Sunday, March 15, 2009

Chaos - The newsstand supply chai

The newsstand supply chain is in the midst of one of the most dramatic upheavals in recent history. Here's what's happened and how some publishers are coping.
There were some high hopes for the newsstand last year at this time. The wholesalers and retailers were force-feeding some tough medicine into the supply chain by cutting titles from retailer lists and reducing the number of copies shipped-extreme measures designed to produce very optimistic 50-percent sellthrough results. These days, however, the burdens of the supply chain mixed with financially strapped wholesalers and an economy in a nosedive have finally crippled the distribution system-at least for now.

Who knows, by the time you read this, the story of the newsstand could be radically different than what is presented here. Such has been the scene since mid-January when Anderson News and then Source Interlink-together representing upwards of 50 percent of the distribution market-introduced a 7-cent surcharge on all copies shipped, plus an additional demand from Anderson for publishers to pick up a $70 million tab on scan-based trading inventory.

We've witnessed the wrath of publishers at what they characterized as unilateral demands of the two wholesalers; a mixed bag of cooperation and downright hostility from various supply chain players; accusations of conspiracies; an anti-trust lawsuit; and the exit of Anderson News from the market.
In the meantime, single-copy sales executives at publishers were at defcon 5 on a daily basis, trying to stay on top of a distribution system in complete disarray while wholesalers, national distributors and even printers scrambled to rework logistics and routing.
Meanwhile, retailers, ever in a position of leverage, remained firm in their desire for status quo, which in the end might have helped the supply chain heave itself back into place again.

How Did We Get Here?
Back in the mid-nineties, there were an estimated 325 wholesalers serving their own little regional fiefdoms. "They were all making good money," says Baird Davis, a newsstand and circulation consultant and contributing editor to this magazine. "They had little geographic monopolies."

Then, fed up with dealing with scores of wholesalers and their different systems, Safeway kicked off the "retailer revolution," as Davis calls it, and pushed for national deals which resulted in a massive wholesaler consolidation, going from hundreds to four in the space of three or four years: Source Interlink, Anderson News, Hudson News and The News Group. "In effect it broke the geographic monopolies that local wholesalers had enjoyed for about 40 years," says Davis. "After that, other major retail chains began bidding their work out, 'awarding'-on more favorable terms-their work to several wholesalers, rather than using the network of local wholesalers.

The new supply chain introduced new layers of pricing, discounts, store allotments, and so on. The average cover price of a magazine was sliced and diced into a confusing array of portions. Importantly, Safeway ushered in a new powerplay from the retailer community. "Now under new deals, the retailer demanded more money and they didn't care what the publisher offered the wholesaler. The retailer negotiated directly with the wholesaler, they didn't involve the publisher," says Davis.
The new supply chain hierarchy also put an increasing financial burden on the wholesaler. "Publishers gave in a little with their discounts, but not to the extent that the wholesalers had to give to the retailers up front," adds Davis.

The 7-Cent Shot Heard Around the Industry
Economic conditions finally forced Anderson News Company's hand and the wholesaler, which represented more than 20 percent of mass-market magazine distribution, announced in mid-January a program detailing two demands: Publishers must pay a 7-cent, per-copy price increase on all copies distributed and they must take on a $70 million inventory cost attached to scan-based trading (SBT). They gave a deadline for signed agreements of February 1st. Non-compliers would be refused distribution.

The demands came from Charlie Anderson, Anderson's CEO, in a conference call moderated by newsstand analyst John Harrington. "The business has not been profitable and has not been for a very long time," Anderson said.

Indeed, Anderson noted that since the major consolidations in the wholesaler market began 10 years ago, profits had been dwindling ever since. "What we are trying to do is give some stability to the channel. Short of that, there will be an implosion in the business," he said. Boy, was Anderson right, just not in the way he hoped.

The 7-cent figure represented about a 3.5 percent increase and was arrived at by examining all the variables in retail pricing and efficiency costs. Anderson believed the increase was a "fair rate."
Publishers were not so convinced. Most were angered by Anderson's sudden demands, citing economic woes themselves.

"To expect publishers to make the decision of spending hundreds of thousands or millions of dollars at any time is difficult. To ask them to do it in a two-week window is absurd," said Jay Annis, VP of single copy sales at Taunton Press.

The second and likely more onerous part of Anderson's demands outlined the wholesaler's exit from bearing the costs of scan-based trading (SBT). "We are no longer going to participate in investment of scan-based trading," Anderson said, and added that they had already invested $70 million into inventories for four major customers.

Anderson said that the greeting card industry, which also uses SBT, passes the cost on to the manufacturer. "We think it is only fair that the manufacturer bear the cost," he said.
Anderson said the pricing is non-negotiable-"We really belive the seven-cent number is the number."-and then dropped this bomb: Publishers that don't sign the agreement would effectively be dropped from distribution.

The flip side, however, was Anderson's already precarious position. If publishers didn't comply, the company would be forced out of the magazine distribution business. "We're committed to this. Over the last 12 years we've tried to serve the customer in the best way. The last thing we want to do is exit the business. But why should we be in a business that doesn't give us any return? We don't want to get rich, but we want a fair return and that's all we're asking for."

Then, exactly one week after Anderson announced its price hikes, Source Interlink announced their own. Like Anderson, Source asked for a 7-cent, per-copy surcharge, but no SBT demands. Source's demands, however, were delivered in a letter.

Combined, the two wholesalers are said to account for about 50 percent of the market.

In the letter to clients, Source Interlink Distribution president Alan Tuchman said, "As we continue to aggressively pursue and maintain an effective cost structure within our operation, we've come to the realization that more needs to be done if we are going to overcome the daunting financial challenges that exist."

If the 7-cent surcharge were added to all 3.185 billion copies distributed to retail, the industry-wide cost would be $267 million. Divide that in half, and the one-two punch of Anderson and Source Interlink amounts to an industry cost of $133.5 million.

