The Primacy of Delivering and Promoting Magazine Value: Q&A With Hearst's John Loughlin

John P. Loughlin has been executive VP and general manager for Hearst Magazines since 2005, responsible for overseeing circulation, digital media, finance, manufacturing, distribution and strategy. In addition, he is executive VP of the advisory board and senior VP of Comag Marketing Group (CMG), and is responsible for CDS Global, the magazine industry’s largest subscription fulfillment company. Prior to Hearst, Loughlin served as president of Gemstar-TV Guide International’s TV Guide Publishing Group, where he helped develop and implement the strategy for a full-size, full-color TV Guide. Loughlin also served as president/CEO of Primedia Consumer Media and Magazine Group, president of Meredith Corp.’s television broadcasting group and in various executive positions within Meredith’s publishing and broadcasting groups.

Here, in an interview with Newsstand Forum editor Karlene Lukovitz, Loughlin offers his frank thoughts on what can be done to minimize the current economic impact and expand consumer engagement with the category going forward, how both retailer and publisher practices contribute to category performance challenges, SBT issues, cover pricing and more.

As always, Forum readers are encouraged to use the newsletter's “Forum Feedback” link to share comments or responses.

Please comment on the category’s performance in this difficult economy and what can be done to mitigate the impacts. 

JL:  Most magazine publishers have seen a marked downturn in unit sales that began to accelerate at the start of the second quarter, when gas prices moved above $4 per gallon. This corresponded with retailers reporting reductions in store traffic and fewer shopping trips per week in the grocery and mass merchandise channels.

Clearly, the challenge given the current economy is convincing consumers that magazines as an impulse purchase are worth every penny. For publishers, it’s a double whammy. Publishers are under enormous cost pressures at the same time that unit sales are down, but it’s critical that we not react by diminishing the quality of the physical product or magazines’ content value proposition for the consumer.

If anything, in this environment, magazines need to deliver even more of the essential characteristics and benefits that attract consumers to magazines in the first place—we need to make them even more “magazine-y,” so to speak. At Hearst, we’ve selectively increased trim size or paper weight and/or edit pages for some of our titles over the past year, and we’ve seen encouraging newsstand reaction.

In addition, as an industry, we need to be more creative about how we stimulate sales. I’m well aware that this is much easier said than done. However, I truly believe that we should initiate a massive, industry-wide program under a theme such as “Reading is Fun” that provides consumers with a compelling offer to try a magazine that they might not otherwise purchase. I’m talking about an offer such as “Buy one magazine and try another free,” or “Buy one and take one free for a friend.”

Given that the average efficiency across the category is in the low to middle 30% range, we could offer a program like this, stimulate sales and not incur any meaningful, real incremental cost.

I believe that jump-starting and expanding consumer interest and engagement with magazines by incenting them in a compelling way would result in lasting, incremental retail sales benefiting wholesalers and retailers, as well as publishers. And think about the positive press in encouraging America to read more. I think that a program like this would be hugely positive.

Again, easy to imagine, very difficult to execute. Still, with the current economy, in which consumers, retailers, publishers and wholesalers are hurting, the time might be right to pull together and create an opportunity for a huge win.

What role does cover pricing play, particularly in the current economic scenario?

JL:  There’s no question that cover price increases have an impact on sale. Virtually every publisher does price testing, and the rule of thumb is that a magazine that raises cover price will generally see an initial half-unitary fall-off. Meaning that if you raise cover price by 20%, you would anticipate a possible unit sales decline of about 10%--although the historical pattern is that you would also expect a recovery of those units over time.

Obviously, revenue gains from pricing versus potential unit fall-off come into play. For example, some of the celebrity weeklies saw double-digit unit declines after they significantly increased cover prices. At the same time, anyone can do the math and determine that, despite the unit declines, these publishers are making more money as a result of the price increases—particularly if they coupled them with draw reductions.

Again, the core issue for a publisher is how to balance the need to cover increasing product costs with the need to deliver a product that is compelling enough to the consumer to be perceived as well worth its price. Paper prices have risen to virtually unprecedented levels over the past 12 months—anywhere from 15% to 30%, depending on how a publisher buys paper and the base cost from which they’re working. Particularly now, with advertisers pulling back on spending because of the economy, publishers also have a diminished ability to increase ad CPM’s. Cutting operating costs can only get you so far. At some point, a publisher needs to look to the reader to bear some of the increased cost burden.

