Is the Shrink Threat Exaggerated?

Circulation Management, April 1, 2003

Byline: Barbara Love

"In a perfect world of technology, scan-based trading would leverage point-of-sale data and distinguish data exchanges among all trading partners. It has the potential to reduce steps and costs that don't add value, to streamline replenishment, to accelerate payments, to eliminate in-voice discrepancies, to improve backroom efficiencies, and to achieve all of the advantages that other consumer product companies already have in place. Many would argue that, in our quest for a workable distribution system, scan-based trading is a proverbial Emerald City. But first, we have to take a good look behind the curtain."

It's fair to say that this observation, offered by Hearst Magazines president Cathleen Black during the Retail Conference held in early March in Washington, D.C., sums up the sentiments of many publishers when it comes to the status of scan-based trading (SBT) for the magazine category.

As Black and others have made it clear, publishers and national distributors, while realizing the inevitability and potential benefits of SBT and supporting the process of moving carefully in this direction, have serious concerns about scanning accuracy and auditing implications, not to mention shrink levels and their potential costs to publishers.

Indeed, even a pioneering retailer like Barnes & Noble, which has had an SBT system in place for more than seven years - albeit with a traditional returns, parallel-processing and payment system in place - encountered heavy resistance from the publisher/ND side when it attempted to convert to a true pay-on-scan (POS) environment.

In recent years, various industry tests have shown shrink falling anywhere between 1 and 13 percent, depending on the category of magazine, according to Anne Finn, senior VP, consumer marketing for Magazine Publishers of America. Time Inc. Distribution Services (TDS) sees anywhere from 1 percent to double-digit shrink, depending on the title, the issue and the store, according to Martin Koschat, executive VP, information management. (The generally accepted definition of shrink is the difference between net sales, calculated as draw minus returns, and scanned sales.)

Some categories, such as men's magazines, maintain that they tend to experience higher levels of shrink because of a high theft factor. For instance, T.J. Montilli, newsstand manager for Dennis Publishing, says that, based on his own research, shrink for Maxim ranges from about 4 to 12 percent, with the levels varying significantly by issue. "Shrink levels will have to be 1 percent or less before I'll endorse SBT," Montilli told CM.

Bill Bishop, president, Willard Bishop Consulting, LTD, a retail consultancy that is working with the publishing industry to sort through SBT issues, acknowledges that publishers are "terrified" of shrink. "In their worst nightmare, publishers imagine a store manager giving away magazines to good customers or good employees," he says.

But since it's clear that major retailers will insist on SBT and POS implementation for the category sooner rather than later, the core challenge is getting beyond such fears to get a handle on the issues, including the real extent of shrink, its causes, and practical solutions for minimizing it.

"The whole subject of shrink is steeped in urban legend," says one distribution executive, who maintains that publishers too often have knee-jerk responses to the shrink issue without having the data or facts necessary to put it into perspective.

A number of retailer tests, some conducted under the auspices of the MPA/IPDA Magazine Retail Advisory Committee, continue to work on issues such as data synchronization, equipment reliability and identifying the causes of shrink, within MRAC-established test guidelines. But all involved acknowledge that these efforts will take time. "These tests are pretty complicated," says Finn. "This problem is not going to be solved overnight."

CHAS. LEVY: TESTS SHOW 2 PERCENT SHRINK

Meanwhile, some major wholesalers have gone ahead with SBT tests with retailers, without direct participation from publishers or ND's, while continuing parallel returns processing and traditional payment arrangements for publishers and their ND's. And at least one is reporting that shrink levels are considerably lower than many publishers fear.

Carol Kloster, president and CEO of Chas. Levy Co., which began SBT tests with some retailers three years ago, says that she has encountered so much "heat" from the publisher side about these tests that she felt compelled to publicly share some of the company's findings at the Retail Conference.

"We did a strategic plan, and looked at the retailers who were complaining about the hassles in the magazine business, and we listened to those who were taking magazine space out of their stores or moving us to less desirable spaces," she explained. "We asked ourselves, 'What could we do to make this category less different than other categories in the stores?' We decided that we would try SBT - get ahead of it, and find out how to make it work for our retailers."