luke magerko A twenty-year veteran of the newsstand industry, working for a small wholesaler – Independent Direct Distributors – in the 1990s and for the Meredith Corporation in the 2000s.  His newsstand successes include the Dollar Tree Program, Family Circle’s 75th Anniversary multi-platform promotion/$0.75 edition, and the sale of the first bookazine (Great American Kitchens, 2000).  He spent the last two years of his professional career as a member of Diamond Comic Distributors where he was responsible for business development.  He analyzed magazine data to determine whether Diamond’s unique methodology would apply to the magazine industry.  In working with magazine publishers and purchasing data from MAGNET, he analyzed more than two dozen magazine titles at retail.

In January 2013, he was accepted to Northwestern University’s Master Program in Predictive Analytics.  Luke also founded the Market Analytics Project to offer actionable data analytics to publishers, vendors and retailers alike.

In the coming weeks I will be introducing a series of interviews with Luke with the hope that we will be able to shed some like at major problems on the newsstands and the different ways to solve them.  It is solutions that I am after and not restating the problems.  So without any further due, here is the first segment of the Mr. Magazine™ Interview with Luke Magerko.

WHAT ARE YOU TRYING TO ACCOMPLISH?

I would like to quote Bob Sacks from his 6/14 newsletter:  “It is my opinion that there can’t be too much data, but there can be inefficient to awful programs that analyze that data and deliver reports that are not readable or understandable by your typical professional.”  He is right; I want to de-mystify the data and provide simple reporting and recommendations which will reduce publisher expense and provide opportunities for growth.

WHAT WOULD YOU CONSIDER TO BE THE MAIN CHALLENGE WITH RETAIL?

Consider how each participant in the newsstand channel is paid and what services they provide:  1.) Publishers require the services of a national distributor who usually receive a percentage of retail sales in exchange for sales and marketing services, “backroom” – or accounting – services, and a final payment for the product. 2.)  Wholesalers are paid on a percentage of sale and provide sales and marketing services, operations – such as shipping and merchandising of product – and payment to the National Distributor.  3.)  In all but the largest publishers, newsstand consultants exist to help publishers by providing sales and marketing service plus being the liaison between national distributors (in larger publishing house, there are newsstand departments doing this work).  They usually get paid either in a flat fee or as a percentage of sale.  4.)  Finally, there is the retailer who also gets paid on units sold.

THAT’S A LOT OF SALES AND MARKETING!

It is!  When I present my cost saving analysis to a publisher, a consultant or any interested parties, the vast majority of respondents do not say my data is wrong.  I am told, however, “There are just not enough people to do this kind of analysis.”  Internal employees, consultants, national distributors and wholesalers all claim they are working on the publisher’s behalf to provide sales and marketing services.  I believe there are enough people to do this important analytical work, however since publishers’ payment structure incents sales, its partners do not focus on the kinds of analysis needed to stop the declines, and instead they focus on what I believe are bad strategic decisions.

WHAT KIND OF BAD DECISIONS?

I will walk you through four today:  let’s start with how print orders are created and how cuts are implemented.  Publishers observe sales declines then decide to reduce the print order based on those declines.  In my experience, cuts are enacted in the following way:

1.)   Publisher sets new national print order based on national sales.  For example, if a publisher targets a 33 percent sell-through percentage and ships 200,000 while selling 50,000 copies (25 percent sell-through), the publisher will reduce the print order to 150,000.

2.)   The consultant/national distributor is notified of the change and works with wholesalers on appropriate distribution reductions.

3.)   Wholesalers, using its advanced metrics, redistribute copies based on the lower national print order.  For example, if wholesaler X received 20,000 copies and now receives 15,000 copies, store-level adjustments are needed to account for the 5,000 copy loss.  In some instances, individual stores cease carrying the magazine, or in other words, are “cut.”

CAN YOU DETERMINE THE EFFECTS OF PRINT ORDER DECLINE?

Yes, you can analyze this question using MAGNET data.  For the purpose of this analysis, I isolate one variable.

  • Last Issue Current Draw = 0.  That is, a store had activity in the previous year (draw and/or sale) but the draw is now zero.  For example, your local grocer used to distribute monthly magazine Y.  The wholesaler distributed 36 copies in 2012 (3 copies per issue) and sold 6 for a 16.7 percent sell-through.  Based on the wholesaler distribution analytics, the store was cut and the new draw is 0.

For this discussion, I analyzed one top-200 monthly magazine found predominantly on the mainline.  My analysis identifies cut stores and how they performed before they were cut.  Further, I compare these cut stores against overall sales results.  In theory,  if distribution adjustments were implemented correctly, sell-through percentage should rise as the wholesaler is removing copies from poor performing stores.

DO YOU CUT SALE WHEN YOU CUT DRAW?

