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A consolidation trend sweeping magazine wholesalers is setting off alarms in the publishing industry and will permanently alter the way consumer magazines reach retailers in the U.S.

With supermarket chains drastically reducing the number of wholesalers they deal with, nearly a third of the nation's wholesalers have disappeared since early 1995 by selling out to larger competitors-often at firesale prices.

In their place, powerful regional wholesalers are arising.

"We have 7,000 retail stores nationwide that are changing wholesalers this year," said Frank Herrera, president of ICD/Hearst, one of the largest national magazine distributors. Distributors serve as bankers to publishers as well as dispatchers to local wholesalers, who deliver the magazines to the retail market.


The big supermarket chains say the consolidation trend is an efficiency move aimed at cutting suppliers and invoices and increasing profit margins.

In one extreme example, Wal-Mart Stores went from 200 wholesalers last year to a current roster of three.

But it remains to be seen if the same principle that spawned the supermarket industry's Efficient Consumer Response program, which saves money by reducing the number of suppliers, will work for consumer magazines.

"We're consolidating to run our businesses more effectively," said Linda Benton, director of general merchandising in northern California for Lucky Stores-currently in negotiations to chop the number of wholesalers it deals with from 11 to two.


As a result of the squeeze, most magazine executives expect in-store service levels to suffer and newsstand sales to continue to take hits.

"My best guess is that newsstand sales will be down 3% in the first half of this year, and that's substantial," Mr. Herrera said.

"It's ugly," said Robert Castardi, president of Curtis Circulation Co., another national distributor. "At this point, everyone is guessing what will happen, but I think S it will cause service to deteriorate."

Whether by coincidence or not, the consolidations began last spring, one year after the antitrust division of the U.S. Department of Justice opened a two-year probe into magazine distribution.

John Poole, a U.S. attorney who is heading the probe in Washington, said final recommendations should be coming "in the next several months."

One theory holds that the initial complaint was filed by a major chain angry it couldn't obtain bids from any local magazine wholesalers to handle larger regions; and that boosted wholesalers' desire to show how competitive they could be. Others blame purely economic factors.


Most industry observers believe the consolidation trend is likely to gather momentum this year as more store chains push for fewer suppliers and bigger wholesalers concentrate on buying out competitors.

"Right now the wholesaler is getting squeezed," said John Harrington, president, Council for Periodical Distributors Associations.

Retailers were traditionally getting a cut equivalent to about 27% to 28% of the price of each magazine sold, he estimated, adding, "Now it is probably several points above that."

There is also a fear in the magazine industry that the surviving megawholesalers will ultimately turn to publishers to make up the difference.

And there are concerns lower circulation and specialty titles may have a tougher time finding stores to stock them.

Supermarket chains such as Safeway and Albertson's championed the consolidation moves starting last summer in order to simplify billing and gain price concessions from a handful of choice suppliers as they had in other corners of the industry.

Many of the winning grocery, drugstore and retail chains are receiving signing bonuses from wholesalers of $40,000 to $50,000 per store, said one magazine industry executive.

Small wholesalers who are being cut out said they doubt large regional wholesalers will provide the same service that local wholesalers did in the past.


Publishers agree.

"It's a whole new environment we're going to have to be living in and I don't think anyone is seeing this as a positive," said David Leckey, VP-circulation at Hachette Filipacchi Magazines.

Pacific Periodical Services lost about 30 retail outlets last fall when Safeway compressed its magazine wholesalers in Seattle from four to Tacoma, Wash.-based Adams News Co. "We probably lost about 20% of our business in that deal," said Kyle Frick, VP-marketing at Pacific.

The periodical distributors association's Mr. Harrington said as recently as mid-1995, there were 185 wholesalers in the U.S.


"Today there are about 120 and that's changing as we speak," he said, adding that number could drop below 100 by yearend.

Some industry observers think the number may drop to as few as 15 power players.

Among the expected survivors are Anderson News Co., Knoxville, Tenn.; Hudson News Co., New York; East Texas Distributing, Houston; ARAmark, Los Angeles, and several others.

"I think there will be chaos until this thing sorts itself out," said Kent Brownridge, senior VP at Wenner Media, publisher of Rolling Stone and US.

Michael Pashby, VP of consumer magazine marketing, Magazine Publishers of America, thinks the shakedown may lead to more efficient marketing of magazines. "Publishers will be able to promote their titles to individual chains," Mr. Pashby said. But in the short term, "It's chaos out there."

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