Retailers rule

Folio: The Magazine for Magazine Management, March 15, 1997 by Cris Beam

Eighteen months ago, the magazine industry experienced a major shock: To streamline their operations, retailers across the country suddenly demanded that wholesalers bid for their business, thus cutting the total number of wholesalers by more than two-thirds. People panicked; publishers predicted lost or misplaced copies, irretrievable single-issue sales data and a subsequent loss in revenues. Now, a year and a half into the changes, we have to ask, was it so bad?

The simple answer, for publishers at least, is no. No one lost as much as was feared, and the wholesaler consolidations are settling down and becoming a bit more predictable. But the real answer is that the entire nature of magazine distribution has been turned on its head, as the power has shifted to the retailer and the system has gone from being supply-driven to demand-driven. Publishers have had to change the way they do business and--perhaps even more significant--have had to do a fundamental rethinking of their industry.

"We've definitely had some negative consequences, but it wasn't the doom and gloom that everyone predicted," says Richard Lawton, senior vice president of Time Distribution Services in New York City, which distributes magazines for Time Inc., Meredith Corp. and Conde Nast Publications. "In terms of real copies lost, it peaked in July and has been calming down since then."

Frank Herrera, vice president and director of distribution, Hearst Magazines Division and president of its international distribution arm, ICD, initially projected a 6 percent drop in total sales in the first year as a result of the consolidations, but now says it's actually coming in at about 4 or 5 percent. Herrera estimates the total number of wholesalers at 96 (as compared to roughly 350 before the shakeout), but warns that this number will ultimately drop to 25.

"We've had our earthquake--now we'll have aftershocks," says Ron Scott, an independent publishing consultant based in Derby, Connecticut. Scott claims that the titles hardest hit are those with regional editions or high frequencies and short on-sale times, since they've gotten lost in the shuffle. "We're going to see major changes in the way we do business," he adds.

And "major" is right. For starters, wholesalers and retailers are going to begin dropping titles from their lists--in a big way.

"If you're a wholesaler, one-and-a-halfyears ago you were making healthy profit margins. Now, you're a survivor," says Lawton. "Wholesalers went from a noncompetitive marketplace to a hypercompetitive marketplace, so they've gotten a better handle on where they're making a profit and where they're not."

This means dropping the magazine accounts that don't make money or have solid sell-throughs. "The good news is, the customer said you're going to have more business. The bad news is, the customer ate up the profits," says Charlie Anderson, president and CEO of Knoxville-based Anderson News Corp., the largest of the remaining wholesaler companies. Before the consolidations, Anderson says his company served 10,000 stores; since the consolidations began, Anderson has acquired about 35 wholesale companies and, in the first half of 1996, added 498 new titles. Anderson News now serves about 25,OOO stores in 38 states.

But to stay on top of his field and to win the bidding wars for store accounts, Anderson has had to offer retailers better and better deals. Traditionally, publishers sold their magazines to wholesalers for 40 percent off the cover price, who in turn sold them to retailers for 20 percent. Today, that formula no longer holds. Anderson now has to give the titles away with an extra 20 to 25 percent tacked on, thus eliminating his profits entirely.

"We have to look at the profit contribution magazines provide on a title-by-title basis," explains Anderson. Some magazines had a sell-through of 20 percent--a number he says is far too low. "Rather than print a half-million copies, publishers have to look at what will sell at 50 to 70 percent sell-through. They need to look at point-of-sale data, and allocate print orders based on need."

The retailer is king

The push for better sell-through isn't coming just from the wholesalers. Retailers, too, are looking for better percentages. And that's not their only demand.

"The retailer is saying, 'I'm taking control,' " says John Fennell, COO and senior vice president at Hachette Filipacchi in New York City. "They're now more like landlords than retailers, dealing with space and profitability." Fennell says Hachette has seen its number of wholesalers drop from 150 to 50 over the past 18 months, but currently has no data on how many sales they've lost.

"Publishers have been able to promote and distribute at great risk to the retailer, but those days are gone," says Bob Callahan, a category manager for San Antonio-based H.E.B. Grocery, a chain of 240 supermarkets located throughout Texas and Louisiana. "We have 1,200 titles total, but only 450 of them make up 90 percent of our sales. It's being pared down to 600 total by mid-year."