Distribution System: 'A mess for us all.'
It immediately became clear that some national distributors and publishers were not going to play ball. Time Inc. and, by extension, Time/Warner Retail, announced they would not comply with the new pricing structure. Then Curtis, AMI, Bauer, Hachette and others fell into step behind Time Inc.

A powerful backlash was suddenly swelling against Source and Anderson, which were faced with a significant and unsupportable loss of product. "I wouldn't say that Curtis cut [Source] off," said Dennis Porti, Curtis's executive vice president, in support of his company's decision to stop shipping product to Source and Anderson. "Because of their unilateral mandate, they more or less cut themselves off. The publishers simply cannot afford that kind of money."

Meanwhile, Comag, jointly owned by Hearst and Conde Nast, despite a leaked client letter from a mid-level manager at the national distributor that said both Anderson and Source were about to go under, announced it was working with the wholesalers to continue relations under its IMPACT program, which essentially gets the wholesaler to agree to deliver on a bundled set of services for the publisher, which, if completed, qualifies the wholesaler for another layer of compensation. Those compensation levels were being negotiated in order to keep service interrupted.

Unable to sustain viability in the face of the publisher and distributor rebellion, Anderson was forced to shut down its magazine operation only three weeks after it announced the pricing changes. CEO Anderson said he would "continue to hold discussions with publishers and retailers, trying to develop a viable model that allows it to remain in business," adding the situation is "a mess for us all."
Source, on the other hand, had other plans. A recalcitrant Jim Gillis, Source's president, accused Time Warner and the others that they were conspiring to shut Source and Anderson out. "This is about American Media and Curtis and Bauer and Time Warner trying to control retailer pricing by eliminating magazine wholesalers so they don't have so many they've got to do business with."

Gillis said he was prepared to maintain contracts with his existing retailers, which approach 35,000 and include Wal Mart and Barnes and Noble, the two biggest magazine sellers. Consequently, American Media, Bauer and Curtis and Time Warner Retail clients would not have product going into those retailers.

Source's chairman and CEO, Greg Mays, sent a letter to retailers in an effort to win sympathy for Source's cause. "This has been caused by an unprecedented and unprovoked assault on this channel by certain publishers and a national distributor. They are trying to lock out competition (Source) in the magazine distribution chain to the retailer's detriment," said the letter.

Mays closed the letter saying that Source was about to file a "major anti-trust lawsuit and [seek] a restraining order so we can continue to properly service your stores."
That restraining order was quickly granted by the U.S. District Court for the Southern District of New York, prohibiting publishers and national distributors from denying shipments to Source's magazine distribution business.

It was a major victory for Source because it paved the way for a settlement with Time Inc. and Time/Warner Retail, which soon signed a new, multi-year contract with Source. The new contract, however, did not include the 7-cent surcharge.

Where Does This Leave Us Now?

The suit, while a win for Source, ended up throwing a wrench back into the gears. The channel was on the verge of regaining control of distribution routes, according to a client letter sent by Quebecor, a printer. "Just when it appeared the turmoil was clearing up after the magazine national distributors had reassigned almost all of the Anderson News and Source Interlink wholesaler copies to new wholesalers, a NY judge issued a court order prohibiting publishers and national distributors from denying shipments to Source Interlink's wholesale magazine distribution business," said the letter.
Indeed, Taunton's Annis was just about comfortable enough to forecast some normalcy. "Two weeks ago yes, but now no one is daring to forecast because of the Source restraining order and the lawsuit," he says.

In the meantime, publishers are scrambling as the distribution system tries to regain control, putting significant newsstand promotions and allocation plans on hold. It's a whole new ballgame. "Now we are operating outside of our strategy," says Richard Alleger, Rodale's senior vice president, retail sales. "Certain activities are on hold."

Up until the newsstand imploded, Rodale was leveraging a two-brands-is-better-than-one approach to help retailers find extra value. "Rodale is unique in that we have some obvious synergies in our products, like Men's Health and Women's Health. We have worked with a number of retailers in 2008 and 2009 to bring retailer combo promotions depending upon what they are trying to promote."
Temporary price reductions were also gaining traction. In fourth quater 2008, Rodale offered price reductions to consumers via in-store coupons. The actual cover price did not change, but the coupons knocked $0.50 to $1.00 off the cover price.

Both of those programs have temporarily been shelved, as is an allocation reduction plan that was helping the company tighten up its print orders. "Up until the supply chain disruption, we've been working with a number of wholesalers to reduce allocations across a category, not juts across a title. We anticipate that when this disruption calms down, we will get back to this again," says Alleger.
Annis has been talking to his national distributor, Curtis, several times per day. "From my standpoint, I'm just trying to ship the copies to the places that are going to get them to the retailers. And that's proving to be very difficult right now."
So are the printers. In Quebecor's letter, the printer detailed some of the distribution snafus the supply chain breakdown caused. The lawsuit, for one, had caused delivery instructions to the printer to be re-consigned-again-resulting in a deluge of shipping requests and changes that created havoc with Quebecor's already delicate distribution plans. "This caused QW plants and QWL CF locations to start and stop destination re-flagging of pallets, load planning, truck rerouting and stopping of equipment in route on the same day," said the printer.

Meanwhile, Anderson's shutdown exacerbated the confusion over alternative distribution options. Magazine product formerly consigned to Anderson remain on hold at plants, and, in early February, Quebecor delivery trucks were literally turned away from 11 Prologix East locations when they discovered the facilities were closed.

For now, Annis says he's keeping extra-close tabs on his print orders, often making adjustments at the last second. "Many publishers, ourselves included, work with their national distributor to set the allotments by wholesaler based on sellthrough, field work, wholesalers requests, promotions, and so on. Once this is done, the national distributor issues a total print order for the newsstand. This is then combined with our subscription number for a final print order to go to the printer. This ensures no copies are wasted. Lately, I have been giving an overall number for the newsstand, which is combined with subs and sent to the printer. I then go back at the last minute and work the newsstand galley to the number I gave initially to try and get as much time to determine what wholesalers are now servicing what retailers, and making the appropriate allocations for each."

