Changing the Channel: Perspectives on Magazine Category Priorities for 2008

By Karlene Lukovitz

At this stage, no one—publishers, national distributors, wholesalers or retailers—would deny that the magazine category faces significant challenges in the retail environment, or that the distribution channel and process are in need of constructive change.

The core challenges are by now familiar: Dollar sales continue to grow, but units remain flat to slightly up. Competition for front-end display space from other categories is increasingly aggressive. Retailers are requiring greater efficiency and improved processes. Financially squeezed wholesalers have implemented programs cutting large numbers of copies out of distributions, but concerns about wholesaler stability persist. Sell-throughs have begun to rise, but all are concerned about ensuring that cuts aren’t made precipitously, to the detriment of sales. Indeed, the category must find ways to stimulate growth while continuing to improve efficiencies. 

At the same time, there’s no denying the category’s well-documented strengths, ranging from high contributions to retailer profit, to consumer demand for magazines at the checkout and mainline, to magazines’ unique ability to drive consumer purchases in other product categories.

Judging from recent interviews with key players, another important factor working in the category’s favor now is that the confluence of challenges has created channel-wide recognition of the pressing need to work together more effectively to streamline the system and maximize strengths and opportunities.

Step one is communication, of course. With that in mind, here are some perspectives on priority challenges and opportunities for the critical months ahead from publisher, wholesaler and national distributor executives:

Rich Alleger, Senior VP, Retail Sales, Rodale
“Our number one priority needs to be clearly and effectively conveying the profitability of our category to retailers. The managers of this category have to be able to sell the category up through their retail organization.

This may mean adjusting some of our current discount and incentive methods. We may need to look at pass-through RDA or fast-pay RDA, so that retailers get that portion on sale or even prior to on sale, instead of waiting for three to six months after off sale.

Second, in my mind, is that data should be free to the industry, or at least sold at cost of preparing. We should be using data to improve sales and marketing opportunities across all classes of trade. Instead, we're expending energy on packaging it for sale to each other.

In terms of authorization lists, it seems to me that we need to work across supply channels to ensure that new magazines always have an opportunity. Fifteen years ago, most wholesalers told Rodale that men would never buy a health magazine or a service magazine for men. We had to fight for every square inch. 

Publishers, on their own and through their national distributors, have to explain new titles in the context of where a magazine's reader and a retailer's customer intersect. Creative editorial concepts will always tap consumer interests and needs and feed the category with fresh, new products.

Bottom line, what retailers want is to carry every magazine that their customers want. That means that title lists need to be carefully evaluated and adjusted by store. The overall number for a retailer could be 200 or 1,000. It’s not the overall authorized number that is important; it’s whether the mix within stores is correct.”

Ron Clark, President and COO, Hudson Group
“Efficiencies and scan-based trading are among the major areas we need to address.
The costs of doing business in the Northeast region that we serve—not just fuel, but everything from labor to real estate to taxes—are very high and rising all the time. So we’re not disappointed to see retailers ask for higher sell-throughs. We obviously want to see costs taken out of the system. But we want to see this happen without damaging sales. And the reality is that you can’t make a huge jump in the efficiency percentage in a very short period without damaging sales.

We want to conference with retailers and provide the benefits of our experience. We don’t want third parties making decisions for us; we want to be part of the conversation and the decision-making process.

We need to all sit down and analyze it together. We should use representative beta sites and let the numbers speak for themselves. On the positive side, retailers who have implemented efficiencies thoughtfully have maintained or even slightly improved sales, but we need to ensure that that trend continues.

SBT has many benefits for retailers, particularly in the check-in and checkout process. But wholesalers see no reduction in costs. In fact, we have additional costs, including the IT costs associated with needing to monitor SBT. And of course, we now own the inventory. Plus, we are still counting returns because of publisher requirements.

We believe that there has to be sharing of the shrink and the liability by the retailer. And we would like to see publishers agree to a more realistic returns process—extending the 20% random checking system used for Barnes & Noble to other retailers would be a step forward.

