Protecting the Newsstand Channel - A Modest Plan (Part 1)

By Baird Davis on May 16, 2018

The original intent of the recent newsstand articles that John Harrington and I did, at Bosacks' insistent urging, was to inspire a vigorous discussion about the often misunderstood process of selling magazines at retail. In that regard we hit a nerve - the response has been hefty and spirited. Thank you to everyone that joined the discussion.

Now that the discussion has begun in earnest I want to offer some more grist to the dialogue mill. In this note I'll present a rough-hewn plan for protecting the embattled newsstand channel. It combines ideas gained from recent reader feedback with those based on my own experience as a circulator and long time newsstand observer.

Publishers Troubling "Blind Eye" Approach

There have been many attempts at newsstand channel reform and continuous warnings, twice a year from me, of the dangers that lay ahead for the channel. All of this to no avail. The reform efforts never came to fruition and the warnings have fallen on the deaf ears of publishers.

What appears to have happened is publishers adopted a fait accompli attitude toward the newsstand; seemingly content to live with decreasing sales and higher newsstand service costs. This doesn't mean, however, that publishers weren't acutely aware of the adverse economic effects of - declining sales, reduced efficiency, increased processing costs and less service from national distributors and wholesalers. They knew there was a problem, but, as always, they seemed perplexed about what to do. 

In retrospect it's become obvious that publishers seriously underestimated the effect of the dynamic changes occurring to the channel infrastructure. In 2009 major wholesaler Anderson News dropped out of the business. In 2014 mega-wholesaler Source Interlink followed suit saying the business wasn't profitable and hadn't been for a long time. These two wholesalers at one time represented nearly 50% of the magazine retail distribution volume. A total meltdown was averted in 2014 when The News Group (TNG), with support from Hudson News*, scooped up the Source Interlink leavings. In doing so they "won" the long brutal wholesaling war of attrition.

 *It should be noted that Hudson News remains in the magazine wholesaling business, but in a non-competitive manner with TNG. 

The result - TNG emerges at the top of the newsstand wholesaling heap, controlling 75% to 80% of the magazine wholesaling volume. 

The Makings of a Single Wholesaling Supplier System

As I remember it publishers, at the time, were relieved that TNG had, albeit with some service disruptions, come to the rescue. But there was no free lunch here. A kind of devil's bargain was reached - immediate service relief when it appeared in 2014 the channel might collapse in return for granting TNG what amounted to a monopolistic position in the magazine newsstand business. 

Evolving to a single wholesaling supplier system wasn't itself such a terrible thing. In fact, I believe, it could eventually be viewed as a positive development. The problem is that the single supplier (TNG) was handed control without sufficient publisher oversight. 

The channel was left with an unchecked supplier in a monopolistic environment - a recipe for trouble and customer discontent. 

TNG Tightens Control

As the surviving wholesaler TNG gained the advantage of operational scale and most importantly eliminated the costly process of competing with other wholesalers for large retail accounts. They also partially neutralized, via the purchase of national distributor CMG, the traditional national distributor role as a wholesaler watchdog. 

The new environment allowed TNG to more easily change operational practices and increase service prices. This is reflected in publishers absorbing a large portion of "shrink" expense, accepting increased service costs as well as reduced service. The overall effect of this "unregulated" power consolidation, I believe, helped break the newsstand will of publishers. 

Publishers, as a result, have become more docile users of channel services. Many adopted a "why fight city hall" attitude. All of which has contributed to the sales downturn. 

TNG - Flawed, But Irreplaceable

Publishers, with few, if any, viable distribution alternatives, are in a tight spot. It's always been an awkward position, but the situation has grown even more precarious in recent years because of several TNG related factors. It appears as if the deepening newsstand sales slide is eroding TNG's profitability and possibly their commitment to the magazine retail distribution business. At a recent industry conference a TNG representative, by inference, touched on this issue. He discussed TNG's diversification efforts, indicating that in a few years magazine distribution would represent only 40% of their business. 