Annis is also taking an opportunity to hit the reset button. "I'm going to use this opportunity to try and improve my sellthroughs. because in a lot of cases you're getting a fresh start and I'm going to try to take advantage of that."

Annis expects wholesalers and distributors will welcome his help in determining new route allocations, not to mention the chance to keep a close eye on existing in-store promotions. "We have checkouts to protect and we have promotions that are going on that we need to ensure get the right amount of copies."

When the dust settle, says Annis, he and his team will physically visit the wholesalers and their national distributor to rework distributions. "I can imagine how flooded they're going to be with trying to set up distributions. We're going to go out there and assist them to make sure they get set up properly.

Wednesday, January 21, 2009

A Newsstand Fable: The Fox and the Jackal

A Newsstand Fable: The Fox and the Jackal
The latest Anderson broadside, no matter how crude, has left publishers in a very uneasy defensive position.
By Baird Davis

Thank goodness for the Anderson family. Their Anderson News Company can be counted on for keeping the fascinating newsstand fable alive with their periodic threats of Armageddon. What would the industry do without them?

Well the magazine industry might soon have to face that unpleasant reality. If truth be known, many of Anderson's wounds are self-inflicted. In the 1990's the Anderson family saw the dramatic changes occurring in the magazine distribution landscape as an opportunity to greatly expand their successful regional wholesaling operations. They were banking on synergies of scale and a core belief in the superiority of their operating practices. Instead they discovered that regional success does not necessarily translate on a larger scale and retailers, not wholesalers, dictate the channel rules. The grand Anderson strategy has been a big disappointment. They have since pulled back from their most far flung geographic excursions. Overall it has been a humbling lesson in business hubris.

Anderson's actions have always been defined by a strange naiveté about both the magazine and retail industries which they serve. Their latest initiative is no exception. In it they "mandated" an across the board price increase (with no publisher quid pro quo) and in classic Anderson fashion included an ominous threat about closing their magazine wholesaling doors if a significant number of publishers don't acquiesce.

This latest Anderson broadside, no matter how crude, has left publishers in a very uneasy defensive position with only Hobsonian choices. Yes, there does seem to be some sentiment among national distributors/publishers to call Anderson's bluff. However, an Anderson family departure from the magazine wholesaling business would leave a gaping hole in the distribution pie. Many of the major chain retail stores, currently serviced by Anderson, can probably be accommodated (over time) by other wholesaler organizations. News Group, Source Interlink and Hudson News are undoubtedly waiting anxiously in the wings for the chance. But make no mistake about it, an Anderson departure would be a traumatic blow for publishers.

While Anderson was struggling, the self-absorbed brotherhood of publishers (i.e. national distributors) failed to address the gravity of channel conditions. It's almost as if publishers were in a time warp-trapped by a nostalgic yearning for yesterday. They have been unable to adjust to the unalterable fact that magazine distribution ground rules have changed dramatically in the last decade. The major chain retailers now set most of the industry's operating and financial parameters. Wholesalers, for the most part, have agonizingly adjusted to the new channel order. However, national distributors have chosen to ignore the effect of change, often blaming wholesalers for their own woes. As a pragmatic negotiating ploy, this might be considered good strategy. But the tough-guy stance of national distributors now appears to be a relic of the past-one that's caused publishers to miss a critical opportunity to direct much needed channel reform to their advantage.

The classic struggle between retailers, wholesalers and publishers is nearly as old as time. The Greek Aesop's fable, "The Lion's Share," captures the essence of this conflict. In it the lion (retailer), the fox (wholesaler) and the jackal (publisher) go hunting and successfully kill a deer and divide it into 4 pieces. The lion (retailer) takes three quarters and leaves the fox (wholesaler) and jackal (publisher) to fight over the remaining quarter. The battle for the remaining quarter is a test for survival in the treacherous, yet nourishing, forest.

That's the Aesop question-can wholesalers and publishers, like the fox and the Jackal, find a way to do what's prudent and equably divide the remaining quarter? If they can't they'll soon find that life outside the forest is less appetizing.

Monday, December 1, 2008

Single Copy Sales Are Likely to Come Back

Single Copy Sales Are Likely to Come Back
But The Newsstand Will Feel the Impact of a Broadly Challenged Magazine Business for a Longer Time
By John Harrington

Business trends have a cyclical quality to them. Most economists expect the troubled national and international financial system to rebound, although they may argue on how rapidly the recovery will take place. That is also likely to be the case with the currently distressed newsstand. Retail conditions will improve, soon we hope, and impulse item retail sales will rise with them. However, magazine newsstand sales are one facet of a more complicated publishing economic model; and some fundamental constructs of that model may be shifting. The eventual form of a refitted magazine business will impact the newsstand marketplace in ways very difficult to predict.

Newsstand 2008: At times it may seem we have reported on it endlessly: "it" being the troubled state of the mass market magazine distribution channel. The first half of 2008 was the worst for newsstand sales in at least five years, after a period of relative stable performance. Sell-through figures, which had been the focus of retailers, publishers and national distributors, and most emphatically wholesalers, slipped, after several years of improvement. The losses were particularly frightening for an already financially stressed wholesaler level of the channel, especially since there were indications it had been adopting some more rational strategies.

It has not gotten any better since then. Virtually at every level of the distribution system, leaders have acknowledged that the third quarter was, if anything, even more discouraging. Magazine Information Network (MagNet), the wholesaler data base of magazine and book retail sales, provided The New Single Copy with figures estimating a year-to-date double-digit decline in units and more than 5.0% in retail dollars. It may be some solace, that almost universally, the dire numbers are attributed to the national, and even international, economy that is clearly recessionary, and, in some ways, bordering on a depression.