Another area we should address together is RDA. If we could eliminate the separate RDA or at least process it faster, that would be a huge category selling point with retailers.

And going out together and selling our category to retailers is a must now. There are many positives for our category, starting with the fact that It’s fresh and updated every week. That’s a major plus from the retailer’s standpoint. As we know, magazines influence consumers to buy other products. And we’re always working on cross-merchandising.

But retailers hear too much of publishers selling themselves, as opposed to selling the category. Wholesalers, national distributors and publishers should be making joint calls on all of the big retailers--and we should all be using the same hymn book.”

Michael Duloc, President and CEO, Kable Media Services, Inc., and Chairman, IPDA
“Speaking for Kable, rather than IPDA, we believe that the biggest challenge for the industry is achieving the right balance regarding the number of titles distributed at retail.

We serve titles of all sizes, but we believe that recent changes have placed an undue burden on small- to medium-sized publications, and that this is an issue that could affect the health of the industry as a whole, if not properly addressed.

The ‘80/20 rule’ applies in every industry—meaning the top 20% produce 80% or more of the sales. But without the 10% or 20%, an industry doesn’t make money.

Even if the top 200 or 250 titles account for 90% of sales for some retailers, if we simply cut the number of titles at retail down to 200 or 300 largest sellers, the industry is going to lose that other 10% of sales that enables overall profitability. We’ve repeatedly seen that cutting lists down to 400 titles doesn’t make up for losing the sales of the other 800 titles.

There are many titles that sell 20,000 to 30,000 copies nationwide, have efficiencies of 45% to 48%, and have high cover prices. What’s the benefit in eliminating these from the system?

We need to do the analysis and determine optimum mixes and distribution lists. Obviously, some titles sell well across geographic areas and in urban and non-urban areas, while others perform in specific areas or types of stores.

However, certain titles have never even been tried in areas or retail formats that may well be natural environments for them. If they’re performing in particular types of stores within certain geographic areas, shouldn’t they be tested in comparable stores within those areas?

Bottom line, we believe that there is a happy medium somewhere between 200 titles and 2,000 titles—a level that’s optimum for the category as a whole.

Continued encroachment by other categories on magazines’ traditional front-end space, and the potential impacts on magazines that are on the mainline now if some checkout magazines move to the mainline, is also a major concern.

We need to recognize that this battle for front-end space can’t be limited to the national distributors. It requires a concerted effort that includes the skills and resources of the publisher and wholesaler communities. Mainline publishers that think this will not impact them are wrong. If magazine front-end space shrinks, the front end-dominate publications will seek similar high-visibility placements on the mainline.”

Jeremy Koch, Executive VP, Consumer Marketing, Magazine Publishers of America
“Over the past year and a half, we’ve seen evidence that it is possible to cut draws without damaging sales, if it is done carefully.

Wal-Mart’s sustainability initiative should be very positive for the industry. It makes good marketing and business sense to achieve better coordination of merchandising resources and better draw management at the store level, and customize titles on a store-by-store basis.

Ultimately, what’s most important is that the industry works together to ensure that retailers are excited about the magazine category as a whole. Streamlining our processes and systems will serve that goal, as will initiatives such as communicating with retailers in a more unified manner.”

Jim Gillis, President, Co-CEO, Source Interlink Distribution
“We’ve told publishers about our intention to cut another 40 million copies out of the system by this summer. This is not radical. If anything, it’s conservative. Returns have to make road trips back to the warehouse, and the costs are simply too high.

We don’t want to lose any sales. We’re going to do store-by-store analysis. We’re going to look at each title’s draw and profitability, and at the title mix as well as store demographics.

We are going to look not just at the copies that were sold in a specific store, but also the copies that weren’t sold. We believe that sales of the remaining titles will definitely benefit, particularly if we can get adherence by store to fixture planograms.

We intend to make the system a pull system, and use exact lists for every store, instead of rounding up and rounding down. We will know all of the specifics, including the kind of display and the pocket depth, so that we can manage exactly and plan reorders.