Unfortunately the answer is yes, however not for the reasons you might think.  I provide total draw and total sale analysis for the previous 12 completed issues.   Overall national sales (“All Store Historical Sale”) are represented in the first row.  The second row represents sales results from cut stores (“Stores with Current Draw of 0”).  Sales are shown in thousands:
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The sell-through percentage of both rows is very close.  The cut stores were less efficient than the overall results (16.7 percent v 18.2percent), however the draw cuts ensure this title has lost or will lose 17.8 percent of  sales based on distribution work (44,000 copies of the 246,000 copies were sold in stores no longer selling the product).  There is a similar pattern in 92 percent of the titles I reviewed.  I am not arguing this title should have maintained its high print order.  18 percent sell through is not acceptable, however the cuts did a great deal of damage.

THE CURRENT MODEL CUT DRAW FROM STORES THAT WERE SELLING COPIES?

Yes.

HOW WOULD YOU REDUCE DRAW SAFELY?

I would like to offer two immediate print order reduction strategies which will cause little to no sales loss.  I would like to focus on House/Stock accounts and “low end freezes,” stores sell zero copies yet remain on distribution.

WHAT IS A STOCK ACCOUNT?

Wholesalers allocate magazine copies individual stores.  In certain instances, the wholesaler will reserve reorder copies for high-volume accounts such as airports.  These reserved copies are found in “stock accounts.”

Unfortunately, stock accounts represent a larger than expected percentage of the publisher’s print order.  In my analysis, the most efficient titles currently have between 2-3 percent of the print order in stock accounts; however, the majority of titles I analyzed currently have between 4 percent and 16 percent of the print order in stock accounts.  Large print order titles (100,000 copies or more) have a smaller percentage of the copies in stock accounts than titles with smaller print orders.

WHY ARE COPIES SHIFTED TO STOCK ACCOUNTS?

As unit sales decline, wholesalers are forced to reduce draw to poor performing stores.  If publishers are not vigilant about making corresponding print order reductions, wholesalers are forced to place these superfluous copies in stock accounts.  There are simply no outlets for these copies.

CAN THESE COPIES BE REMOVED?

Yes, MAGNET provides this information in the “Class of Trade” section of its store level report.  As of this writing, I believe all national distributors have this report and should be able to identify this field.  Here is a sample of what this report looks like.  Data has been generalized so as not to divulge the title, and columns such as address have been hidden due to space concerns:

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MAGNET Data File, August 2012

WHAT IS A LOW END FREEZE?

Wholesaler analytic systems sometimes require distribution of nonproductive titles to fulfill its vision of a successful product mix.  Other times publishers demand distribution if, for example, they bought checkout space or a promotion and want to ensure product is available in those pockets.  In either example, these stores are given a static amount of copies irrespective of need.  To demonstrate this, I analyzed the same top-200 monthly magazine from last week.

PUBLISHERS ARE SHIPPING COPIES TO RETAILERS WITH NO HOPE OF SELLING THEM?

Yes.  For this analysis, I isolate a different variable:

  • Zero sale stores which continue to receive magazines.  For example, your local grocer used to distribute monthly magazine Y.  The wholesaler distributed 72 copies in 2012 (6 copies per issue) and sold 0 copies for a 0 percent sell-through.  In some instances, the store was not cut and the new draw is somewhere between 1 and 6 copies depending on the wholesaler.  Let’s look at the same title I used to analyze the cut draw/cut sale trope:

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Note in table two 20,000 copies of distribution netted zero sales in one year yet remain on distribution.  Again, 18.2 percent is not an acceptable sell-through percentage.  My recommended print order cut of just 1.5 percent (20,000 copies) will raise efficiency to 18.44 percent.  Actual cuts represented a 19.4 percent reduction of the print order (263,000 copies) to increase efficiency to 18.51 percent.  In summary, the publisher cut 13 times as many copies as I recommend for a 0.07 percent improvement in efficiency.

This error is not uncommon.  I found 88 percent of analyzed titles could remove 1 – 5 percent of the print order with zero loss in sale (the higher number is found in some checkout titles).  From a publisher’s perspective, there were multiple expenses attached to these 20,000 copies.  They were printed, there may have been checkout fees, IPO fees and promotion fees.  Further, wholesalers had to pack, ship and merchandise these copies.  And for what?  Zero revenue to cover these expenses.  This is not a successful business model for anyone.

ARE THERE OTHER WAYS YOU WOULD CHANGE THE MODEL?

First, publishers need to have an understanding of newsstand profitability.  My assumption is every publisher has an overall P/L and the analytic publishers have a chain P/L.  My model creates a store level P/L designed to demonstrate how individual stores perform for the publisher.  The store level P/L is a collaboration with David Ball, former VP of Consumer Marketing at the Meredith Corporation.

