Who’s got the power?

Retail multiples flexing their muscles and exerting pressure on the newspaper and magazine supply chain is old news, and so is thinking of ‘National Distribution’ as the only outcome worth worrying about. We believe there are a number of consequences that all the participants of the supply chain are not considering as retail multiples begin to treat this category as ruthlessly as they treat suppliers in their other categories.

In this article we will look at how retail multiples have become so powerful, if this will lead to ‘National Distribution’, and how this power will affect the future of niche magazines. As newspapers and magazines become more important to retail multiples we will also look at their plans to position and manage the category which has implications for all players in the supply chain.

Retail power, the old news

Retail multiples are continuing to dominate the retail landscape by offering a one-stop shop and leveraging their trusted brands to sell almost anything, evidenced by financial and insurance offerings and Tesco and ASDA trialling non-food only stores. Supermarkets are capturing audiences, market share and additional revenue through their use of in-store TV and in-store advertising. With superstore growth limited by regulation, retail multiples have also diversified into "top-up" shopping, developing chains of highly profitable convenience stores. Through this, large retailers are expected to continue to grow their market share and with this, continue to grow the power held over suppliers. Based on the profit they have squeezed out of the supply chains in other product categories, retail multiples are sure to try to use this power as their influence on the newspaper and magazine category grows.

The principal sources of power, factors which provide negotiating power and competitive advantage against other parties in the newspaper and magazine supply chain, are shown in the "sources of power" chart – below.

Supermarkets have used their increased power to redefine supply chain economics in other categories over recent years - reducing their number of suppliers to harmonise processes and placing increasing demand on them. For example, with the support of the BRC (British Retail Consortium), supermarkets have investigated levying KPIs (key performance indicators) on suppliers, they have demanded shelf-ready packaging, and they have ordered supplier funded RFID (radio frequency identification) development (ie Wal-Mart).

Retail multiples have begun to exert their power in the newspapers and magazines category - one of the major super market chains is leading the effort in the UK by taking a commanding role in the BRC initiative of instituting KPIs to enforce suppliers to follow an efficient distribution process and to ensure they maintain a defined availability level for the category. Demands are also being placed on newspaper and magazine publishers and distributors to adhere to rules around range compliance, sales based replenishment and returns management in an attempt to drive their own continuous replenishment system.

National Distribution, an unlikely occurrence

An important question is whether the use of power to drive process harmonisation through reducing the number of suppliers will result in a better model for retail multiples in this category? On the subject of magazines, with the new OFT ruling, if this argument is taken to the extreme, this could result in a national or regionally polarised distribution model. As history can attest, national distribution as modelled and advocated back in 2000 is not likely to happen again. Tesco has announced that they are not in favour of such a model, as inefficiency (and even bad press) may result. More tellingly, the savings are not likely to be huge given that wholesalers will not be able to move from their exclusive territories to serving the whole country at the competitive prices that a current incumbent can offer. Wholesalers would also struggle to reach the whole country by retail delivery time (6:30am) without significant investment and margin loss.

A regional distribution model is a much more likely end state, with the three largest wholesalers commanding almost a third market share each; Menzies in Scotland and the north of England, WHS in the heartland of England, and Dawsons with Wales and the southern coast. An important knock on effect to consider is that the institution of KPIs and a move to regional distribution of magazines is likely to harm the independent wholesalers. They may be forced to cede share to their larger competitors where they cannot efficiently achieve KPIs or deliver to a region large enough.

With regional distribution and independent wholesaler numbers declining, it is possible that the OFT’s hope to increase competition in the market for magazine distribution could backfire and result in a more efficient, but less competitive and more monopolistic wholesale structure. Newspaper publishers may be forced to support this model when renegotiating wholesale contracts to ensure they obtain competitive prices as magazine delivery subsidises newspaper delivery. It’s too early to call who would win the power games in this case - all that is certain in this scenario is that with less choice for publishers and retailers, the power of the wholesaler would increase.

Complicated category

It is no secret that retail multiples don’t like newspapers and magazines as the delivery times are difficult to handle, they often have to deal with more than one different supplier, they have to manage inserts, they cannot modify the manufacturer controlled cover prices, and the sale or return model brings extra complexity to their supposed efficient store operations. The intricacies of this category mean that the multiples cannot simply use a tried and tested methodology to squeeze value from the supply chain.

Dealing with a category that they struggle to understand, retail multiples are crying out for a category manager to reduce their burden and to help drive additional sales, specifically in magazines. They are also crying out for someone to educate them on consumer behaviour and to truly understand, through analytics, what is going on at the point of sale (for example, they seek analytics like some loyalty programs can provide, but in more specific detail around the news and magazine category). It is likely that consumers too would welcome the entrance of a category manager to assist the retailers in cleaning up and providing space management for the magazine shelves that are in a current state of disarray, partly driven by the number of titles on offer.