I don’t think it’s unrealistic to expect consumers to pay $4 or $5 or so for a magazine that provides hours of entertainment and information. A magazine costs the same or less than a Starbucks Grande that’s consumed and forgotten in a few minutes.

The challenge for our magazine editors, and for all of us involved in maximizing our magazine sales, is to provide and convey that compelling value proposition to the consumer.

We need to be very careful not to do anything that discourages a consumer from buying a magazine on a regular basis. In addition to not reducing physical product quality, I believe it would be a mistake to try to implement excessive price increases, or alienate customers by failing to deliver content that lives up to the promises made on our cover. 

Bottom line: Unit declines as a function of raising cover price are probable, but not inevitable. And strong franchises will recover in unit sale, particularly if they’ve built trusted and compelling relationships with their readers.

In national surveys, consumers are at least claming that, even after the economy starts to recover, they will continue the more conservative spending habits that they’ve been forced to adopt during this trying period. What’s your prognosis for the magazine category once the economy begins to recover? Will sales units rebound at least to pre-economic downturn levels?

JL:  I’m confident that we’ll see a rebound for the magazine category when the economy picks up. History has demonstrated that our category, along with many other discretionary-purchase product categories, feels the pain during economic downturns, but recovers when consumer confidence and spending pick up.

However, there’s no denying that this recession is different. It’s not just higher gas prices and lower home values. It’s rising commodity prices and higher unemployment. And it’s enormous consumer debt. All of these “negatives” absolutely affect consumer purchasing behavior, and magazines are feeling it.

What I worry about is not just the lost sale of a copy; it’s the potential that a consumer could “lose” the habit of picking up and buying his or her magazine. Look at the dynamics that occurred in television during the writers’ strike. Some viewers tuned out during that period and, while most of them returned when new shows began airing, not all of them did. My point is that the retail scenario involves not only the broader economic context, but consumer habits. We need to protect and encourage that "newsstand habit.”

Which comes back once again to my point that magazines must provide even higher perceived value to the consumer, maybe even more so during this economic turbulence.

Some retailers have indicated concern that publishers might be lessening their commitment to the newsstand within their overall business models. Your thoughts?

JL:  It’s not something publishers would want, I can tell you that. Newsstand copies are the single most profitable unit of circulation for virtually all publishers, so publishers would not willingly pull back.

As a publisher, it pains me to see the encroachment of everything from beverage coolers to chewing gum in the checkout space that historically has been occupied by magazines. Given that the amount of real estate devoted to magazines has shrunk very considerably, are retailers really surprised that magazine sales have been affected? 

And while I understand why retailers are going to self-scan checkouts, and why they might have only three lanes open in a 12-lane store during slower periods, these practices also absolutely limit the exposure of magazines as an impulse product. They reduce sale, lead to draw reduction and ultimately put pressure on publishers to make up that lost circulation with subscriptions.

The problem is, in part, driven by the tyranny of our rate base-based advertising and circulation system, which sometimes creates irrational economic behavior. As newsstand units have declined over the years, publishers have had to turn to subscriptions to deliver rate bases. And those magazines that don’t have a sufficient consumer demand have to sell those subs at lower and lower prices. So in some cases, the differential between the per-unit cost of a newsstand copy and a per-unit subscription cost has become problematic for the consumer and the retailer.

I understand why some retailers might have this perception, but it’s really not a matter of publishers saying, “We’re not going to support the newsstand.” The causes of category performance challenges are much, much more complex than that—and frankly, equally shared between retailers and publishers.

Providing the core magazine product-value proposition is obviously fundamental, as you point out. But what about the distribution, display and in-store merchandising needed to put that value in front of the right consumers? How far have we come in these areas, and what are the priorities going forward, in your mind?

JL:  We’ve made progress, but we need to continue to press forward aggressively on several fronts.

First, publishers need to stop pushing the outdated notion that every title—or more to the point, our own titles—should be available everywhere at retail. Do we really need eight golf titles or 10 car enthusiast titles in a supermarket mainline? Very doubtful. On the other hand, should all or most of those titles be available in Barnes & Noble and Borders and specialty stores? Probably yes.

Continuing to improve efficiencies is also critical. And a major part of efficiency is effective channel segmentation, based on using the hard sales data that’s now available on a much more timely basis. One of the best things happening in our industry now is that our national distributors are becoming much more sophisticated about both collecting and analyzing what is selling at the title level and the store level in almost real time. This allows for much more effective distribution that takes into account geography, seasonality and outlet performance.