Some background:  Consumer marketers reach rate base by collecting subscriptions from a wide variety of “sources”, including direct mail, renewals, public place, partnerships, etc.  Each source is judged by its financial performance and that performance is based on profit per copy sold (“PPCS”).  I translated this model into newsstand.  Newsstand PPCS defined:

Profit per Copy Sold = ((Retail Price * Units Sold) – Expenses)/Units Sold

By analyzing sales at store level, publishers can 1.)  Determine what percentage of stores are profitable 2.) Analyze what loss is tolerable.  This is especially important for rate base titles might accept a small loss to reach its rate base goal.  3.) Make better decisions on where its product should be distributed.

WHAT PERCENT OF STORES ARE TYPICALLY PROFITABLE?

It varies based on price and sell through.  I will say EVERY title I analyzed – including $9.99 bookazines – distributes to unprofitable stores.  I have one analysis to share today:  I analyze a top-100 monthly title heavily reliant on subscribers to reach rate base.  I have two years of data for comparison purposes.  In those two years, this title was distributed to 64,402 stores with a current distribution in 46,964 stores.  I created a P/L for this title, conservatively estimating wholesaler terms, RDA and print expense.  I DID NOT include rack fees or promotion estimates as I cannot know what the publisher spent.  Therefore by not including fees and using favorable assumptions, I overestimated the profitability of this title.

WAS THE TITLE PROFITABLE OVERALL?

This title lost $0.11 per copy sold.  Since it is a rate base title, $0.11 lost per copy is not the end of the world if these copies help reach rate base.  The profitability breakdown by store is alarming, however.  This title broke even in 19,993 stores or 42.6 percent of the store count.  Further, of the nearly 27,000 unprofitable stores, 8,518 (31.5 percent) lost more than $1 for every copy sold.  Of those poor performers, 1,462 stores lost over $5 per copy sold!  Last point:  2,997 of 17,438 stores no longer on distribution were profitable.

A TOP 100 TITLE WAS NOT PROFITABLE IN 57 PERCENT OF THE STORES IT WAS SHIPPED TO?

Remarkable, isn’t it?  I devised an algorithm to adjust the distribution of this title.  This algorithm can be adjusted to the publisher’s criteria, however for the purposes of this conversation, I aggressively tightened the print order for maximum profitability.  By trimming copies shipped on unprofitable stores and eliminating stores which were impossible to make successful, I can improve profitability from $0.11 loss per copy sold to profitability of $0.16 per copy sold.  The recommendation is to eliminate 4,000 stores from distribution.  Further, 25 percent of the print order has been identified as unnecessary and would be eliminated.  In my model, sales will be shaved by 10 percent.
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WHAT IS THE BENEFIT OF MAKING SUCH SHARP CUTS?

Profitability and opportunity.  I am offering newsstand departments a way to look at distribution in the same manner as consumer marketing.  By doing so, both departments align goals and both become more profitable.  Two examples:  1.) Consumer marketers can acquire subscriptions year’s subscription for approximately $1 (less shipping and handling).  While it is an expense, it is a far more acceptable expense than losing $5 on one copy sold.  2.)  Non-rate base titles need to determine if they ever need to be in an unprofitable store and act accordingly.  Now with this newfound profitability, publishers can use this savings to enhance any part of its business, including reinvesting in newsstand.

BUT AREN’T YOU JUST EXACERBATING THE DECLINE OF NEWSSTAND?

No.  I am trying to save it!  I have a series of recommendations for retailers which I will share at a later date but I have a rhetorical question for you:  this title (along with the vast majority of non-celebrity titles) shares pockets with other titles (think SIPs).  If this example title loses $5 for every copy sold and is removed, won’t the other titles sharing space benefit by residing in the pocket longer?  Therefore, the publisher saves money on the unprofitable title and enhances profit for the other checkout titles.  Win, win!!

VERY GOOD.  WILL THERE BE A PROBLEM IMPLEMETING THIS?

Yes, the problem is my model will never be accepted by any group other than the publisher.

WHY NOT?

Since all participants in the distribution channel except publishers are paid based on retail sale, there will be great pushback against this model as I am purposefully reducing sale.  Again, my algorithm can be adjusted to reduce sales loss, but nevertheless I am asking trade partners to reduce national sale.  This is a terrible business model for them using current terms and conditions.

WHAT DO WE DO?

I have a profitability financial model for publishers to offer its trading partners.  At this point, I am still not willing to share my POS recommendations but at a time when sales are soft, a publisher willing to switch to a profitability model will be successful in the short term (more profitability) and longer term (cash flow to grow sales and profitability).  Further, this model provides an opportunity for wholesalers, national distributors and consultants to increase their business.  I look forward to sharing the model with you at a later date

SUMMARY

Thank you for the forum, Samir.  Stock accounts, zero sale stores and draw/sale analysis is not exciting nor is it revolutionary, but when analyzed with a focus on profitability, our industry can start healing itself.

There are a great many other topics to discuss, most notably POS, checkout malaise and how publishers can grow its business using advanced analytic techniques.  I look forward to discussing these topics with you in our next Q&A session.

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