier), doing kitting and packaging, arranging outbound transportation to retailers and distributors, and handling returns. As an example, he said the company managed the supply chain for the “Rock Band” video game, which included hardware in the form of mock instruments, as well as software on discs.
As companies look for near-sourcing opportunities in Mexico, Technicolor feels it can sell its expertise in handling cross-border moves.
“We are looking for medium-size opportunities. We don’t want to chase tiny stuff that is too small to matter, but we are not looking to take over the General Electric supply chain—we don’t have the resources and we are not trying to make massive investments in infrastructure. We are trying to leverage the investments we have already made and find incremental opportunities and as the core DVD business continues to decline, we want backfill with new clients in other segments,” Sullivan said.
The company has a well-developed business in Europe, manufacturing discs in Poland, and operating distribution facilities in France, Germany, Italy, the United Kingdom, and Scandinavia. It also has manufacturing and distribution facilities in Australia. While the company has done distribution work for one of the big U.K. supermarket chains, Sullivan said the company is focusing its diversification efforts in the United States. The company does not have facilities in Asia, where Sullivan said it’s nearly impossible to compete with pirates.
“There are a lot discs floating around in Asia, but 80 percent of them are pirated,” he said.
Evan Armstrong of the Wisconsin-based supply chain market research and consulting firm Armstrong & Associates said in addition to Technicolor, a number of other traditional distribution companies and contract manufacturers, including Ingram Micro (which is different from Ingram Entertainment), Cardinal, and Celestica, all have substantial 3PL businesses.
He said there are many advantages to the 3PL business as a distributor eliminates the risk of inventory obsolescence, the carrying cost of inventory and price risk.
“Where 3PLs own inventory, it tends to be related to corrugate, dunnage packaging materials or maybe some parts for doing test and repair type work, but inventory ownership tends to be low,” Armstrong said.
Distribution companies are attracted to the 3PL business, because “they have developed good internal supply chain management capabilities and they have an accessible customer base they can sell to and they have existing infrastructure in terms of warehousing and people that allow them to sell 3PL services,” he explained.
“Most companies are undergoing some sort of change,” he said. For example, Ingram Micro had to adapt to the decline in computer users downloading software rather than buying programs on discs. “It tends to happen where companies are in very competitive markets on the distributor side and looking to diversity and improve markets, or there are markets being eliminated by technological changes,” Armstrong said.
This article was published in the October 2014 issue of American Shipper.
