Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.

New Business Model Needed for Magazine Newsstand Distribution

February was a bad month indeed for U.S. print publishers. Half the publications intended for sale at newsstands encountered delays, as publishers tried to choose alternative means of distribution in reaction to a 7¢ per copy fee imposed by Anderson News and Source Interlink, the nation’s leading magazine wholesalers. Lawsuits, accusations of collusion, and massive business disruption have followed. Digging a little deeper uncovers the screaming need for a new business model, possibly the first of many as this stagnating economy unplugs obsolete and dysfunctional distribution processes throughout the publishing supply chain.

Current News Capsulation

Magazine wholesalers providing single copy distribution services claim to be losing money or experiencing unacceptable erosion of margin as the result of not increasing their prices for years. Anderson News reported a $20 million loss on 2008 revenues of $760 million. Apparently rebuffed in their discussions with publisher clients about the need for cost driven price increases, the two leading vendors, who control half of the single copy sales network and provide these full services, levied a unilateral 7¢ per copy fee.

This fee was to be applied to the 2.184 billion annual copies distributed through full service wholesalers. This would result in an incremental expense to publishers of these General Interest titles of $153 million. While the sum total of all publication revenue streams – subscriptions, advertising, and newsstand sales – are $40 billion annually, this smaller figure would potentially eradicate significant publisher profits if other corrective measures were not taken to offset this expense hike.

When the large publishers refused to deliver their weekly single copy issues to these two largest and presumably exclusive magazine distributors and merchandisers, Anderson News was forced to shut their doors. Source Interlink successfully filed a court injunction against Time, Inc., other large publishers, and competitive distributors for trying to put Source out of business. Time settled with Source for a multi-year distribution agreement that does not include the 7¢ per copy fee. This clearly does not solve the diseconomies of this decades old unsustainable distribution model for single copy sales.

Value of Single Copy Sales

The under girding revenue belt for all publications is advertising. These rates are determined by size of ad, amount of color, appearance frequency in multiple issues, position placement in the book, and most importantly – size of readership (circulation). Higher circulations drive higher per thousand ad rates.

Gross circulation is hiked by offering attractively low subscription rates, hopefully still covering the first copy cost (read-print make ready) of the periodical. While Newsstand sales at grocery stores, book stories, latte outlets, and airport terminals are relatively small by unit measures, the absolute price per unit is high as it relies upon guilty pleasure or impulse buys. While typically lagging the other two revenue streams in absolute numbers, net single copy revenues still contribute significantly to publishers’ bottom lines.

A weak economy always nails this type of discretionary spending. And yet single copy revenues have been sliding for more than a decade. The retailers in turn replace slow moving merchandise with other more exciting consumer pleasures. Retail magazine sales are experiencing this type of yawning maturity and steady decline.

Basic Current Single Copy Distribution Business Model

These large established mag wholesalers and distributors provide valuable services to both publisher and retail clients. The wholesalers’ proprietary software provides pre-sales order taking, coordinated and consolidated single drop off to each retail outlet weekly, merchandising -which entails picking up the outdated unsold issues and replacing neatly with current issues, sale monitoring service, and destruction of returns. These returns, the bane of the “green” sustainable movement, typically are two-thirds of the original inventory delivered! These multiple services currently cost half of a 42¢ first class stamp for each copy handled. On the other hand the magazine wholesaler’s revenues are based upon a percentage of total single copy sales. Costs have little to do with revenues in this distribution model.

These commodity services are further aggravated by the additional requirements of select marketing programs and agreements between publishers and large retailers. For example, the “free rider” title subsidies associated with certain large publications (most notably found with certain lower cover price weekly publications) force unusual intensive service demands on the wholesaler and retailer in the name of potentially higher incremental sales. Discriminatory pricing practices of select publishers have fueled retail demands by national retail chains. Similarly publishers choose not to limit print orders to balance production with retail display capacities.

The printing overruns thrown out rarely cost the publisher as much as 1% of the retail over-the-counter price of the issue. And because of the relatively small portion of the total run length, e.g., Sports Illustrated’s single copy inventory is reported to be only 10% of the total run, the overrun cost issue is a minor one to the publisher. Hence, the opportunity-loss (to the publisher) of stocking out and missing the premium priced impulse buy far exceeds the nagging expense (to the mag wholesaler) of picking up, trucking, and destroying thousands of tons of unsold outdated issues. The publisher has little incentive to reduce run length and save landfill space. And the large publishers have effectively used the promise of economy of scale to refuse to pay the magazine wholesalers’ requested value-add or inflationary cost increases. Welcome to the reality of free enterprise.

All of the full service distributors are apparently losing money with this near century old business model. This article is not intended to suggest a mediation resolution but rather focus on the possibilities for an altogether different, sustainable distribution business model.

