Invaders from Mars and Other In-Store Scenarios: Q&A With DSI's Mike Porche

By Karlene Lukovitz

Later this month, Mike Porche, president and CEO of Distribution Services, Inc. (DSI), will be honored for his career achievements and industry leadership by the newsstand distribution industry's 25 Year Club at its annual Frank E. Herrera dinner.

During his 24 years at DSI, Porche served as executive VP, divisional VP, auditor and regional manager before taking on his current roles in 2001. Prior to joining DSI, he was district manager for Globe Communications, covering the Mid-Atlantic and New England regions. A third-generation newsstand executive, Porche divides his time between his home with wife Kelly and five daughters in Palm Beach Gardens, FL and the New York City headquarters of DSI parent company American Media, Inc. (AMI).

With a field force of more than 1,500, DSI’s Distribution and Marketing Groups provide a broad range of field and analytical in-store sales and marketing services across more than 10,000 supermarket, mass merchandiser and transportation terminal outlets throughout North America for leading checkout and mainline publishers. Clients include Bauer Publishing, Hachette Filipacchi, Hallmark, Mansueto Ventures, Newsweek and Budget Travel, General Mills Magazines, New York Holdings, Inc. (New York Magazine) and Rodale, in addition to AMI’s National Enquirer, Star Magazine, Globe, fitness titles and other publications. In combination, the titles represent about 25% of total magazine retail dollar/unit sales.

In addition, DSI’s Retail Merchandising Group performs in-store implementation, ongoing merchandising support and fulfillment services for a large list of leading supermarket and mass merchandise retailers and manufacturers/brand marketers.

As he looks forward to a milestone award, IPDA Newsstand Forum editor Karlene Lukovitz asked Porche to tap his 30-plus years of retail experience and share his views on industry issues and opportunities.

As always, Forum readers are encouraged to comment and contribute counterpoints (click into Forum Feedback.)  

Increasingly intense competition for checkout display space is obviously a key challenge for the magazine category. What are your thoughts on the implications of the recently announced Mars/Wrigley’s merger?

MP:  The confections companies have been engaged in an aggressive, well-organized effort to go after magazines’ traditional customer left, over-the-belt space at checkouts, and a formally combined entity with a lot of capital behind it is certain to present new challenges. We would be foolish not to anticipate an even more formidable competitor.

With supermarket shopping trips down, various types of consumer packaged goods companies have recognized that the checkout is ultimately the one and only place all consumers visit during their shopping trips.

On the other hand, particularly over the past year, magazines have done an incredible job of communicating and working with retailers in the face of these competitive challenges. With only one or two exceptions, our category has been able to maintain overall space, including the quality positions for weeklies that are so critical to their impulse-driven sales.

The biggest key is driving home the reality that magazines are a top-performing category in retail dollars and space ROI. When all of the elements are taken into account—including margin, sales, inventory, service and warehouse costs—magazines stack up very, very well against confections and other categories.

Even as our individual brands continue to compete vigorously, we need to continue to get better at communicating the overall category’s benefits to retailers. The new One Voice initiative to provide all publishers and distributors with consolidated category performance data communications tools is an important step forward, as is the Willard Bishop Grocery Super Study.

However, we need to do more analysis and benchmarking of other categories and employ that data, as well, as part of our efforts to meet with retail executives to convey the category’s strengths and enhance our ability to meet their specific needs. Creating a category marketing coalition is one key initiative being explored by the new Industry Forum group comprising top-level executives from book and magazine publishing, national distributors and wholesalers. These various efforts represent major opportunities for magazines and books. [See Update on these initiatives, this issue.]

What are the most important challenges and opportunities relating to achieving effective, efficient in-store merchandising and marketing in the current retail and supply-chain scenarios?

MP:  The magazine category is inherently complicated because of the large number of participants involved in the supply channel and their varying economics. And business model and supply-chain issues ultimately affect marketing effectiveness.

One example is wholesalers’ financial condition and the pressures causing them to cut back service in at least some markets and classes of trade, as well as move toward once-per-week deliveries. It’s becoming more difficult to assure timely delivery, service and merchandising of our product. In addition, there’s a demand on publishers for additional discounts and incentives, which is especially hard on those that either don’t have the mass-market volume or rely almost entirely on newsstand sales, as opposed to advertising and subscription revenue.

