It has not been an easy time for magazine newsstand sales in the United States. The most severe economic downturn since the Great Depression was a key factor driving unit sales down by more than 10% in 2008, after four years of stable if unspectacular performance. Then early in the new year, the distribution channel was shaken by what may have been the most traumatic disruption of the post World War II period. These events, each in themselves nearly ground-shifting, took place while the engine that drives the economic model of American magazine publishing, advertising, is undergoing a transformative shift. In 2008, ad pages in magazines fell, like newsstand units, by double digits, and in the first quarter of 2009, by a catastrophic 26%. There is some reason to believe that the magazine distribution channel could emerge stronger than it has been in more than 15 years, and, as the economy recovers, retail sales of magazines might return to the consistent performance of the years from 2003 to 2007, if not improve upon them. However, the future for the American advertising market, for all media not just magazines, is likely to be significantly different. How that impacts the overall magazine business will be as important to newsstand sales as the recovering economy and the reconfigured distribution channel.
Newsstand and the distribution channel
Prior to 2008, for a period of four years, magazine newsstand unit sales were stable and retail dollar sales grew by nearly 10%. This performance followed more than a decade of unit declines and provoked the cynical analysis that “Flat is the new up”. Nearly all magazines, whatever frequency, whatever category, and regardless of cover price increases, declined last year. Not coincidentally, a distressed economy drove all commodity retail sales down, and reduced traffic in most retail formats, particularly grocery stores, where nearly half of newsstand sales take place. For impulse items like magazines, a reduction of store traffic is troubling, to put it mildly. While retailers were expressing concerns about soft magazine sales, in private they were even more concerned about poor numbers being put up by other products in their stores. Only fools would not be concerned about the performance of magazines at retail last year, and the beginning of this year as well, however, there is no overwhelming evidence that factors beyond the generally depressed economy were to blame.
For more than a decade, there has been a widespread acknowledgement that the American magazine distribution channel was financially fragile, most notably at the wholesaler level. In 1995, virtually overnight, the financial relationships between wholesalers and retailers were upended, introducing a period of radical consolidation and concentration. Since the beginning of this decade, four wholesaler companies accounted for approximately 90% of all newsstand sales. Entering this year, only one of them, Hudson News, admitted to being even marginally profitable (and, in light of 2008’s poor numbers, it might not still be), while the other three – the Source Interlink Companies, the News Group, and Anderson News – said they were losing money, and at rates that could not be tolerated much longer. Over the years, publishers and national distributors, to varying degrees, have modified some of the terms they offered wholesalers. However, economic conditions did not improve, as brutal competition for retail customers usually resulted in supplier dollars being passed along to the chains. For too many years leading up to 2009, the newsstand channel acknowledged that it was damaged and fragile, but it stumbled forward and the recent period of stable sales perhaps lulled most of its players into assuming it would continue to produce in a fashion.
The earth moves
Early this year, the stumbling turned into a disastrous crash. In mid-January, Anderson News, with a market share of nearly 25%, demanded that publishers pay an additional seven cents for every copy they distributed through the wholesaler. They further demanded that publishers assume an estimated $70 million change in cash flow Anderson claimed to experience when it was forced to accept scan-based-trading terms from some of its largest retail customers. Within days, the Source Interlink Companies, with a slightly more than 25% share, asked publishers to agree to a similar surcharge of seven cents on copies distributed. If publishers agreed to the Anderson and Source Interlink proposals, they would have to be prepared to offer similar terms to all wholesalers.
An analysis by Harrington Associates, estimated that could cost as much, over a year, as $267 million, an untenable number. The largest publisher, Time Inc and its distribution arm, Time/Warner Retail, said that, rather than meet the demands, they were cutting off supplies to both wholesalers immediately, and developing alternate distribution plans. Other major publishers and national distributors, with the exception of the Comag Marketing Group (see footnote), also announced they were ceasing supply to Anderson and Source Interlink. As of February 1, both wholesalers would have been without around 75% of their magazine supply.
Massive disruption of supply
On February 7, Anderson News announced it was suspending all of its magazine distribution business. At nearly the same time, The Source Interlink filed an anti-trust suit against the publishers and national distributors, as well as wholesalers News Group and Hudson News, and a United States District Court ordered supplies be resumed, while the case was being heard. Source Interlink also maintained it had rescinded its surcharge requests. Although, all suppliers resumed supply to Source Interlink as quickly as possible, for at least one week and probably parts of two, magazine deliveries were not made to retailers representing as much as 50% of US magazine sales. Within a very short time, Source Interlink began announcing settlements of its suit with publishers and national distributors and had resumed deliveries to its retail customers.
However, Anderson News ceased to exist as a mass market magazine wholesaler-distributor and its retail chain customers began signing new supply agreements with other wholesalers, primarily with Source Interlink and News Group, but some with other remaining wholesalers.