The situation is more serious than a business struggling through a sluggish economy. The economic model of magazine wholesaling has been broken for more than a dozen years. Some band-aids have relieved conditions, but not in a structural fashion. Of the four large, surviving wholesalers accounting for over 90% of the business, only the smallest one with an estimated 15% market share, was even marginally profitable going into 2008. What does anyone think the catastrophic numbers cited above have done to these companies' bottom lines?

On top of that, only within the last month, the market for magazine waste paper, which has been for some time a key source of income for wholesalers, has virtually collapsed. Most waste paper was being sold through brokers to the China market, where it was used to manufacture construction materials. In a constricting world economy, there is not a lot of construction going on. Some wholesalers thought they had a level of protection on this issue through price-protection contracts they had with paper brokers. Sorry, however, last week, one of the largest brokers notified its customers it was exercising a force majeure clause in its contracts and cancelling them.

The Good News: Still, even after this dreary recitation of bad news, it is worth recalling Mark Twain's comment about Wagnerian opera, "It's not as bad as it sounds." Really? How so? To start with, there are some national distributor initiatives moving forward designed to deal with some of channel's structural liabilities. Both have been previously reported on here, but each are getting closer to the operational stage. Comag Marketing Group's Impact II program, which will establish primary distributors in most markets, will be, according to the company's management, signing contracts with wholesalers in the next few weeks. Early this fall, Time/Warner Retail announced a plan to implement pass-through pricing for all Time Inc. publications, eliminating the cumbersome display allowance collection process. TWR management confirmed its plan will be implemented in January, even where it is meeting resistance from retailers, service providers, and even wholesalers. Although both plans have critics, many others, including most wholesalers, think the programs will lend some rationality to a troubled distribution network.

In terms of sales, the celebrity category, which had lost some of the buzz of the past five years, was looking at phenomenal sales for current issues with covers featuring the United States President-elect, Barack Obama. People may end up with its best issue ever, outside of those covering the death of iconic figures, such as Princess Diana and John Kennedy, Jr. Us Weekly is expected to top one million on the newsstand, a figure it has exceeded on only a few occasions. Additionally, the newsweeklies are looking at 500,000-plus copy sales of not only their regular issues, but also for specials about the first African-American elected President. Across the publishing spectrum, there is a sense, and certainly a hope, that the Obama effect will boost newsstand sales for several months, at least through his historic inauguration in mid-January. Always optimists, channel members are hopeful that the excitement over these publications will improve the entire category. It is not an unrealistic thought.

Additionally, magazines generally remain friendly to price increases. Although some checkout titles have recently experienced substantial losses following large price hikes, the results may have been exaggerated because the cover prices had been kept artificially low for too long. On the other hand, The Economist recently jumped its cover a dollar to $6.99, less than two years after going to $5.99, also a dollar raise. Sales continued to grow for the newsweekly, which is priced two dollars higher than its primary competitors.

Some executives have expressed concern that depressed magazine sales are driving retailers to squeeze the category, perhaps reducing space, even at checkout. A skeptical view from here is "What will they replace publications with?" Consumers are not, perhaps slightly hyperbolically, buying anything right now. Sales of all discretionary products are down, most by significantly higher numbers than magazines. The public is going to the supermarket less often, and with a parsimonious mindset. If it's not on the shopping list, it doesn't go in the basket. That attitude doesn't just hurt publications, it hurts most of the products magazines and books compete with equally. Perhaps cold comfort, but some comfort.

The Publishing Background: Publishing revenues have often been described as a three-legged stool: advertising, subscriptions, and single copies, or newsstand. The latter has always been the smallest leg, on a broad scale, estimated at 16% or a sixth, with subscriptions at around a third, and a little more than 50% coming from ads. However, our analysis of some of the largest titles puts ad income considerably higher, and newsstand around 10%*. Even before 2008, The New Single Copy has stated that newsstand, even with all its well documented struggles, was probably the most reliable leg of the stool. Advertising pages were down and had been for most of the decade. Subscriptions were about even, but that was deceiving, because the cost of obtaining them had grown dramatically ever since the late 1990's collapse of the subscription clearing houses. In contrast to newsstand, which has been friendly to cover price increases, the average subscription price today is lower than it was 10 years ago.

As 2008 draws to a close, newsstand is not only the most reliable source of publisher income, it may be the only reliable one. The problem is it is also the smallest, and is not easy to expand. Advertising sales, the engine that drives American publishing, may not have collapsed, but some publishers likely think it has. The CEO of the largest magazine company recently said, "It was looking like 1931." For non-historians, 1931 was not a good year for anything. One of the most famous former magazine editors, Tina Brown, was quoted on (11/1/08) saying "I'd hate to be a magazine editor now." The most recent figures from Publishers Information Bureau (PIB) showed ad pages down so far this year by nearly 10% and revenues by half that. MIN Media Industry Newsletter (11/17/08) reported third-quarter pages off by 10% and estimated the fourth-quarter number would be minus 14%. Since much advertising is discounted, the revenue figures are generally acknowledged to be much worse than reported.

Unlike newsstand declines, advertising malaise is caused by much more than the sorry economy. That just makes it even worse. All media advertising is in turmoil, as it adjusts to the impact of the internet and expanding media outlets in general. For publishers, that means there is a pervasive fear that much of the lost advertising will not come back when the broader economy does. In a general publishing economic model where the function of circulation, both newsstand and subscriptions, is to support advertising rate base guarantees, low ad sales downgrade the role of circulation.

A few weeks ago, Hearst Magazines announced that, because of poor ad sales, it was closing CosmoGirl! Certainly a sound publishing decision. Yet, CosmoGirl! sold over 300,000 single copies every issue. In 2007, it generated $11.3 million at retail, ranking it 44th among audited titles. That's out of more than 5,000 titles. For wholesalers and retailers, those sales will not be replaced, and there are no meaningful cost savings for either of them by not delivering, merchandising, and accounting for the title. Many magazine industry analysts think that, even after the worst of the present ad condition is past, more than a few magazines will close, and not be replaced. The impact on wholesalers and retailers is clear. Large mainstay titles of the newsstand are likely to recover, but the total pie will, quite likely, be considerably smaller. And there are not commensurate cost savings.