Another example is accelerating promotional program costs in some retail channels, such as airports. Publishers with more advertising-, rate base-driven business models can in theory rationalize such programs against the costs of their most expensive subscription sources, while newsstand-driven titles look solely at the ROI of each individual promotion or other sales-related opportunity. Basic business models aren’t going to change--but in my view, publishers' participation in programs with higher cost structures generally yields a short-term gain, at best, and works to the category’s disadvantage in the longer term by raising the costs of doing business for everyone involved.

There is also a growing trend of attempting to replace market-leading titles with titles that drive lesser sales volume, but are willing to up the ante on terms and conditions to the supply chain. I believe that if that trend isn’t checked somewhere along the line, it will cripple newsstand sales and impact not only leading publishers. but wholesalers and retailers.

As part of our efforts to raise retailers’ awareness of the real value of the magazine and book categories, we also need to simplify our pricing and incentives structures, including IPO’s, RDP’s and RDA’s, so that we receive full recognition for our true, total gross margins. For example, magazine publishers’ fixturing investments exceed $50 million per year, and IPO’s amount to at least $20 million per year. These contributions are recognized by retailer buying departments, but store managers, regional managers and store operations people never see them because they’re not passed through on invoices. Unfortunately, these influential executives know the category mostly for its check-in/check-out process and merchandising needs.

There is tremendous opportunity to improve sales efficiencies, eliminate waste and lower costs for the entire supply chain, but this needs to be achieved in phases over time, so the industry can assess the true impact of each round of draw reduction. Invariably, too much, too fast is a recipe for lost sales.

Hundreds of millions of copies have been taken out of the system in the past year alone, but that progress has not come without some cost in terms of a hit to sales. And I’m concerned that wholesalers may have underestimated their fixed costs and overestimated their variable costs and therefore aren’t finding the savings they expected at the start of this initiative.

Are there solutions for better meshing the in-store merchandising roles of ND’s and wholesalers, to minimize redundancies and maximize effectiveness for the category as a whole?

MP: That’s an important question, and one that we’ve been giving a great deal of thought to, particularly over the past year or so. We're actually in the midst of a fairly substantial study whose goal is to determine the upside financial/sales benefit of redeploying collective publisher merchandising resources and coordinating that effort with a clear understanding of the servicing wholesalers’ merchandising efforts and schedules. Simultaneously, we’re testing the impact of weekend merchandising, which could potentially yield even bigger results.

While it’s fairly early in the testing process, we're confident that these coordinated efforts will yield positive results for titles at both the checkout and mainline. Certainly, if the results prove to have a positive impact on DSI’s own efforts, we will be pursuing expansion of the concept.

Given increasing in-store labor pool challenges and costs, and wholesalers cutting back on service, our core mission of providing clients with effective, consistent merchandising is obviously more critical than ever. And there’s no question that what’s ultimately needed is a broader, more consistent merchandising effort by all involved. Although it’s a challenge to persuade retailers to participate in merchandising efforts, given their constant struggle with labor, they are obviously the only ones who have personnel in stores 100% of the time. We need to keep seeking their participation, while realizing that this will only be possible with certain retailers.

For all of the benefits of various value-added in-store services, when you get down to it, for checkout titles, the biggest leverage lies in moving copies from sold-out or sold-down checkouts to the busier ones just before the biggest shopping days. Doing this most effectively requires investing in technology such as hand-held computers for field staff and, most critically, expanding retail coverage. For us, this has meant going beyond the approximately 10,000 high-volume supermarket and mass accounts we service every week and working toward 100% chain coverage. Without pitching DSI, I’ll just say that at this stage, we’ve achieved this goal in one major chain and have nearly achieved it in three others.

In addition, technology is starting to make it possible for publishers and wholesalers to better understand store customer traffic flow patterns. Many retailers, particularly those with loyalty card programs, now accurately track transactions and dollar volume by checkout lane. Most retailers don’t have consistent checkout pattern plans on a chain-wide basis, but armed with store-specific, by-checkout historical transaction data, we can walk into a store knowing which checkouts need to be stocked with the most product and receive the most merchandising focus.

What are your thoughts on the opportunities and challenges of scan-based trading?

MP:  SBT is likely to be the way magazines are sold in the future. It represents a huge cost-saving opportunity for retailers and wholesalers, and for that reason, DSI completely supports this initiative.

That said, to make SBT the standard for the magazine category, the entire supply chain has some significant hurdles to overcome. Retailers’ ability to control shrink, distribution of the financial responsibility for finalized shrink, finding a solution to the huge costs involved with either wholesalers or publishers having to pick up in-store inventory, and publishers’ need to have their sales recorded accurately for both retail revenue and circulation auditing purposes all add up to a complicated transition.