Alternative Solutions

Publishers could partner with the United States Postal Service

Printers could prepare single copy packages utilizing co-mailing software and equipment for the various retail outlets. Most of these general interest publications are longer run and therefore produced on web presses. And most of the web publication specialists have co-mailing lines and LTL relationships to easily accomplish this. The USPS limitations are

• Publishers typically have outdated purchase histories for these specific storefronts and may therefore send conservative (high) counts to assure minimal stockouts.
• The retailer would view multiple deliveries from several different printers to retailers throughout the week as chaotic. (The magazine wholesaler currently gets all publications to storefronts in a single delivery.)
• The wholesaler also creates weekly orders for each storefront from its massive data files, delivers and checks-in each order (which is needed for payment and to maintain retail “item” files that track retail transactions).
• The wholesaler merchandises the copies by placing new issues on display and by removing unsold copies for processing and destruction.
• The wholesaler also monitors and updates retailer point–of-sale systems.

Anderson News reportedly performs all of these services for the publisher and retailer for little more than a couple of dimes for each scanned based trading (SBT) customer inventory item. These are many more IT and labor intensive functional tasks than the post office is currently able to provide. Publishers have sold direct to retailers before, and the results were unsatisfactory for both parties. Publications failed to get timely display and retail shortages existed, discrepancies and payment problems were reported to be common.

UPS and FedEx have demonstrated innovative IT expertise and the ability to muster extraordinary economy of scale logistical power to move items small and large throughout the globe in a timely fashion. However, their margins revile that of the most profitable publisher and most importantly their pricing models are always cost driven.

Wholesalers Recover Costs by Lowering Retailer Discounts

This knee jerk response has been tried before with retailers responding by putting out RFPs requesting improved services and higher discounts. Think of WalMart’s 16# fine adjusting tool in negotiating with these wholesalers.

Maintaining sales volumes is important to the density and effectiveness of the wholesalers’ delivery routes. The different wholesalers have met the higher discounts of their competition only when necessary to maintain their sales volume and protect their route density. These are tactics that exist in a free enterprise economy. However, they are not a long-term solution to the diseconomies of this broken distribution wheel.

The argument has been presented that retail discounts are simply too high and should be reduced to reflect more properly the maturity of this consumer product line. The single copy magazine category is mature and has experienced sales declines over the past decade. The category competes at retail for display space with hundreds of other items. When it fails to deliver sales growth, the magazine category naturally is being deemphasized by retailers. Many examples exist where key retailers have reduced the category’s display space or moved displays outside of higher traffic areas. If retail margins are reduced or costs otherwise increased for retailers, display space for the magazine category would be expected to further decline.

“Direct” Wholesaler or Non-Service Distribution Model

This also has been tried. Just as the name implies these national distribution sources provide favorable economy of scale shipping rates but no in-store merchandising service. They likewise get “reship” or freight allowances for the outdated returns. Publishers ultimately pay nearly as much and the retailers get less help.

Opportunity for a New Distribution Business Model

Print On Demand

The POD concept would minimize the freight consolidation and extended distribution channels currently encountered. Presumably over-run inventories could be reduced, as a midweek reprint cycle would be feasible. Hence, the “green” sustainability would be improved though not perfected. At DRUPA 2008 four different print engine manufacturers were printing daily newspapers by inkjet on web presses to show the technical feasibility and acceptable print quality currently available. In line or near line finishing capability still needs to be developed. Every metropolitan area could have production lines to meet the overnight demand. Favorable economics would be an interesting challenge.

Kindle or SONY e-book Reader Download

The e-reader concept would eliminate the retailer altogether as well as anyone involved with analog distribution. A publisher website could be accessed via COPI's CodeZ Quick Response (QR) barcode. (See The Seybold Report August 28, 2008, pages 3-6.) These two-dimensional QR codes can be printed on statements. They are easily readable by PC cams built into the Kindle. Pointing the Kindle-cam at the QR symbol instantly connects the recipient to a Web page without ever having to remember or type in URLs, numbers or promotional codes. The Web page, encoded in the QR code, could launch a video of the contents of several current publications or a personalized coupon promotion based on the recipient’s demographic profile. The issue download would automatically debit the user’s credit card.

E-book readers with dozens of current issues already downloaded, could be available for temporary use in airport or railroad lounges, on flights, in hotel rooms, or in doctor’s reception areas. The subscription service for these readers would automatically receive the current issues wirelessly while deleting outdated issues. This would eliminate any human intervention to keep the content current. The security to keep these lightweight devices from accidentally being placed in brief cases would be simple and humorously embarrassing for first time thefts. There would be few second time thefts.

Conclusions

The current depressive economy will continue to highlight supply chain disfunction in the various printing and publishing business models. Depending upon the economy of scale, lawyers might well be kept busy trying to defend obsolete and outdated turf. Technology innovators and entrepreneurs might well find fertile ground for new services and business relationships. The final cocktail conversation comment will often be, “Why didn’t they think of that solution years ago.”

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.