TNG's diminishing commitment to magazine distribution should be of tremendous concern to publishers.Despite TNG's flaws, and there are many, they remain an irreplaceable link in the magazine distribution chain.If they should decided to exit the magazine business it would surely trigger a disastrous channel meltdown, the one that was averted in 2009, after the fall of Anderson News and Source Interlink. 

TNG simply can't be allowed to fail. 

Meeting the Challenge of a Channel Meltdown Threat

The channel is on the very cusp of a meltdown that has been precipitated by continuing sales losses, a lessening TNG commitment, an apathetic publishing community and an archaic set of operating principles. 

However, the situation is not completely hopeless. The channel may have arrived, in a strange draconian way, with a set of conditions that can realistically support a platform for newsstand channel reform. It's been helped by the growing recognition that the evolving single-entity wholesaler system, despite its shortcomings, has demonstrated the potential for making operational efficiency improvements.                     

Three-Point Plan (in broad strokes) 

1. Consolidate Channel Functions Under the TNG Banner - This would include combining all of the traditional channel functions - wholesaling, national distribution, merchandising, front end management, etc. This step is crucial. It helps address the channel's fundamental organizational flaw - its "two-middleman" configuration. In effect it would eliminate the organizational flaw and greatly reduce the territorialism and conflicts of interest that depress system efficiency improvement efforts. 

2. Dramatically Increase Publisher Channel Management Involvement - The "two-middleman" albatross can't be lifted from the channel's shoulders without consolidating operations. Conversely we know that left unchecked, a single-entity wholesaler supplier system can have an unintended, but corrosive impact on channel operations. In order to balance this power vacuum publishers must assume much greater channel operational responsibility. This would, most likely, require publishers to purchase a financial stake in TNG.           

3. Operating Like a Public Utility - To make it all work, I envision a newsstand channel system that has the characteristics of a public utility. The concept being that TNG cedes, to publishers, some channel operational decision making control in return for financial support and the privilege of operating what might be called "The Newsstand Utility". 

The tradeoff - Some financial protection for TNG in return for publishers gaining representation on the TNG management counsel. 

Assessing the Practicality of The Plan 

From a TNG Perspective - I think TNG would be amenable to a plan like this, especially if it provides some financial security. TNG is one of 24 divisions in The Jim Pattison Group - the 2nd largest privately owned company in Canada with estimated annual revenue of $8.4 billion and nearly 40,000 employees. This is to say that TNG's effect on the Jim Pattison Group's balance sheet is relatively small. However, I think Jim Pattison and his management team are very cognizant of the critical nature of their channel responsibilities, which would make them reluctant to exit the business unless financial conditions seriously worsened. On the other hand, as a for profit organization, I think they would welcome some financial protection in return for having to "open their books" and cede some operational control to publishers.  

From a Publisher Perspective - The publisher side of this bargain is a little more problematic. It requires that publishers do something they have been unable to accomplish in the past - cooperate on a newsstand reform effort. But maybe the time is now right - as they say - "necessity is the mother of invention". The current one-entity wholesaler system has made it much easier for publishers to grasp both its practical attributes, as well as its dangers. 

To avoid disaster I believe it's largely up to the four leading newsstand publishers - Meredith, Hearst, American Media, Bauer - to establish a publisher coalition to negotiate an agreement with TNG that would allow for the construction of the "Newsstand Utility" described above. 

What's at Stake? For Publishers Everything!

If the channel flames out publishers have infinitely more to lose than TNG. The Jim Pattison Group would take a little write off and keep on ticking. But for publishers the consequences are very severe. They would be left without a viable newsstand distribution system. Cobbling together a make shift one would be inefficient and costly. 

And perhaps even more importantly it would be a terrible blow to an industry that's desperately trying to demonstrate that magazine print remains a viable business. 

P.S.  Let's keep the dialogue going. We solicit and welcome your comments.




By Baird Davis| May 16, 2018
Categories:  Industry News|Opinion

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Baird Davis

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