Frankly, I see few real benefits for publishers in industry-wide SBT. We already have the ability to forecast sales. SBT could potentially be used to significant advantage for just-in-time replenishment or reorder, but again, wholesalers are moving to once-per-week delivery.

I also question whether publishers should share in shrink. Other than errors in bundle counts/sizes that are created during manufacturing, or instances where magazines arrive late and force galley delivery—as opposed to the more accurate, efficient tie-line process—publishers don’t really contribute to or have control over shrink. Not to speak for other publishers, but I think that most would agree to pay for 100% of their own errors. In fact, most do that now. But they might have a difficult time understanding why they should pay for contributing factors over which they have no control.

The inventory buy-back issue also has many implications. This would represent a substantial one-time cashflow hit for public companies, or revenue hit for private companies. And for public companies and companies with publicly traded debt, there are significant revenue-recognition issues associated with Sarbanes/Oxley. There would also be nexus and other complex tax and insurance issues to consider.

But to me, the number one concern by far in relation to SBT is the ability of retailer systems to accurately record sale. As standard practice, any time there’s a price change, DSI visits a random sample of stores from the top 25 chains a week or two in advance of the on-sale date to verify that the price change has been properly entered into the retailers’ systems. With the exception of Wal-Mart, we routinely find holes in many of the largest chains, even with a 90- to 120-day lead time to drive the UPC BIPAD down to store level.

In a live environment, this would mean not just missing scattered sales, as happens when cashiers inadvertently using a GM key instead of scanning the actual UPC. In effect, the publisher—and wholesaler—would lose the entire sale for that issue in stores not yet scanning the correct code. Today, wholesalers have POS relationships with chains that would enable reconciling big misses like these based on negotiated settlements, but for publishers, there are circulation auditing and other considerations involved.

The scan data that we receive from a number of major chains also routinely shows many stores not reporting scan for the first several weeks after a title has a new UPC. While it’s conceivable that some stores had product and didn’t sell any copies, we know--based both on strong past sales and actually sending reps into the stores to research--that the majority of theses cases result from system issues. Again, in a live SBT environment, these misses would represent lost sales for both the publisher and wholesaler.

Bottom line, my recommendation is that we proceed slowly and judiciously. DSI and other national distributors have independently created standards for SBT environments that safeguard supplier-side business requirements while enabling SBT’s benefits for retailers and wholesalers. Publishers and their distributors need to work with retailers to ensure that mutually acceptable standards are in place and are tested for at least six months prior to going live, to provide adequate assurance that sales are being accurately recorded. Maintaining a substantive group of control stores for ongoing shrink measurement, and other checks and balances, would also need to be in place.

The need to be prudent about working through all of the implications with our retailer and wholesaler partners is driven home by the feedback we hear in the field from major packaged goods companies that have entered into SBT relationships with retailers. These are companies that have implemented the operations changes necessary to realize in-store check-in/check-out cost savings. Yet, they report that savings have not offset their shrink costs, and acknowledge that these trading relationships have not proved to be a rewarding financial decision.

Again, however, I would stress that DSI supports the core SBT premise and its potential benefits for our partners. It’s a matter of exercising due diligence and working through the issues to ensure that all of the pieces are in place before implementing these trading relationships.

Being a division of AMI and the ND for Bauer and other checkout publishers, you’re obviously on the front lines when it comes to issues relating to cover pricing, and the associated sales volume and economics issues. What’s your perspective on these dynamics?

MP:  As the industry knows, Bauer implemented significant cover price increases last year, particularly on In Touch and Life & Style, in support of some wholesalers’ stated needs in relation to their costs and economics.

Given Bauer’s volume and commitment to retail sales as its dominant revenue source, the company has of course simultaneously made significant additional investments in its products to offset some inevitable impact on units resulting from price increases, at least in the short term—particularly given the current economic pressures that are affecting all consumer products to some degree. Bottom line, these titles continue to enjoy a unique level of consumer demand at checkouts. Their entertainment value for consumers has driven their success for years now, through both good and poor economic times, and it will continue to do so.

But the core issues here go well beyond any specific publisher or DSI client. It speaks to the value of magazine brands and consumers’ passion for them that the category as a whole has been able to successfully raise average cover price year after year. However, each price increase for each title is a decision that must always be based on testing, research and analysis of the impact not only on retail sales, but what that will mean to a publisher’s overall financial model.

And while there will always be exceptions, I believe that, in general, we’ve reached a plateau—that publishers will find it increasingly difficult to implement aggressive price increases. We could be at risk of killing the goose that lays the golden egg.