Tuesday, October 7, 2008
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.
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.
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.
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.