THINNING THE RANKS

Consolidation among magazine wholesalers, for better or worse, continues to affect all distribution sectors of the publishing industry.While the new environment has been painful for wholesalers, it's been positive for retailers and publishers. Retailers are enjoying higher profits and improved category efficiencies.Before the consolidation, some of the larger retailers had up to 100 wholesalers --

Consolidation among magazine wholesalers, for better or worse, continues to affect all distribution sectors of the publishing industry.

While the new environment has been painful for wholesalers, it's been positive for retailers and publishers. Retailers are enjoying higher profits and improved category efficiencies.

Before the consolidation, some of the larger retailers had up to 100 wholesalers -- all with different operations, billing systems and programs. If a publisher wanted to promote a magazine at a certain chain with floor displays or signs, 50 or more wholesalers would have to be involved. Now, one wholesaler handles that type of promotion.

Publishers have benefited because retailers are dedicating more shelf space and paying more attention to magazines. At the same time, the new system has made it easier to market magazines, said Michael Pashby, executive vice president of Magazine Publishers of America, New York.

Another advantage is that retailers are investing in magazines more, which has opened up doors in areas like cross merchandising. For instance, Marsh Supermarkets is extensively testing cross merchandising. "Magazines have become more of a core product at supermarkets," Pashby said.

Advertisers also stand to gain. Since magazines are getting greater exposure, so are ads. When asked to comment on how consolidation is affecting ads, Pashby said it would take another two or three years before the impact could be measured.

The success of retailers and publishers has come at the expense of wholesalers. Faced with lower profits and extreme competition, they've been forced to streamline their operations to survive.

The wholesale sector's financial situation could be improved if publishers increased their magazine discounts, said Ray Argyle, president of Periodical Wholesalers of North America, Toronto. This request has been met with a moderate response, he added.

Argyle warned that if discounts weren't increased, more consolidation would follow, leaving just two or three truly national wholesalers. Under this scenario, the wholesalers would have to run extremely cost-efficient operations, Argyle said.

"Wholesalers will have to be selective on titles, so publishers may find access to newsstands difficult and expensive," he said.

Another fear is that because so few wholesalers are handling such a large part of the business, problems could arise if they're not financially secure.

"There would be an enormous debt in the industry if they went out of business," Pashby of the MPA said.

Consolidation began in 1995, when Safeway began bidding out its magazine business. The move prompted virtually every other retailer to do the same. Wal-Mart, for instance, went from 200 wholesalers to three.

The bidding spread rapidly, turning the wholesale industry into a violently competitive businesses. It compelled many companies to go on acquisition sprees.

Earlier this year, Charles Levy Circulating Co., Chicago, announced it had entered into a letter of intent to combine sales, assets and liabilities of United Magazine Co. (Unimag) of Ohio. Terms were not disclosed.

The new entity would be the second-largest periodical distributor in the United States, with 1999 projected sales of more than $700 million. It would make Charles Levy the No. 2 wholesaler, behind Anderson News, Knoxville, Tenn. Anderson has made acquisitions of its own, including the periodical and book division of Aramark Corp., Philadelphia.

"In order for us to continue to be a low-cost operation, we need to increase our volume and lower our operating expenses," said Dennis Abboud, chief operating officer of Charles Levy. "As a result, we've been on an acquisition campaign over the last two years."

In those two years, Charles Levy has also acquired North Shore Distributors, Wheeling, Ill.; Badger Periodical Distributors, Appleton, Wis.; Aramark's book and magazine companies in Brainerd, Minn., and Milwaukee, and ETD, among others.

Unimag would be one of Charles Levy's most significant mergers, Abboud said -- and others are possible. "We're continuing to pursue acquisitions," he added. The transition is far from over. Some industry observers predict the top five companies will represent 90% of the business within two years.

Already, the top five organizations represent 75% of the business, up from 31% in 1994, according to John Harrington, a partner in Harrington Associates, Norwalk, Conn., which specializes in publishing distribution services. Last year there were just 56 wholesale ownerships, down from 182 in 1994.

While the pace of consolidation has leveled off recently, in large part because there are so few players, there's still plenty of room for significant shifts. This year could be the test that will determine the future of the industry, some observers said.

"Talks are going on all the time because the economics of the business are still perilous," Harrington said.

This wholesale shakeout has been the biggest change the magazine industry has seen in the last three years, according to Harrington. It has virtually paralyzed the smaller, independent wholesalers. Some have closed down, but most have been acquired by larger companies. Eventually, just 30 smaller wholesale companies will be left, Harrington stated.

The consolidation has been painful for wholesalers because it has occurred in such a short period, said Argyle of PWNA.

"It's been a rapid evolution -- from a geographically based regional operation to a national situation," he said.