The prospect of an already severely damaged wholesaler level of the channel being rendered even more financially distressed has to be troubling to publishing senior management. Unfortunately, at the moment, it is not as demanding of their attention as the catastrophic ad business. When they have tweaked their business plans and adjusted to the new realities of advertising, the internet, and some other things as well, hopefully they will still have a newsstand distribution channel to make better.
* These figures represent total moneys generated, calculated on published ad rates, subscription and newsstand cover prices. They do not represent publisher income.

Monday, October 20, 2008

Publishers Claiming Digital Circ on Rise

Publishers Claiming Digital Circ on Rise
By Dylan Stableford

Driven by environmental concerns and the high cost of international distribution, publishers are claiming digital circulation is on the rise.
The number of publishers claiming qualified electronic editions-i.e. digital copies-on their most recent BPA circulation statements increased 28 percent, according to the company. There were 286 in June, up from 224 in December. (The jump, in part, can be attributed to a rule amendment requiring just a single pre-audit per publisher, BPA CEO Glenn Hansen said.)

Cimarron Buser, SVP, marketing and business development at Texterity, added that "the increased use of laptops in a paperless world" has also helped spur on the increase of digital.\

Despite the increase, digital still accounts for a small percentage of the overall circulation mix. On average, electronic editions made up 13 percent of total circulation for all BPA members. In fact, of the top 20 magazines in terms of digital circulation tracked by BPA, just one-Renewable Energy Focus-claims a majority of its circulation digital-only.Oracle claimed a digital distribution of 146,545-a 19 percent increase-during the first half of the year, topping all BPA titles in digital circulation. Electronic editions now comprise almost 30 percent of Oracle's total subscriber base.
BPA's Top 20 Titles in Digital Circ First Half 2008


Magazines Wrestle with Future Business Model
By Tony Silber
SAN FRANCISCO-The magazine industry can't afford to have a "protectionist" strategy about businesses that are not growing, and instead should manage them for profit and apply resources to growing areas of the business, IDG CEO Bob Carrigan told attendees at the American Magazine Conference here Monday. In a wide-ranging conversation under the banner "Reshaping the Model for Magazines," Carrigan-who unlike fellow panelists Amex Publishing CEO Ed Kelly and Meredith EVP Andy Sareyan is an executive in b-to-b and in the tech sector-seemed to be more e-centric than either Kelly or Sareyan. Asked what the ideal revenue mix would be in the next few years, Kelly and Sareyan both said they want to reach a 40 or 50 percent mix between e-media and print. Carrigan said IDG is already there. "We're already in a space, in digital, where the advertising is bigger than print ever was," he said. "We're seeing an expansion in digital. We'll manage print as best we can." "We'd like 50 percent," Sareyan said. "But ad pages remain very important and they often lead an integrated buy." But how do you build a business when you're putting in more money than you're getting out? Carrigan said it's about creating programs that drive leads, rather than sell eyeballs. "There's no reason why worldwide magazine brands shouldn't drive very high CPMs," he said. And a strong database is critical for that, he added. "Marketers are willing to pay dearly for qualified leads." Kelly pointed out that Amex Publishing is owned by American Express-which has one of the largest databases in the world-and is partnered with Time Inc. "I spend a lot of my time trying to tap into that database, and tying into all the things we can do for marketers," he said. "The whole 360-degree approach is an area where we've had a lot of success." Social networks remain a distinct challenge for publishers. "There are things to generate revenue directly and there is indirect revenue," Carrigan said. "We try to get people to do one more thing on our Web sites and then sell against that." "We're only dipping toes in the water," Sareyan admitted. Kelly said: "I'm letting American Express figure it out and share their learnings with us."

Tuesday, October 7, 2008

Deciphering a Conundrum: First-Half 2008 Newsstand Sales

Deciphering a Conundrum: First-Half 2008 Newsstand Sales
By Baird Davis
Record price increases unleashed a precipitous unit sales drop while overall revenues managed to climb.

The conundrum, which is the newsstand, was never more apparent than the first half of this year. The unit sales of audited publications dropped a staggering 5.9 percent, undoubtedly the largest year-over-year decline in history. Yet revenue grew by a record 3.0 percent to over $1.6 billion.

This apparent contradiction was caused by record price increases. The average price of newsstand-sold publications rose by 9.6 percent-from $3.42 to $3.75. To understand the magnitude of this historic price escalation consider that during the preceding four-year period newsstand prices only rose 2.6 percent, an annual average of a little over a half of one percent.
Pricing alone can't explain what transpired at the newsstand in the first six months of this year. But it's fundamental, I believe, to understanding the depth of the changes that have occurred.

The End of the Low Cover Price

The sound you just heard was the end of the low cover price checkout title era tumbling off a wholesaler's conveyer belt. It was an era personified, and dominated, by the gigantic sales of digest-sized TV Guide, selling for decades at prices less than a dollar, and the price-friendly tabloids. Now TV Guide is a sales laggard, cover-priced over $3, and the major tabloids are priced at $3.40 and selling at a fraction of the level they achieved just a decade ago. In the last few years Bauer titles In Touch and Life & Style (priced at $1.99) temporarily filled the low price niche vacated by TV Guide and the tabs. But in October of 2007 the low price era, effectively, came to an abrupt end when market leader Bauer not only raised the prices on the aforementioned celebrity titles to $2.99 (a 50 percent increase), but also increased the cover price of their other seven audited titles, including a 19 percent increase for unit sales market leader Woman's World. By all accounts the Bauer price increases were precipitated by strong pressure from wholesalers who argued that the economics of distributing super low priced publications (less than $2) were no longer economically feasible. Yes, there are still a few holdouts. They include Family Circle, All You and Woman's World, which despite a 19 percent price increase, is still priced below the $2 line. But the low cover price era has receded into history.

