The writing is on the wall: Something needs to give if magazine wholesalers are going to survive.
The four major book and magazine wholesalers are struggling to eke out a profit, and analysts think major changes are due to occur soon -- possibly this year or the next -- that could affect the profitability of the category for retailers.
"Most of the [wholesaler] companies insist they are not profitable or not sufficiently profitable to invest in the business the way they need to, so I think there's always a fear that one or more of them would leave the business," said John Harrington, partner, Harrington Associates, Norwalk, Conn. "Not go bankrupt, but just decide this is not a wise investment to continue."
Harrington suggested that some wholesalers could decide that there's not sufficient customer density in some areas to continue providing service to retailers in those markets. Wholesalers also overlap each other in some markets, he said, which could cause some to think about exiting from certain regions.
"There's got to be some substantial changes in the economic model in the distribution channel in the coming year, substantially different from the way they've operated in the past," he said.
Retailer consolidation in the 1990s led many large chains to negotiate better terms for their periodical services, and massive wholesaler consolidation followed. Now about 90% of the periodical distribution business goes through four big wholesalers: Anderson News, Knoxville, Tenn.; The Jim Pattison Group, Vancouver, British Columbia; Hudson News Co., North Bergen, N.J.; and Charles Levy Circulating Co., Chicago.
"We did a terrible thing where we gave away margin and money, and we can't do that," said a source at one of the wholesalers, who asked not to be identified. "Wholesalers have to be smarter in their contracts with retailers -- offer a percentage, but not up-front money. That cuts on margins tremendously."
Harrington said wholesalers currently are working on developing several plans to improve profitability.
Among the ideas being discussed are plans that include elements of a "cost-to-serve" business model, in which wholesalers would be compensated for the work they do rather than receive a percentage of the sales.
While the cost-to-serve model is supported by the publishing side of the business, wholesaler support is less enthusiastic.
"This plan may work for the top-selling, high-profile titles with brand recognition that sell at the checkout," said Gil Brechtel, president, The News Group, Atlanta. "However, in my opinion, it doesn't work as well for the titles that sell on the mainline fixtures, for either the retailer or the publishers. While we certainly aren't opposed to the cost-to-serve economic model, I believe there are still discussions that need to take place among all parties to determine if it is the best approach for the industry."
He also said the cost-to-serve model could further complicate the system by introducing publisher-retailer negotiations into the mix.
Jim Clement, president of newsstand consulting firm J.R. Clement Associates, Los Angeles, suggested that if retailers were to expand the display space they have for magazines, it could increase customer interest and improve profitability.
"Increasing sales as a result of improved displays would go a long way towards making everybody more profitable," he said.
He suggested, for example, that the magazine category is much more profitable than greeting cards, which are often afforded full aisles in stores that allow only 10-foot racks for magazines.
Peter Kreisky, president, Kreisky Media Consultancy, Boston, disagreed. "We are long way past trying to solve this problem simply by changing merchandising and display," he said. "We're in a much more serious situation here. If we don't find a solution to the problem, we're likely to see another major wholesaler collapse and service interruption."
