Magazine distribution in need of more efficiency, data sharing

Drug Store News, April 29, 2002

In an effort to bolster the shaky magazine distribution system, Time Distribution Services and Comag Marketing Group are floating new programs aimed at improving profitability and efficiencies in the industry.

The programs, developed by TDS and Comag, national marketing companies for major publishers, directly address key issues facing magazine distribution--poor service levels and payment methods. The industry certainly needs emergency repair. Efficiencies are at an all-time low. After several years of consolidation, wholesalers are financially troubled and over-extended. Tight category management is rare.

"The current system isn't working," said Michael Sullivan, p resident and chief executive officer of Comag, which is jointly owned by Conde Nast and Hearst Magazines. "It's inefficient and we want to change that. The future of magazine sales at retail depends on our ability to create a wholesaler channel that is not only stable, but enables us to deliver the right product to the right place in the right amount at the right time."

Drug stores generate about 13 percent of total single-copy magazine volume, according to Harrington Associates. Publishers say the drug channel can better develop the category--but they can't do it alone. "There 's a lack of service and knowledge in the category and that's a big complaint among retailers," said one industry expert. "Not all magazines belong in every outlet. Retailers need better category leadership."

Indeed, new titles rarely are able to break into drug's distribution network, yet thousands of copies of the current top titles are routinely destroyed each month. Industrywide, category sell-though is at an all-time low of 36 percent according to Comag's Sullivan.

For every 100,000 units pumped into the newsstand channel, 64,000 are returned and destroyed. That means the distributor and retailer have touched 164,000 units in order to sell 36,000. If we could improve the channel efficiency by just 10 percent, we could take millions in costs out of the system," he said.

Cumbersome payment methods also seem to take time from retailers and wholesalers. Many in the industry want to eliminate the Retail Display Allowance system that gives retailers an additional percentage on each magazine copy they sell. "The retailer can't get the money until they put in a claim," said one industry source. "Why not give the wholesaler the money up front so they can pass it to the retailer?"

Both TDS and Comag believe many of the problems facing the industry today can be solved through scan-based trading. Through data sharing, a scan-based trading system will eliminate much of the in-store labor, inventory and administrative costs that chip away at the category's Profitability--much of it caused by the high return rate Sullivan cited.

While Wal-Mart and Barnes & Noble use scan-based trading, the practice is far from widespread. Getting the entire industry up to speed technologically in order to trade that way will take time.

In the interim, both marketing companies have developed plans that can be put into place more quickly. TDS' plan uses an existing distributor network, but seeks to change the way payment is made. "Instead of retailers paying wholesalers, then financially troubled wholesalers paying publishers what they can, publishers will pay wholesalers directly and retailers will a publishers only for what they sell," said Jeff Blatt, TDS executive vice president and chief executive officer Blatt said wholesalers would be expected to determine the costs of delivering and servicing each copy of a magazine in and out of the stores and if publishers deem the cost to be reasonable. Publishers will add a profit margin onto the cost, ensuring wholesaler profitability.

Retailers, according to Blatt, have shown interest in the program and TDS will begin testing the plan with WalMartin the second quarter.

Comag recently announce d its solution-IMPACT (Innovation Magazine Partnerships & Channel Transformation). The program, which is now being presented to retailers, raises the bar on service by establishing service level commitments from key distributors. "Service will improve by requiring, by contract, that distributors perform certain functions, such as visiting the stores a specified number of times and merchandising the category and participating in category management," said Frank Herrera, Comag's recently retired chairman.

Distributors aren't likely to take on the additional services for nothing. Sullivan said that those distributors who provide retailers with additional services under the program would be eligible for compensation discounts not avail able to distributors who do not take on the value-added services. Those distributors who opt out of the program won't be prevented from servicing their retail accounts nor will they receive less favorable terms from publishers. However, Sullivan believes as more wholesalers see the benefits of the program, more will want to take part.

Whether retailers choose to use the Coma g or the TDS program, the in us is in for some changes. "The industry has been 10 years behind the curve. At least now the basics of the business are finally changing," said Herrera.