The Newsstand Supply Chain Is Broken. It's Time to Fix It.
American Magazines displayed for sale on newsstand
The points raised in the following article are my opinions. I would hope that anyone who reads this, and is so inclined, will provide their own thoughts and rebuttal. It will only be through a sharing of ideas and a concerted effort by key members of the supply chain that a workable and sustainable model will emerge. While my focus in the article is on magazines, the book publishers who sell products through magazine wholesalers also have a vested interest in the future of the channel.
MagNet recently reported that final 2013 newsstand magazine sales were $3.119 billion, and that for the sixth year in a row, sales had declined. Contrast that with 2007, when newsstand magazine sales in the U.S. and Canada were nearly $5 billion dollars, having actually increased in both unit and dollar sales over the previous five-year period. Unfortunately, when the economy, home prices, and the stock market plummeted in 2008, the newsstand business went with it, and hasn't recovered since.
Over the last six years, newsstand sales have declined by almost 38%. There are many factors for the falloff. The same category (celebrity titles) that fueled the sales gains in the early- to mid-2000s had the greatest negative impact on the sales decline from 2008 through the end of last year. Consumer shopping habits drastically changed when the economy tanked, with consumers making fewer shopping trips, which affected the weekly titles more than most.
Technological advances and social media have impacted magazine sales, too. In 2010 when the iPad was released, it provided consumers with another vehicle to receive content. By the end of 2013, over 33% of all Americans owned a tablet or e-reader. Facebook had 400 million users in 2010 and now has nearly 1.2 billion users, with over 660 million of those communicating through their pages every day. The explosion of mobile smart phones has also had a huge impact on people's leisure time and their ability to receive content.
When the technological advances became prevalent and consumers changed their method of receiving content, publishers' focus moved towards finding a way to monetize their digital businesses. Yet at the end of 2013 digital sales were less than 3% of total circulation. There was less focus on developing new printed magazines. There was also more publisher emphasis on increasing their low-priced subscription offers, attempting to prop up their rate bases as digital sales floundered and newsstand sales declined. All of these factors have contributed to the newsstand sales drop.
Quite frankly, I find it difficult to envision any reasons that would indicate that the trend won't continue, and that there will be an upswing in newsstand sales. The best that we can hope for, I believe, is a slowing of the annual decline. I do believe that we will continue to see high-priced specials prospering. It is a very positive sign for our business when consumers will spend $10 or more on good quality publications at the newsstand. That category of titles now represents about 11% of all newsstand sales, and continues to grow. The fact that publishers continue to produce these titles that generate little or no advertising revenue and few if any subscription sales must mean that this is a profitable business model. Perhaps there is a lesson to be learned by publishers that newsstand sales would benefit if magazine titles were not sold at such low subscription rates.
The Wholesaler Crunch
All the parties in the supply chain have been affected by the continual newsstand sales decline. Some retailers have deemphasized the category, removing checkout pockets, reducing mainlines, or moving them to low traffic locations in their stores. As mentioned previously, publishers have had to offer lower subscription prices to maintain their advertising rate bases. National distributors have lost revenues, as they receive a brokerage based on newsstand sales. They have all cut back on their personnel in order to maintain a semblance of profitability. Whether or not it makes sense for four different companies to each bill a shrinking number of wholesalers is open to discussion.
However, no channel participant has been affected as much as the wholesaler. It is the wholesaler who picks, packs, and delivers copies to stores, yet receives compensation only if the copies sell. The wholesaler must maintain trucks, drivers, and merchandisers -- all of which become much more expensive on a copy-sold basis when sales decline. In fact, a wholesaler's costs increases as sales weaken, as there are more returns to be handled and scanned back at their warehouse. The wholesaler's business is a high fixed-cost concern that requires many people, large warehouses, and plenty of equipment, whether sales are good or not.
The first sign that the magazine wholesaler business model was under pressure was in the beginning of 2009, when Anderson News Company, the largest U.S. wholesaler, went out of business. As the remaining larger wholesalers attempted to fill the void, sales were affected. Some sales that were generated by Anderson were never recovered as there were more than 8,000 stores serviced by that company that were never assumed by other wholesalers. Or maybe those retailers just decided to stop selling magazines.
We have seen smaller wholesalers close their doors over the last four years, but they serviced mainly local independent retail stores and their loss didn't raise huge concerns that the wholesalers' economic model wasn't sustainable. When Mercury Retail Services, the dominant wholesaler in the southwest and Texas went out of business in 2013, people began to notice. As a standalone wholesale operation, Mercury represented about a 10% U.S. market share. Their demise cost national distributors and publishers plenty of money, as not all of the receivables were collected. Also, other wholesalers were not as quick to jump in to replace Mercury as they were when Anderson went out of business, another sign that wholesalers increasing market share did not necessarily equate with additional profitability.
In the first two months of 2014, we've seen additional major wholesalers going out of business, or attempting to sell their assets. Montreal-based Benjamin News Company, which has been in existence for nearly 100 years, announced that it was divesting all of its retail customers and closing. Gopher News Company in Minneapolis did the same. PMG, a San Antonio-based international wholesaler, and HDA, a specialty wholesaler with retail chain accounts including Dollar General, Lowe's, and Michaels, are both attempting to sell their customer contracts to other wholesalers.
In my opinion, the business model through which wholesalers make their money as resellers of magazines and books for retail is no longer sustainable. TNG, the largest U.S. wholesaler has started to change the model by requiring publishers to pay subsidies in addition to their normal discounts. By all accounts, many publishers have agreed to the TNG requests, as they recognize there are currently no other financially viable options to get their titles to traditional magazine retailers: supermarkets, drug stores, bookstores, etc.
Looking for a Solution
While most suppliers -- publishers and national distributors -- seem sympathetic to the wholesalers' plight, many of them are somewhat stymied in their ability to assist because of the ongoing anti-trust lawsuit that Anderson News Company filed against most of the national distributors, and some major publishers, charging that they were forced out of business because of supplier collusion.
But, even when the suppliers are in a position to assist in changing the business model, it would be imperative that the three major wholesalers were on the same page as to what the new model should be. That is currently not the case.
Wholesalers continue to ask suppliers for margin relief, subsidies, shrink absorption, and a host of other operational efficiencies, but their priorities are not aligned. That inconsistency has allowed the suppliers an out by accurately stating, "Well the other wholesalers aren't requesting that."
Until the wholesalers reach a consensus, which they should do collectively working in conjunction with their anti-trust attorneys, I expect that the status quo will remain and more wholesalers will exit the business. That will just put more pressure on the remaining wholesalers to assume additional retail volume, when in many cases, once they do, they will lose even more money. This will then put more pressure on the suppliers who won't be able to support all of the different wholesaler appeals for relief, as there will be no consistency in their requests. This same scenario has been in place for at least three years now, which has led to an inability or unwillingness to fix the wholesaler business model.
The newsstand business is very fragile. I believe that a continuation of this dysfunction will, in the near future, limit the ability for publishers of small niche products to get their titles into the traditional magazine retailer accounts, and will also cause some retailers to give up on the category.
The time for action is now. Wholesalers need to work collaboratively with the major suppliers to put a model in place that can save the newsstand business as we know it today. If not, my vision of the future is that we will have fewer titles being distributed to fewer retailer stores. Even in that scenario, the wholesaler business model will be forced to change, as the overall volume of newsstand sales will be much lower than it is today.