The Bauer Factor

Although Bauer operates outside the glare of Manhattan media attention, and is not an advertising sales behemoth, they have been the newsstand unit sales leader for most of this decade. Prior to this year, they accounted for over 20 percent of all unit sales of audited publications, outselling Time Inc., the number two newsstand sales company, by nearly two to one. To some great extent the newsstand market dances to the beat of the Bauer drum. As previously mentioned, Bauer raised prices on all their publications-up an average of 35 percent. Sales losses were certainly to be expected given the magnitude of the price increases. In the first half of this year, the price sensitive market weighed in with its decision. Bauer's sales declined nearly 19 percent. However, their sales revenue rose 8 percent. Does this represent a reasonable trade-off for Bauer? I'm not sure, but I suspect the unit sales decline was greater than they anticipated. In the aggregate, Bauer unit sales decreased 20.6 million copies in the first half of this year. To put the scale of this decline in market perspective it should be noted that their unit sales decline was only a little less than Conde Nast's 23.6 million unit sales during this period.

The Market Effect of Bauer Price Increases

When the sales of 20 million copies are sucked out of the market it's bound to have an effect on the sales of other publications.

Celebrity Titles

The six major celebrity titles (People, Us, In Touch, Star, Life & Style, OK!) experienced unit sales losses of 10.3 percent and offsetting revenue gains-to $459.3 million-of 9.9 percent. The unit sales decline in this category can largely be attributed to Bauer's two celebrity titles (In Touch and Life & Style). But a funny thing happened to the other four publications in this category-two gained unit sales (People and OK!) and the other two (Us, Star) lost sales ground. Interestingly People's unit sales rose in the face of an 11 percent price increase. OK!, on the other hand, was the only title in this group that did not raise cover price. People's sales increase can be partially attributed to several very successful covers (several of which involved payment to the cover subjects), but it also appears as if People may have benefited by the sharp decline in In Touch and Life & Style sales. OK!'s unit sales increase appears to be a result of holding steady on price (relatively low $2.99) and, perhaps, because of a perceived market quality distinction. Overall the celebrity category suffered some serious unit sales price shock, but they added to their sizable share (30 percent) of the newsstand revenue market.

Top 25 Checkout Titles

In this period they accounted for more than 75 percent of the checkout unit sales and revenue. They represent 60 percent of total magazine unit sales and 52 percent of the revenue pie. There are 535 audited publications that reported newsstand sales in the first half of 2008, but it's the sales of the top 25 publications that really define the newsstand market. During this period their unit sales declined by 24.9 million, which accounted for nearly all of the 26.7 million unit sales losses for the entire audited publication market. To understand the newsstand market it's seldom necessary to look very far beyond the sales performance of the top 25 publications.

The Bauer price increases appear to have had a broad market affect. The unit sales decline of Bauer titles not only accounted for a large percentage of the total market fall, but its pricing changes, particularly for their two celebrity titles, appears to have altered title preferences-note the sales increases for People and OK! and the market declines for Us, Star, the tabs, Cosmopolitan and O, The Oprah Magazine.

Checkout Sales are Mixed, Mainline Sales Continue to Fall

The sales of checkout titles were scrambled in the wake of the Bauer price increases. Overall the unit sales of checkout sales declined 6.3 percent, but revenue rose a robust 4.7 percent. Mainline unit sales also declined (4.6 percent), but the 4.2 percent increase in average cover price was not enough to lift revenue above last year's level.

The six-year trend reveals checkout unit sales annually declining 1 percent and revenues rising about 2 percent. This contrasts with the mainline whose unit sales have been declining steadily-an average of 4.4 percent and revenue falling about 2 percent annually. The spread between checkout and mainline sales continues to expand-an indication, I believe, that a growing proportion of industry sales are being made in the mass merchandiser, supermarket and drugstore channels of trade-where checkout sales predominate. This trend has been accentuated by the growing reluctance of wholesalers to distribute low-efficiency publications.

Newly Audited Publications

A total of 23 publications with newsstand sales were added to the auditing ranks in the last year. They contributed substantially to overall sales-adding 13 million unit sales and $40 million in revenue. Five of these titles contributed more than $2 million in sales for the period. They included People StyleWatch, which continued its strong performance first reported in the second half of 2007. All You reported average sales of 406,000 per issue, which is very impressive considering that it's distributed only in Wal-Mart stores. Quick and Simple, published by Hearst, reported seemingly high average per-issue newsstand sales of 321,000. However, their sales might be a little disappointing considering that the cover price was a super-low $1.63. O at Home (also published by Hearst) reported sales for the first time-nearly a 300,000 average for their two published issues. The fifth title reporting more than $2 million sales was American Curves, published by newcomer Canusa. Its 77,000 average sales per issue is good considering its high $6.99 cover price. This title joins Oxygen - Women's Fitness, also published by Canusa, which made its audit debut in the first half of 2007.

The relatively strong performance of these titles demonstrated the continuing importance of new publications in sustaining a viable newsstand industry.

Sales of the Top 10 Newsstand Publishing Companies

The top 10 publishing companies dominate the newsstand-combined they account for 79 percent of unit sales and 75 percent of revenue. The top six newsstand companies (Time Inc., Bauer, American Media, Hearst, Conde Nast and Wenner) further separated themselves from the pack. They accounted for over $1 billion in revenue in the first half of this year. These are the companies that have, by far, the most significant effect on newsstand sales.

Time Inc.

In a difficult market Time Inc. sales leaped dramatically. Unit sales were up nearly 12 percent and revenue increased more than $40 million-a lift of almost 19 percent. Contributing to this strong sales performance were two titles new to the auditing ranks (People Style Watch and All You). Even if the sales of those new publications are excluded, their revenues would have been up 12 percent. The sales revenue of People (up 19 percent) and Sports Illustrated (up 34 percent) were the major sales increase contributors. However, nearly all titles, except Southern Living (down 12 percent) and Money (down 15 percent), displayed steady sales performance. As a result they extended their revenue sales lead and made big inroads on Bauer's unit sales lead.