Although Source Interlink was being supplied after only a short interruption, and most of Anderson’s customers quickly signed new wholesalers, parts of the distribution channel were disrupted and some of it was without supply for six to eight weeks. At this point, it is estimated that the News Group, and companies it has partnerships with, have acquired the largest portion of what had been Anderson’s customers and its market share is estimated to be close to 50%. Source Interlink lost some customers, but gained others, and its share is still slightly more than 25%. Hudson News has about 15%.
Fierce wholesaler competition
When Anderson was still operating, the footprints of the four wholesalers overlapped substantially in many areas, resulting in the kind of aggressive competition that had rendered magazine wholesaling an unprofitable venture for more than a decade. Following the events of the first quarter of 2009, the company footprints are more dense, but not so much so that the competition for retail customers will not continue to put pressure on wholesaler margins.
The level of competitiveness that has characterised the magazine wholesale business, beginning in the late 1990s and extending to the present, has resulted in retailer gross margins on magazine sales growing by 30% and more during that period. The economic model that underpins the magazine distribution channel has meant that nearly all of that growth in retailers’ profits has come out of wholesaler margins. As noted earlier, while publishers and national distributors have tinkered with their plans, there has not been any basic restructuring of how wholesalers are compensated. Essentially, they are offered a discount off the cover price on each copy sold, a discount ranging from the low or mid-30% ranges to the mid-40% for most well-known magazines. They keep the share that they do not offer to the retailers.
After the reconfiguration of the wholesaler market, in the wake of Anderson’s demise, the increased density of some of their footprints may result in a reduction of the level of competition. However, the financial model that they operate within is the same one that put all of them in economic distress, resulted in the collapse of Anderson, led Source Interlink to propose unrealistic surcharges, and nearly caused a total implosion. It seems Pollyannaish to hope that a possibly lessened level of competition will in itself mean that wholesalers can achieve reasonable and sustainable levels of profitability.
An advisor to President Obama, referring to the economic debacle of the past year and more, is reported to have said, “You never want a serious crisis to go to waste.” The same advice could apply to the American magazine distribution channel. Up to now, it has.
The magazine financial model
Using a broad characterisation, the magazine financial model is a three legged stool – advertising, subscriptions, and newsstand - and the legs of the stool are not equal. According to a 2006 Magazine Publishers of America (MPA) study, advertising accounts for 56% of publishers’ revenue, subscriptions for 32%, and newsstand 12%. Magazine advertising has suffered even more than newsstand sales. Ad pages were down 26% in the first quarter, after falling nearly 12% last year. However, there is also an emerging consensus that the causes of magazine advertising’s woes are more numerous than those of newsstand. In the financial debacle of the past 12 months or more, advertising in all media has suffered and there is a general uneasiness that magazine advertising, even in a rebounding market, will not return, as newsstand very well might, to the levels of 2007. In fact, it may not even come close. And, if true, that could impact on the newsstand environment as well.
One alternative, in a shrunken ad market, for major publishers, is a modification of their financial model. Simply, it is a return to a truly three-legged stool model of publishing revenue. In such a model, all of the legs generate profits out of the revenues they produce. The average price of a subscription copy has actually declined since the beginning of the decade, while the newsstand cover price has risen by more than 30%. Subscriptions have been viewed primarily by publishers as a means of supporting their ad rate guarantees, and not as profit centres in their own right. The subscription devaluation of a magazine most commonly results in notorious promotions, such as “75% off the newsstand price”. This tactic is responsible, more than any other factor, for newsstand’s share of consumer magazine circulation shrinking to less than 20% (some analysts peg the number even lower).
In broad strokes, a more balanced publishing economic model will mean lower ad rate bases and reduced circulations. The circulation cutbacks are almost certain to come out of currently bloated subscription numbers, and will mean pushing price increases that will make subs actually generate profits in their own right. That should also translate into a greater emphasis on newsstand, which will not have to suffer from aggressive, desperate subscription marketing.
However, particularly for the larger publishing entities, often divisions of much larger media conglomerates, turning around the financial model does not take place overnight. And, if the ad market were to rebound more dynamically than most expect it to, returning to pre-2000 levels, or even exceeding them, then publishing history demonstrates that management would be likely to go back to its old ways in a heartbeat.
Clearly, the American magazine business has been battered from every direction. Its leadership is examining its basic concepts. At the newsstand level, its distribution channel has been forcibly restructured, but the same economics that led to a near collapse earlier this year are fundamentally still in place. It would be a shame if the “crises” of the overall magazine business and its distribution level were wasted.
Footnote: As part of a marketing programme, Comag was the only national distributor that had written contractual relationships with its wholesalers and Comag claimed those contracts required them to continue supplying the wholesalers and also required the wholesalers to honour their existing terms of business.