The real challenge is retooling the machinery so that publishers and their ND’s can anticipate and react effectively to this knowledge at the individual store level. This is one of the most important near-term opportunities we have, from publisher through to the retailer. Wholesalers of course need to enable and facilitate this. And while they’ve gotten better on this front, there are still impediments in the wholesale system that, if resolved among the players, would allow publishers to sell more and/or operate at higher levels of efficiency with minimal or no lost sales.

Further, we need to collectively look at the fundamental distribution channel structure. We have a lot of duplicative activity among publishers, ND’s and wholesalers. In the days when costs were lower and sales were higher, you could afford to have multiple players all providing what I think of as “plumbing.”
Today, there’s enormous economic incentive to explore whether there are backroom functions or “plumbing” that are common across the landscape and could be shared in ways that yield real savings and efficiencies. I don’t just mean cost savings, I mean realizing time-to-market advantages and ultimately moving toward the type of demand-based replenishment employed by Barnes & Noble.

What are your thoughts on scan-based trading?

JL:  We need to resolve the legitimate concerns of all parties involved, and particularly publishers, so that we can move into true scan-based trading. The reality is that we’re already well into SBT. The last report I saw indicated that about 27% of all magazine dollar sales at retail are being recorded through scanning.

The good news is that ND’s have invested significant time and effort in working with major retailers to analyze and work through SBT issues. Those efforts resulted in initial, individual ND white papers proposing voluntary best practices. And now that we have the new industry-wide Newsstand Industry Council, wholesalers, publishers and their ND’s are working on a set of mutually agreeable best practices guidelines. Once finalized, those guidelines can be employed by individual parties as they negotiate win/win SBT implementation agreements.

The other good news is that we’ve done enough industry studies now to confirm that, by and large, shrink is more in the 1% to 2% range when best practices are followed, versus the 6% to 10% range that was experienced years ago when this technology was first introduced in relation to our category.

While 1% to 2% is by no means negligible, it’s a more manageable and negotiable risk. Publishers naturally hope to share in the substantial savings that will be realized by wholesalers and retailers through true SBT, meaning dispensing with the current need to continue the parallel physical return of millions of magazines back to a wholesaler facility because of circulation auditing requirements.

One of the most significant remaining challenges to widespread adoption of true SBT for the magazine category is the need to define an auditing process that satisfies advertisers and media buyers and, in particular, provides publishers with a fair reporting solution for the large and growing portion of our single-copy sales that are on an SBT basis. Publishers have to maintain rate bases, and we need assurances that we will not be unfairly penalized.

Working groups of advertising buyers and sellers within the Audit Bureau of Circulations and Magazine Publishers of America are now exploring how best to structure a process that provides comfort for everyone. So those discussions have commenced. 

Two national distributors—Time/Warner Retail & Marketing, for Time Inc. titles only, and CMG, for participating client publishers—are introducing processes that will make it more feasible to execute much more timely, pass-through retail display allowance credits or payments for retailers. Do you think a system may eventually evolve to enable “all-in” pricing, meaning consolidating  RDP’s and other retailer incentives, as well as RDA, on a single invoice?

JL: From my perspective as a publisher, I believe the category would benefit from the retailer seeing the cumulative margin that’s delivered by a magazine sale. Magazine margins, rate of turn, product freshness and ROI are exceptional relative to most grocery products. But today, because those elements of compensation are delivered in different ways, by different parties, to multiple players in a given retailer, it’s very rare that a retailer sees the cumulative value of a magazine. Certainly, a manager of a single store never sees it presented this way.

In addition, you could probably lower processing costs with a single, comprehensive invoice as opposed to multiple parties processing multiple pieces.

I think the reason “all-in” pricing hasn’t happened is that it will require realigning the system. While pricing and payment decisions must be made by individual companies, I would hope that publishers and national distributors, with input from other involved parties, could develop an infrastructure that would allow a practical way for producing a single invoice, where individual agreements make that desirable. 

It’s complex, no question, but I think we’re getting closer. Particularly because, as a function of consolidation among various parts of the distribution chain, there are far few players, so suppliers and their customers can more easily engage in conversations about how to improve and address these operational and structural issues.

Magazines have a great story for retailers. We need to do a more effective job at communicating it.