As previously discussed Bauer performance was decidedly mixed. They surrendered a major portion of their unit sales lead, but they also expanded their revenue, advancing their share of revenue above all their primary competitors, except Time Inc.

American Media, Hearst, Conde Nast, Wenner

The newsstand revenue of these four companies remained relatively flat in the first half of this year, although three of them (American Media, Conde Nast, Wenner) suffered unit sales falls. American Media was hurt by the continuing sales slide of their two tabloid publications, which accounted for the bulk of their unit sales decline (8 percent). Hearst posted unit sales and revenue increases primarily because of the addition of two newly audited titles (Quick & Simple, O at Home). However, Hearst unit sales would have been off 11.5 percent and revenue down 7.5 percent without the benefit of those two titles. Disappointing sales from O, The Oprah Magazine (units down 17 percent and revenue off 6 percent) and sales drops of 18 and 23 percent respectively from Cosmo Girl and Seventeen contributed to a surprisingly weak six-month period for Hearst.

Conde Nast's performance was more stable than Hearst, but still far short of satisfying. They had some sales difficulties with Glamour (down 9 percent) and Vogue (down 13 percent), but they were helped by Vanity Fair's 6 percent sales rise. Wenner raised the price on Us and experienced an 11 percent unit sales decline. This accounted for nearly all of their unit sales losses, but they still eked out a 1 percent revenue increase on the strength of Us' cover price increase.

Source Interlink Media

It was a very rough six-month period for Source Interlink Media at the newsstand-unit sales down 19 percent and revenue off 12 percent. The major culprit was the sales fall of their two soap opera titles (Soap Opera Digest and Soap Opera Weekly). Combined the two soap titles lost 22 percent in unit sales and dropped nearly 16 percent in revenue. Their other 43 titles (all special interest publications) didn't fare too much better. They were down 16 percent in units and 10 percent in revenue. This company is rapidly losing newsstand sales. They appear to be a victim of the large cover price increases they have imposed over the last few years, as well as the downturn in the automotive industry, which has adversely affected most of their large cadre of auto-oriented publications.


On the surface it appears as if Meredith bucked the sales decline trend that's plagued the industry. They reported increases in unit sales and a 6 percent revenue gain. However, their sales were artificially helped by distribution to Dollar Tree stores, where publications are presumably sold for a dollar or less. Meredith has rescinded the Dollar Tree agreement, but the remnants of this agreement are reflected in the sales they reported in the first half of this year. It's believed that both BH&G and Ladies Home Journal were particularly helped by the inclusion of Dollar Tree sales. Without the Dollar Tree benefits it's assumed that Meredith's sales for the period would have been flat or down a little.

Northern & Shell

The sales of OK! continue to surprise. Their unit sales and revenue jumped nearly 20 percent. They were one of only five publications among the top 25 newsstand publications not to suffer a unit sales decline. It's now obvious this title is going to remain a formidable entry in the highly competitive celebrity title category.


Another strong period for Rodale. Increased sales from Men's Health and rapidly rising Women's Health more than offset Prevention's nearly 10 percent sales decline. Runner's World also impressively increased sales even though its cover price was raised.

Assessing Reasons for the Sales Decline

Conventional wisdom would seem to indicate that the hefty first half sales declines are attributable to higher gas prices, less supermarket visits and a declining economy. I have no doubt those factors have contributed, but I don't believe they're the major contributors. My sense, after reviewing the data, is that the major contributor was the record price increases, particularly those initiated by Bauer. To a lesser extent, but still a more significant contributor than a weak economy, are the wholesaler initiated draw reductions.


The newsstand market has always been very price sensitive. Publication pricing that got too far ahead of the reader demand curve was nearly always punished. That's why cover price increases have traditionally been very conservatively employed. However, in the last year many publishers have thrown pricing caution to the wind. The Bauer price increases, which we've discussed, have had a particularly large sales impact. The Bauer titles were joined in the price increase parade by a host of other checkout titles (11 of the top 15 titles increased price in the last period and all 15 titles increased price in the last two years). Price sensitivity is most acute for checkout titles, those publications trying to appeal to a broad audience. Special interest publications and those sold primarily on the mainline, I believe, are slightly less price sensitive because they are less of an impulse purchase.

Price increases, if they are in the extreme, are also likely to change buying behavior and product preference patterns. In this period we witnessed this phenomenon as the mega-price increases employed by Bauer for their two celebrity titles appeared to affect the sales pattern of all celebrity publications.

Wholesaler-Initiated Draw Reductions

The wholesaler-initiated draw reductions, started in earnest more than a year ago, are also having an adverse effect on sales (although they have helped produce the first industry efficiency rise in many decades). The rapid spread of scan-based trading (SBT) applications and the reduction in wholesaler distribution centers have accentuated the impact of these arbitrarily initiated draw reductions. It's difficult to hazard a guess as to its magnitude, but if efficiencies have improved, as reported, by 3 or even 4 percentage points it's a good bet that sales have been adversely affected by at least 1 percentage point.

Final Thoughts
The newsstand is not one-dimensional. It's driven by a set of interactive factors that conspire to make it one of the most confounding segments of our business. In the first half of 2008 the influence of pricing-especially the mega-price increases, which have had such an impact on sales-has been well demonstrated and so has the crucial market impact of wholesaler operations. The market affect of the economy, often used as a scapegoat, is less well understood.

For publishers it seems the lessons are clear-to maximize newsstand sales, pay careful attention to pricing strategy and develop a sound understanding of wholesaler operations, including their expanding SBT initiatives.