We are also working with retailers to create regional footprints and route density.

Once we have density, we will be able to do a lot more in-store service, and that will also contribute to sales. We think the industry should address the redundancy of having several national distributors plus a wholesaler doing merchandising. We don’t care who does it, but it would make sense for one party to do it. And there should be a continually updated list of the merchandising that needs to be done for the titles on the authorized list.”

Michael Sullivan, President and CEO, Comag Marketing Group 
“From where we sit, print is alive and well. We had a very strong year last year at CMG, and the industry’s performance as a whole was positive, especially considering the current state of affairs at various levels within the distribution channel.

That said, we do have some very critical issues to address at retail. First, category management—getting the right product to the right place at the right time—must become a priority. Retailers clearly want stronger category management, along with higher levels of service and performance.

Second is efficiency. We can’t keep putting out 100,000 copies to sell 35,000, period.

Third, we need to improve the quality of display and how our product line is merchandised at the point of sale. And fourth, we must take redundant costs out of the system.

Obviously, the players in this very complicated channel have to find a way to work together to accomplish these goals.”

Will Michalopolous, Senior Director, Retail Newsstand Marketing, Hachette Filipacchi Media
“We’ve made progress at cutting waste out of the system without hurting sales. Last year, we [HFM] cut about 10% of the draw across our line, and sales were probably up by about a half a point, overall.

Now the question is how the industry is going to grow sales.

Executing at the store level—getting the right products into the stores—is critical. And the players in the distribution chain need to communicate and work together more effectively, of course. All of us, including publishers, need to think about the category as a whole, not just our own interests.

Just as important, we need to communicate, educate and speak to retailers with a unified voice. The categories that are competing with us at the checkout have a unified voice.”

Robert A. Castardi, President, Curtis Circulation Company
“The potential for losing display space at the checkout to soda and other categories is a serious concern for the industry, both because of the high volume sold at checkouts and because if magazines are displaced and moved to the mainline, some mainline titles would be displaced, in turn.

We feel that retailers and wholesalers must use extreme caution when removing titles from the mainline—titles that can sell significant numbers of copies in the right stores and areas. Distributions need to reflect editorial content, as well as geography. Stores next to lakes need to have boating and fishing titles, for example. These types of factors tend to get lost in the shuffle when distributions are determined.

Inadequate factoring in of seasonality--basing allocations on prior seasons’ sales, for example--also leads to over-allotments and under-allotments. We should be adjusting allocations to reflect mass merchant holiday sales blips that may begin in October, increasing teen title allocations during the summer months, and so forth. Accounting for seasonality by geographics should also be possible.

No one has been able to show me reliable data that proves that removing titles improves sales. Every analysis we’ve ever done has shown that it hurts sales.

Efficiency is obviously a big issue. We would point out that a recent analysis showed that nearly 70% of the industry’s returns are generated by approximately 50 large titles. We need to take product out of the system intelligently and in a very targeted manner. Using an across-the-board efficiency percentage, like 40%, as the basis for cuts is not the way to reduce actual waste copies while maintaining sales. If a larger title is drawing 100 copies in a store and selling 40, there is a lot of margin to play with. You can take copies out of high-draw accounts and still have that margin of error, so that sales aren’t affected. Titles that may have only three copies in a store may sell one copy on average, but they do sell two or three sometimes. So if you cut the draw to two or one, you lose those sales.

Discounted subscriptions are in my mind perhaps the biggest challenge the newsstand has. However, with paper prices rising and advertising trending down somewhat, publishers seem to be adjusting rate bases and scaling back on subscription levels.

We would like to see the category in more specialty retailers, where special interest magazines can sell large numbers of copies, and we continue to develop relationships with a growing number of specialty wholesalers.

With all of its challenges, we continue to have an incredible system. Wholesalers excel at getting magazines out cost-efficiently and on time. They’re also getting better at focusing on sales-increasing activities, though this is not yet at the level we would like it to be.

