MAGAZINES: COPING PUBLISHERS LEARN NEW TRICKS TO WHOLESALER MAP: CONSOLIDATION FORCES MAGAZINES TO IMPROVE EFFICIENCIES; DELIVERY REMAINS AS A SERIOUS CONCERN

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Scenes from a wholesaler consolidation: There were just over 180 magazine wholesalers in 1995, and today there are less than 60; overall magazine sell-through rates were an average 52% in 1986; now they're closer to 40%; meanwhile, newsstand dollar sales rose over 8% last year, more than any other year in the decade.

NEW REALITY

The radical consolidation of magazine wholesalers has created a new business reality for the retailers who have profited, the wholesalers who barely survive, and the publishers caught in the middle.

This new environment is not as hazardous to the health of magazines as many originally feared, but it has created vast changes in distribution that are still taking some adjustment.

"I'd say we're in a recovery stage now," says Richard Jacobsen, president of Time Inc.'s Time Distribution Services.

Since 1995, when large retailers like Wal-Mart Stores and Target Stores forced wholesalers to bid on servicing either their entire chains or divisions of them, the rules have changed. Several wholesalers were driven out of business, sold or acquired in the Darwinian scramble to win accounts as retailers raked in larger discounts (reported to have risen by 25%), attractive contract-signing bonuses and other incentives.

As a result, markets are no longer defined by geography but by retailers served.

COULD BE DOWN TO 12

John Harrington, president and founder of consultancy Harrington & Associates, predicts the consolidation will continue until as few as 12 wholesaler groups represent 90% of the market by 2000.

Already, the top five represent more than half of all sales, by his estimation, with Anderson News controlling 25% to 29%, Aramark and News Group ruling 10% each, and Hudson News, Unimag, Chas. Levy & Co. and EDT Kromar grasping for4%-5% among them.

Mr. Jacobsen says the healthy magazine sales of 1997 are in part a sign that wholesalers are adjusting to the new system. Still, delivery is one of the more lingering concerns.

Critics question how wholesalers can deliver to stores and provide adequate service at any great distance from their base of operations. Wholesalers have responded by keeping the distributors they've acquired open as regional service centers to better service smaller areas.

Other problems have had to be solved by the publishers. Regionals and smaller titles, for instance, have in some cases paid extra incentives to insure they get good placement on newsstands.

NO PROFIT MARGINS

Claiming they're pushed to the limit with no profit margins and operations streamlined to the breaking point, wholesalers are sharing their burden with publishers by forcing them to improve their efficiencies (a.k.a. sell-through) with "activity based costing" programs.

Wholesalers prior to the consolidation used to earn a net profit of 3%-4%, according to Mr. Harrington, who estimates that most are either operating at a loss of as much as 6% or just breaking even.

EDT Kromar, which handles Southwest chains, last week rolled out ABC options for customers. One program cuts back publishers' allocations if they have a 55% sell-through, another imposes a return handling fee that rises incrementally for any sell-through below 55%.

The company also offers a customizable version that works within similar parameters.

Richard Rhodes, VP-retail marketing at Weider Publications, says that while he is "not unsympathetic" to the wholesalers' plight, publishers already have many fixed costs and may not be receptive to having more concessions to pay.

"Several years ago when the price of paper in effect almost doubled, we didn't go back to the wholesalers and say 'Well, you know what, we need to take back additional margin.' We basically just tried to become a lot smarter about our business and a lot more efficient," he says. "Wholesalers now recognize the fact that they need to do the same.

..They're now saying, "Well, we've done everything we can, so we have to go back to the publishers.' But I'm not sure if in fact they've done that."

ONE-STOP SHOPPING

On the plus side, the new wholesaler/chain alliances allow publishers to one-stop shop for special promotions that can be carried out in all of a retailer's stores.

Pre-weekend delivery, which greatly enhanced the sales of Time Inc.'s People's Princess Diana commemorative issue, also has become more feasible to engineer.

"We're dealing with less players so our ability to facilitate the movement of those goods much earlier was made easier because we had far fewer management groups," says Mr. Jacobson. "On the other side of the argument, I don't think there's any question these guys are losing money right now, and I think anything to put more pressure on the movement of goods in the channel is difficult."

BREAKING EVEN

Despite the new advantages they've engineered, most wholesalers are lucky to break even these days, and some experts have questioned their long-term survival. Publishers are mulling whether going straight to the retailer may be an alternative.

"We are certainly expecting and hoping that we can sell our magazines in places where we aren't today," says Time Inc. President-CEO Don Logan. "Wholesalers are also going to have to be more marketing driven to help us do that."

David Pecker, president-CEO of Hachette Filipacchi Magazines, believes publishers will have to establish their own relationships.

"Publishers are going to have to look for non-traditional distribution," he says. "And they will need to establish those relationships on their own. I don't see the wholesalers changing to help them find these non-traditional retailers."

SEEKING HEALTH-STORE SLOTS

Weider is looking for ways to get its titles into health and sporting goods stores, says Mr. Rhodes.

"While that in and of itself is not going to be enough to offset the declines that we might see in the business through the consolidation, it's still very important for us because it's a profitable revenue stream, and also one we can go out and sell to advertisers," he says.

Mr. Harrington believes retailers, the only segment to have benefited from the new arrangement, are unlikely to pitch in to help wholesalers. Even without their signing bonuses and incentives, gross margins from magazines have risen around 25% since the consolidation.

BARNES & NOBLE MOVE

The importance they are placing in magazine sales is evidenced by moves like Barnes & Noble bookstore chain last month hiring TDS' Senior VP Richard Laughton in a new post of VP-newsstand distribution.

EDT's VP-General Manager David Parry predicts for the time being at least, retailers probably won't aggressively pursue direct-to-retail opportunities with publishers.

"It's like going out for a big dinner. You don't need to go out and have a hamburger or another dinner right away, because you're still trying to digest what you've just done," he says. "I think they've all sat at the table and eaten heavily in the last two years. . .their appetite has been somewhat quenched for

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