Sunday, December 16, 2007

As 2007 Draws to a Close: Where is the Business Heading?

As 2007 Draws to a Close: Where is the Business Heading?
By John Harrington

Editor's Note: Last week, I participated in a Newsstand Forum sponsored by the Magazine Publishers of America (MPA). The following is an overview of my remarks and some of the discussions that followed. The panel moderator was Jerry Lynch (IPDA), and the other members were Tom Masterson (Hachette Filipacchi Media U.S.), Lindsay Valk (Hearst Magazines), and Jeremy Koch (MPA).

2007 began with a continuation of trends that have characterized newsstand for several years; low levels of unit and dollar growth, and a small, but encouraging improvement in retail sell-through figures. A very preliminary look at results for the third quarter finds a continuation of both trends. Retail dollar sales appear to have improved 1.6%, compared to the same period in 2006, while units were up 1.3%. If this continues for the remainder of the year, it will mark three straight years of moderate unit and dollar growth for magazine newsstand sales. Following nearly a decade of declining unit sales, this level of performance is encouraging.

More notable is that the 1.3% unit sales increase in the third quarter was accompanied by a reduction in retail draw of 5.1%, which translates into a sales efficiency of nearly 42%. Although that figure needs to be viewed very cautiously (the first-half figure was 38.4%), it would appear to indicate that the efficiency initiatives of most wholesalers and several national distributors are beginning to pay off. According Harrington Associates' annual study, The Magazine Retail Sales Experience, the industry efficiency figure has not been above 40% since 1996. In any event, the magazine distribution channel's conventional wisdom of "Cut the draw, cut the sale," seems ready to become history.

Positives: So, entering 2008, newsstand sales are coming off three years of unit growth, accompanied by improving efficiencies, both trends that contrast sharply with the preceding decade. Added to that is a retail atmosphere that has been generally friendly to cover price increases (Harrington Associate's regular review finds nearly a third of price increases are accompanied by unit growth; and last week The New Single Copy reported that Bauer Publishing appeared to be doing well with its 50% price hikes on some of its high-volume celebrity titles). A recent history of unit growth, improving efficiencies, and an ability to raise prices! It's not the worst way to begin a new year.

Challenges: On the challenge side, the economics of the channel remain fragile. Three of the four large wholesaler groups that represent 90%-plus of the market claim to be losing money, and the fourth says its profit margins are slim. Publishers are competing in a soft advertising market, and the subscription side of circulation has been struggling since late in the 1990's.

Scan-based-trading (SBT), which has been on retailers' agendas for nearly a decade, is an issue that the magazine distribution channel will hear a lot about in 2008. For a variety of reasons, wholesalers are now involved SBT relationships with retail chains, who are estimated to represent more than 25% of magazine sales. Several other chains want to do the same; the number could expand significantly. To date, these programs have been developed strictly between wholesalers and retailers. Yet, the long-term impact will be felt, substantially if not equally, by publishers and national distributors. Most participants agree that for SBT to progress in a way that is beneficial to the channel, it must be an industry-wide initiative. The issues inherent in SBT - among them shrink and the responsibility for it, the impact of inventory costs shifts, and auditing - are profound. Negotiating them, and a host of peripheral matters, will strain a channel already characterized by tensions at every level. Moving forward will require accommodations by all of the trading partners: publishers, national distributors, wholesalers, and retailers.

Moving Forward: The recent positive history of unit growth, improving efficiencies, and a price-friendly market may help ease the resolution of the above challenges.

Publishers and national distributors acknowledge that the recent wholesaler efficiency drives are more productive and effective than previous efforts, and the suppliers are working more closely with them as a result. Still, they caution against moves that may not take into consideration unique publisher needs, particularly advertising rate base issues. As one publisher pointed out, the economic models of publishers, national distributors, wholesalers, and retailers do not always match. Granted, there will never be a full match of economic incentives, but it was also noted that the distribution channel's financial structure has only been marginally modified over the past dozen years. In 1995, there were around 300 wholesalers and they operated in limited markets, characterized by retail density. There were many fewer titles, some of which sold over two million copies per-issue, and their efficiencies were in the 60% range. No single title sell that many copies today and only one or two have that kind of sell-through. Discussion seemed to indicate there is more awareness of these disparities, and sympathy to the problems they create.

During the forum discussions, there was considerable reference to the "Sustainability" initiative of Wal-Mart, the largest retail chain. At its direction, publisher, national distributor, and wholesaler executives have met twice in the last month in the retailer's Arkansas headquarters to address a list of issues, selected by the chain. Overall, Wal-Mart said the main goals of "Sustainability" are 1) a sales increase of 5%; 2) improving efficiencies to 50%; and 3) achieving waste reductions throughout the channel. A national distributor executive said that other retailers can be expected to follow Wal-Mart's lead. The fact is, the "demands" of major retailers to focus attention on these issues may be the push that renders them achievable.

There seems to a broad sense that 2008 will be a year of significant change. If the entire channel, including retailers, operates as partners, the change has the potential to be positive and long lasting.

One possible impediment to that process was raised at the forum by Mike Sullivan, president and CEO of Comag Marketing Group (CMG). Responding to the topic of a lack of significant progress, despite much debate, Sullivan said, "'Ego-nomic' business decisions continue to prevail over 'eco-nomic' business decisions."

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