Distribution makes for strange bedmates

"Content may be king, but distribution is God." That wry observation, from Periodical Publishers Association chief executive Ian Locks, elicited nervous laughter from the crowd attending a newsstand seminar during the recent FIPP World Magazine Congress in New York City. The unstated understanding was that our content, however compelling, wouldn’t be worth much if few had the chance to buy and consume it.

As InCirculation’s readers are keenly aware, according to the PPA, newspaper publishers, wholesalers and newsagents, a chilling effect on distribution and public access to periodicals would result if the UK’s Office of Fair Trading finalizes its provisional decision to open up the magazine side of existing distributors’ current regional newspaper/magazine monopolies.

I am not daft enough to recklessly formulate/promulgate opinions about UK matters based on reading your trades and listening to a few discussions. Still, it occurred to me that a few observations about the ironic twists and turns involved in US distribution relationships over the years might be of some prurient interest (akin to watching a car wreck).

Industry inertia

It would be a serious understatement to state that US publishers and their national distributors had a love-hate relationship with wholesalers for decades prior to 1995, when retailers forced a revolution in our magazine distribution system. These groups had been battling over perennial issues (off-cover margins, "premature returns," etc) for 40 years. And starting in the late 70’s, they knew that retailers were restive about the magazine category. Retailers complained about having to deal with scores of regional wholesalers and about the costs associated with growing volumes of returns, and were becoming dubious about the space devoted to magazines (at least on mainlines) in relation to the category’s less-than-1% contribution to supermarkets’ overall sales volume.

But publishers and wholesalers were unable to get beyond their mutual mistrust and begin the distribution system overhauling that was clearly needed — not only to address retailers’ concerns, but to improve data exchange, hone distributions, and increase efficiencies, sales and profits for all. This inertia was also fed by the reality that, despite the disfunctional flare-ups between these business partners, wholesalers were flourishing financially, and the newsstand continued to be a very profitable circulation source for publishers — even after unit sales began their apparently inexorable slide in the early 80’s.

The only real surprise about what happened in the mid-90’s was that retailers waited so long to act. Virtually overnight, the magazine industry, which had been metaphorically fiddling whilst retailers’ impatience burned, found itself dancing to those retailers’ tune. Retailers exercised their free-market prerogatives to force wholesalers to a) bid for their business across entire, geographically dispersed chains (blowing the territorial monopoly system and its operational efficiencies sky high); b) shell out huge up-front payments to win contracts; and c) heed retailers’ dictates as to which titles (and how many copies) were being sent into their stores.

Struggling for survival

Suddenly, hugely profitable wholesalers were struggling for survival, and consolidating like crazy. All but one of the four major wholesalers who now account for 80% of magazine sales are in precarious financial circumstances. The threat that one of these will go out of business continues to hang over the industry’s head. If that occurs, ND’s and publishers will be saddled with huge receivables, and will have no viable fall-back system for getting product into the affected retail outlets...until the mega-stores perhaps supply their own solutions. Players throughout the distribution chain are skittish, aware that Wal-Mart’s modus operandi is to minimize the "middle man" factor in the distribution chain wherever possible.

The distribution turmoil has certainly contributed to sales declines, but it’s difficult to put a metric on this. The number of retail outlets carrying "full lines" of magazines through traditional wholesalers has declined by about 25%. The number of specialty and other stores carrying some magazines (serviced by secondary distributors) has increased, but their volume impact is negligible. Still, the rapid growth of magazine sales within the discount chains (aka Wal-Mart), in particular, has helped offset the volume lost in other classes. Furthermore, it must be acknowledged that the sales slump not only began long before wholesaler consolidation, but that competition from the Internet, declining reading levels and other mega-trends may well be the bigger culprits in this downward-spiralling scenario.

Publisher initiatives

The players in our distribution chain are at last trying to cooperate. To keep wholesalers afloat, publishers are paying more for, and/or limiting distribution of, low-volume, inefficient titles. Comag’s IMPACT plan, which pays "key distributors" in geographic markets based on contractually specified practices, reportedly yielded unit sales gains of 11% for its client publishers in 2004. And US publishing CEO’s are (finally) taking the trouble to meet with retail executives.

But outcomes remain uncertain, and more threats loom. To wit, as major retailers push magazines into scan-based trading, teetering wholesalers will not be able to continue to absorb "shrink" — the costs of distributed but unaccounted-for magazine copies. And publishers and retailers are, of course, loathe to eat the shrink, as well. (Just what we needed: another stalemate.)

Your newsstand dynamics — starting with geographic size and population patterns — differ in some very key ways from those in the US. So, again, I would not attempt to draw clear-cut comparisons, never mind offer "lessons." I could point out the obvious — that all would ultimately benefit if publishers, distributors and retailers managed to hammer out constructive solutions that employ the strengths of all parties involved. But who are we to talk?