Imagine empty magazine reading racks in your supermarket!
This wasn't a general merchandise manager's bad dream. As previously reported in SN, a distribution dispute erupted in early February in the publishing industry, resulting not only in empty slots on retailers' shelves where popular weekly titles such as Time, People and Sports Illustrated were displayed, but in the demise of one major wholesaler, Knoxville-Tenn.-based Anderson News. Founded in 1917, the wholesaler represented about a quarter of the magazine distribution business and serviced retailers, including Wal-Mart Stores, in 37 states.
Major supermarket chains like Safeway and Kroger were affected, as well as regional chains.
“Some of our distributors informed us that they are having issues fulfilling their obligations to retailers. We hope they resolve their situation soon and, in the interim, are looking for alternative suppliers,” Glynn Jenkins, a Kroger spokesman, told local media at the time.
K-VA-T Food Stores, Abingdon, Va., a longtime Anderson News customer, failed to get its magazine allotments.
“We're sympathetic with their goal to get a more effective business model; however, we're not being serviced. That can only go on for a certain amount of time. We support Anderson and hope they get these issues resolved, but ultimately, we have to make sure our customers get the products they want,” Steve Smith, chief executive officer of K-VA-T and outgoing chairman of Food Marketing Institute, told local media.
This came on top of rapidly declining ad revenue and circulation escalated by the recession, making the second half of 2008 and first half of 2009 one of the worst years in publishing in a decade.
Recent figures released by the Publishers Information Bureau show advertising revenue plummeted 20.2% during the first half of 2009 to $4.1 billion and ad pages dropped 25.9% for the period.
“The latest PIB data reflect the advertising paralysis triggered by the late 2008 economic meltdown. Marketers froze ad budgets, which affected placement in the first-quarter magazines,” said Ellen Oppenheim, executive vice president and chief marketing officer of Magazine Publishers Association, New York, in a press statement.
Newsstand sales, meanwhile, declined during the second half of 2008, according to Audit Bureau of Circulations data. Sales for 535 magazines fell 11% from the second half of 2007, to 43.3 million.
Of the Top 25 single copy titles, most showed significant declines and just five showed sales gains, according to preliminary figures released by ABC for the six months ending Dec. 31, 2008. Titles with sales gains were: People, up 3%; In Style, up 6%; Figure, up 10%; Lindy's Football Annuals, up 2.7% and Vogue, up 0.19%.
According to The New Single Copy newsletter, retail sales revenues of all magazines in 2008 were down 3.2% to $4.8 billion and unit sales dropped 11.7% to $1.27 billion.
Consumers squeezed by the recession cut back on discretionary items, and that included magazines. Particularly hard hit in the second half were popular checkout celebrity and women's titles: US Weekly dropped 21%, Touch Weekly declined 32%, Star Magazine fell 13.4% and O, The Oprah Magazine slid 25%.
The spark that ignited the major distribution cuts was a 7-cent per copy surcharge that Anderson said it needed to stem net revenue losses of over $20 million on sales of $760 million in 2008.
Source Interlink Cos., Bonita Springs, Fla., another major distributor, faced a net loss of $36.6 million during the third quarter ending Oct. 31, 2008, and also decided to initiate a 7-cent per copy surcharge. Supermarket investor Ron Burkle and his Yucaipa Co. private investment firm is heavily invested in Source Interlink.
The publishing side of the business and its national distributors refused to pay the surcharges and cut off supply to the wholesalers. The events led to big disruptions in the supply chain for about 30 to 60 days, and antitrust lawsuits were filed against the publishers and competing wholesalers. As of this month, Source Interlink has settled the last of its disputes.
John Harrington, publisher of The New Single Copy, Charlestown, R.I., said the distribution failure happened abruptly and was costly. “For some retailers they were basically out of the magazine business for four to five weeks. Those retailers have established relationships with different wholesalers and most of the channels are open and operating now,” he said.
Anderson News' business has been split among The News Group, which now represents approximately 50% of the magazine distribution business; Source Interlink has about 30% and Hudson News holds 15%, Harrington estimated.
LESSONS LEARNED
Ironically, in 1995 Safeway, in an effort to cut costs and be more efficient, decided to go with just one magazine wholesaler instead of many to service its divisions. That decision triggered a major consolidation of some 200 wholesalers in the magazine distribution channel as other retailers followed Safeway's lead.
This time around, said Harrington, retailers voiced their concern about further consolidation within the sector and made it clear to the publishing world it is important to have a choice, with Source Interlink remaining viable.
Harrington believes retailers value the category enough to rally around a distressed wholesaler. “They could have said, ‘If you guys are going to have this disruptive distribution, we'll find other products,’ but they seemed to value magazines enough to get involved and make their feelings known at the highest end of the publishing business.” He said the top executives at major chains came to New York to discuss the situation with publishers and their national distributors.
Industry insiders agree that magazines won't disappear from supermarkets, because the category is too profitable for retailers to give up. Now that the dust has settled from failure in the supply chain, the publishing industry should pause and work to change their economic model, they say.
“The category will do better,” said former Wegmans Food Markets executive Jerry Lynch, who is president of the International Periodical Distributors Association, based in New York. “There is no question the publishing side has a vested interest to make it better and they'll pull out all the stops to do just that.”
The challenge is to get everyone in the supply chain, including retailers, on the same page and grow sales, he added.
Willard Bishop, Barrington, Ill., just released its 2009 SuperStudy that tracks 203 categories at three top national food chains. The study indicated magazines remain in the top third (No. 61 of 203 categories) in terms of profitability. The average category in a store generates about 30% gross margin, which includes retail discounts and promotional funding. Magazines generate 33%-34%, said Paul Weitzel, managing partner at Willard Bishop.
He noted consistency in volume, variety (about 900 skews per store) and profits over the two years since the study was last produced. “We aren't seeing any major drops [in magazines]. Retailers tell us it is important. It is profitable. When you talk about the future, everything will be fine,” he said.