The question is who will fulfil the category manager role and what would be the motivation to provide this charitable offer, given that multiples don’t generally pay for category managers? Publishers, distributors and wholesalers all have their own independent motivations, such as promoting certain products at the expense of others and/or building closer relationships for strategic contractual positioning. Frontline may have captured a significant first mover advantage in the area of category management by choosing MicroStrategy (a business intelligence software solutions provider) to provide them with analysis of sales and supply data for the 150 magazines they distribute. Frontline has also contracted with CIBER UK (an international system integration consultancy) to provide them with systems to provide demographic information on consumer purchasing trends and promotional analysis. This knowledge around consumer behaviour and the performance of their magazines could assist retailers with promotional offerings, space management and range management. If other publishers, distributors and wholesalers are not weighing up the pros and cons of entering into such category captain behaviour, they definitely should be before someone steals an insurmountable march.

Footfall and range retailing

Although work still needs to be done to understand the dynamics behind weekend trade footfall, we do believe that retail multiples are beginning, or should be beginning, to question the role of newspapers and magazines as footfall generators in superstores which operate under a different model from convenience stores. At supermarkets, customers shop throughout the day adding a newspaper or magazine to an already full basket and the queues don’t easily allow for a convenience purchase of a paper or magazine on the way to work in the morning. How can newspapers and magazines thus justify their positioning on the premium front of store shelf space in supermarkets?

Also related to space management, readers who do not take the trouble to subscribe to their favourite title are becoming increasingly likely to substitute to an alternative publication if their first choice is unavailable. Given this, retail multiples may be driven to stock an increasingly small range to reduce complexity and free up valuable front of store space for other products if total sales (and any related footfall) are unlikely to be significantly affected.

Niche titles

So what would happen to the niche titles? Range retailers such as WHSmith and Borders would have increased power over the route to market for such magazines and would have the power to charge a premium to stock niche magazines if they wished. If sales could not be substituted for subscription and could not be increased in CTNs (the newsagents whose numbers we all know are declining), the increased charges to stock a magazine and reduced sales from retail multiples could force a number of smaller magazines out of the market.

In order to address the reduction in sales of niche magazines, magazine publishers need to increasingly think about alternative routes to market, either through an improved subscription model or through non-traditional resale outlets. Increased subscriptions for niche magazines may be the answer, such as that found in the US – the question is whether this model can be replicated in the UK. In improving the UK’s subscription model, Tower (subscription fulfilment bureau) and others need to be encouraged to improve their fulfilment and B2C (business to customer) technology so publishers can utilise important customer information that may help in their promotional or editorial targeting. Whether or not subscription is the answer, publishers and distributors should increasingly look to sell niche magazines in specialist retail outlets, such as Today’s Golfer in golf shops or Wine International in wine stores – such positioning is already happening, but is likely to increase even more as niche titles are ‘ranged out’ of some supermarkets.

Conclusion

As the equilibrium shifts away from power held by publishers, exclusive contracts with wholesalers, and subsidies for newspaper delivery, in order to adapt, all players in the supply chain need to evaluate how to respond strategically.

Newspaper publishers, having always held the position of power for the distribution of their content, are fighting to retain such a power position at all costs. While grappling with the theory of digital distribution and the shifting of advertising spend to the internet, newspaper publishers are pursuing alternative business models through the distribution of free papers and through investigating going direct to retail for some titles.

Magazine publishers can strategically respond to increased retail power by improving the subscription model for niche and other magazines and can also pursue more targeted resale outlets outside of the traditional CTN and retail multiple spheres. Magazine distributors, with the nod from their publishers, are addressing the shift by investing into technology to strengthen their knowledge of consumer behaviour at the point of sale and to strengthen their ability to be category captains to the major retailers.

This power shift is leaving wholesalers in the middle – they are struggling to understand who their customer really is (are their customers the publishers who traditionally awarded exclusive territories for distribution, or are their customers now the increasingly more powerful retailers?). Wholesalers need to court their new and more powerful customer, the retailer, who actually purchases the magazines and newspapers from them and who may even be looking for regional suppliers. The courtship of the future is likely to take the form of category management activities, if they can beat the distributors to it, and enhanced distribution performance necessary to satisfy the KPIs and to justify their carriage service charges.

Times truly are interesting in the world of newspaper and magazine distribution – the OFT decision and subsequent power plays in the supply chain have given us a lot to think about. A once stable supply chain has been disrupted - all players in the supply chain have important strategic decisions to make so when a new equilibrium is reached, they are positioned for success.