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.