Monday, September 29, 2008

To Postal Workers, No Mail Is 'Junk'

To Postal Workers, No Mail Is 'Junk'
With revenues falling, the post office owes its future to stuff we throw out.
BY Caitlin McDevitt
From the magazine issue dated Oct 6, 2008
These are tough times for the U.S. Postal Service. It's being pummeled by high fuel costs. The soft economy is crimping the overall volume of mail, which fell 5.5 percent in the past year. Its business is also falling as Americans opt for e-mail over birthday cards and thank-you notes. Now comes another threat: consumers like Colleen Plimpton of Bethel, Conn. Earlier this year Plimpton became tired of the credit-card offers, catalogs and advertising fliers that clogged her mailbox. So in February she paid $20 to GreenDimes, a firm that helps consumers reduce their inflow of "junk mail" by contacting businesses on their behalf. "[Junk mailers] are cutting down trees willy-nilly, and that has got to stop," says Plimpton.

To the post office, consumers like her are a serious threat. "Efforts to convince people not to receive mail are really going to hurt," says Steve Kearney, a Postal Service senior vice president.

The Postal Service lost $1.1 billion in its latest quarter. That number would be even larger if it weren't for direct mailings, which now constitute 52 percent of mail volume, up from 38 percent in 1990. Revenue from direct mail "is the financial underpinning of the Postal Service-it could not survive without it," says MichaelCoughlin, former deputy postmaster.

But 89 percent of consumers say in polls that they'd prefer not to receive direct-marketing mail; 44 percent of it is never opened. That's why 19 state legislatures have debated Do Not Mail lists, which would function just like the federal Do Not Call list. But partly due to opposition from postal workers, not a single bill has passed. When Colorado state Rep. Sara Gagliardi held a public meeting on a bill she was sponsoring, she was surprised when a crowd of postal workers showed up to express vehement opposition.

Both the Postal Service and the Direct Marketing Association say direct mail is a key source of customers for small businesses. "Advertising mail is a very valuable product to many consumers," says Sam Pulcrano, Postal Service vice president for sustainability, who points to two-for-one pizza coupons as especially welcome surprises. To blunt opposition, the DMA recently launched the Mail Moves America coalition to lobby against the restrictions.

GreenDimes founder Pankaj Shah isn't sympathetic. Not only is his company providing a service to consumers, he says, but it has also used its fees to plant more than 1 million trees. "We're all about giving consumers choice, not about bringing down the post office," he says. Still, as more consumers opt out of junk mail, rain, sleet and gloom of night may seem like the least of mail carriers' problems.


Tuesday, September 23, 2008

More Publishers Raise Prices. But Success Rates Are Less Encouraging

Cover Prices: First Half 2008
More Publishers Raise Prices. But Success Rates Are Less Encouraging
By John Harrington

Significantly more publishers increased their cover prices during the first half of the year than has been the trend of recent years (see chart below). On the other hand, the results were less encouraging. Those are the findings of a special analysis of recently released semi-annual circulation figures of audited magazines conducted by Harrington Associates, publisher of The New Single Copy.

The 25% rate of titles whose unit sales rose during the same six-month period in which they also increased their newsstand cover price is not only the lowest figure in the past three years, it is the lowest figure since Harrington began measuring the performance in 1998. Likewise, the percentage of magazines whose dollar sales rose at all, and whose dollars rose by more than the inflation rate was also the lowest during either period. For 355 titles not raising their cover price, 109 of them experienced unit increases, a performance in line with past experiences. As has generally been the case, few magazines lowered their price (only 12), and seven of them had unit jumps, but only two large enough to increase retail dollar sales.

Until this measuring period, we have maintained that the newsstand is generally friendly to cover price increases. As we stated in reviewing the overall sales in an earlier issue (8/11/08), one six-month period does not indicate a trend, but the soft numbers are certain to influence future publisher decisions.

In any discussion about pricing, it is noteworthy that four major newsstand titles - Bauer Publishing's Woman's World, First for Women, In Touch, and Life & Style - all instituted major price hikes during the period. Each of them were previously priced under $2.00, a level nearly all other publishers had pushed past quite some time ago. A factor that made newsstand price-increase-friendly has been the low key approach most magazine publishers have generally taken to marketing price. Few publishers make price easily identifiable for consumers. It might be hidden in the barcode, camouflaged in small print on a corner, or tucked away on the spine. The only place these publishers drew any attention to their newsstand price was on subscription insert cards buried in the pages. Bauer was the leading exception to this practice, promoting their low prices in starbursts or balloons on the cover (some competitive titles followed suit). Hence, when Bauer raised their prices (the two celebrity weeklies, In Touch and Life & Style went up 50% to $2.99; Women's World and First were less aggressive), potential buyers were much more likely to recognize the magazines now cost substantially more. The results, particularly for the celebrity weeklies, which had both been on growth curves, were dramatic. In Touch units were down 28.7% and Life & Style's fell 30.2%, although retail dollars rose for each, 7.2% and 4.8% respectively.

Women's World and First, whose increases were gentler, experienced unit fall-offs, 10.5% and 4.7%, but their dollar growth figures were more comforting: plus 7.5% for Women's World and an impressive 19.2% for First. Some observers have noted that since most Bauer titles are newsstand-revenue driven, with limited advertising pages, the overall performance was at least tolerable for the publisher.

A few performances worth noting. Large newsstand magazines combining price hikes with unit sales increases included People, price up 12.9%, units up 5.2%; Cooking Light, price up 8.5%, units up 3.8%; and Men's Health, price up 10.9%, units up 2.0%. Among larger newsstand titles not raising their costs, some had strong unit growth, and they might be considering price hikes: Popstar!, units up 29.4%; Twist, units up 27.0%; Fitness, units up 20.0%; and OK!, units up 19.4%.

A major publisher on pricing: In an interview in (9/17/08), the email newsletter of Circulation Management, Paul Caine, president of the Entertainment Group at Time Inc., offered the following: "Our pricing approach has always been to price appropriately for the market based on what we believe the consumer is willing to pay, and the value we are providing to them...For those reasons we exceeded $4.00 for the first time on our average newsstand price [for People]."