We are very optimistic about this business and its future. Fifteen years ago, when wholesaler consolidation began, people were predicting that there would be far fewer titles going to far fewer retailers. It didn’t happen, and I never thought it would. As long as we have great product to offer, there will be a demand for it, and it will be distributed and sold.”

Richard Rhodes, Consultant, Publishing Management Services, Inc. 
“The current uncertainty and change in the distribution work is challenging for both existing publications and those trying to launch in the marketplace. Unexpected obstacles can arise to implementing plans that have been carefully constructed to meet distributors’ guidelines.

That said, there are opportunities for publishers, if expectations are realistic and the approach is more targeted by class of trade. Often, the more targeted approach is more efficient for the publisher, as well.

We now all have access to the sales data, and publishers who take time to go through it can improve efficiencies for existing titles with limited sales impact, and launch titles with more realistic draw levels that ultimately work to their advantage.”

Rich Jacobsen, President Time/Warner Retail Sales & Marketing
“I think we are at a tipping point relative to the supply chain. Unless we see significant  change in the behavior of wholesalers, national distributors and publishers—all of the players—there could be dramatic change in the way the supply chain is constructed, and not necessarily for the better.

The tenor and nature of relationships among all of the players need to shift, and shift quickly, to a constructive mode that enables effective solutions and growth for the category.

For example, the time is long past when publishers could doubt the economic challenges faced by wholesalers. The huge increases in fuel costs alone in recent years are evidence enough, and these are far from the only factor involved, as we know. The reality is that wholesalers provide a critical service that is irreplaceable, economically, and we must work from that reality and function as partners.

One core challenge is that we’ve been mired in a push system. Wholesalers can’t operate on 35% or lower efficiencies. And from their perspective, many publishers are still not using the timely retail data we now have for the purpose of improving the overall system—efficiencies, costs; some are still trying to use it to push more draw out, for their own purposes. The system can’t support that intransigence anymore.

We need to achieve more efficiency while at the same time achieving more profitable category growth. How do we do this? Certainly not through a reactive mode. A reactive mode is totally inadequate for the challenges we face today and going forward.

We have an excellent story as a category. We are very profitable for retailers, although this is somewhat obscured by the way we take our trade incentives to the floor. Retailers are all about meeting consumers’ needs and wants, and study after study has shown that consumers want magazines at the front end."

Yet, retailers are frustrated with the way we do business, and we are under siege at the checkout. This, I believe, has awakened wholesalers, publishers and national distributors to the fragility of our space. We have recognized that we as a category, and as individual players, must get the very positive magazine story out to retailers effectively. And that at the same time, we must improve supply chain dynamics and processes for the benefit of all.

For example, the returns process. Are there ways to reduce these costs and waste, support sustainability initiatives, and redistribute our resources toward more productive efforts?

On-sale dates are another example. Most magazines now go on sale in the third week of the month. If we could reduce the volume in week three—smooth out the flow of magazines—it would help wholesalers’ cost structure.

We need to get all of the players in the supply chain together and work through these issues. IPDA, MPA and PBAA can help create a platform for that.”

Lindsay Valk, Senior VP, Analysis and Planning, Hearst Magazine Group
“We of course support the need to improve efficiencies and reduce waste, and we’ve done a lot of work in this area. It’s good for the environment and it makes good business sense. The challenge is doing this in a way that optimizes the overall equation for retailers and all others in the chain.

The thinking is that if we manage draw holistically across all titles, we can increase efficiencies without losing sale. This remains to be seen.

It’s easy to cut draws and declare victory, but if we manage to an artificial sell-through target, it could be counterproductive. We need to set up controlled tests to understand the true results of distribution cuts. This is being done in some cases, but not in others.

Wholesalers’ order regulation system generally works well, but we have not honed it to a point where we can say that the right number of copies of a title are in every store.

It makes sense to clean up the mainline by eliminating truly marginal titles. This would give other titles more visibility, which should improve sales.”