In my continuing series of interviews with the man who wants to save the newsstands, Luke Magerko, Managing Director, Market Analytics Project, this segment of the interview deals with the fees announced by The News Group regarding magazine distribution.
Samir Husni: What are your thoughts on The News Group (“TNG”) imposing a fee on copies distributed?
Luke Magerko: I have a two main thoughts:
1.TNG’s action was necessary because partners in the supply chain ignored operational challenges and direct warnings from wholesalers for more than 15 years.
2.TNG’s plan will provide short-term financial relief but also will cause many challenges in the short and long term.
SH: What kinds of challenges?
LM: There are many specific operational and financial questions that have not been addressed. Wholesalers did not provide guidance on fee calculations and refuse to do so. Publishers are left with no way to improve the situation for the wholesaler other than to pay the fee.
Also, Texas and Alaska distribution was affected on December 2 so there is no chance publishers were properly prepared for such a radical change.
SH: Will this fee save the industry?
LM: No. This fee only adds to industry confusion. The publisher will now pay both shipping fees and margin to sell copies. If I were a publisher, I would ask these questions:
1. Why did TNG choose regionality as a basis for the fees? If wholesaler expenses are too high, wouldn’t a fee based upon the all-sales volume of a store make more sense?
2. Who is responsible for title order regulation?
3. If TNG implements a shipping fee, is it reasonable to assume publishers are going to reduce copies shipped? If print reduction adversely effects sales will wholesalers increase the fee to make up the difference?
4. Is this fee permanent? If not, how long will it be in place? What stops TNG from raising the fee again when the program is reviewed at a later date?
SH: What would you do if you were a publisher?
LM: As we discussed before, publishers pay excessively to sell a magazine because of great overlap in the system. Publishers should create a store-level Profit/Loss Statement, analyze every service provided as part of the supply chain, determine what is vital and eliminate all that is not.
I believe the following players are integral:
• Wholesalers provide the essential service of shipping and merchandising however the efficacy of wholesaler category management and sales services should be questioned.
• National distributors act as a financing arm, providing publisher payments and backroom services. If the publisher feels they receive effective sales and marketing services from this group, then they should pay for that service as well.
• MAGNET provides industry-leading data for publishers to analyze and are imperative in this process
SH: What do you suppose the publishers will find when they analyze its business?
LM: First, publishers will find many newsstand consultants desperately calling national distributors to obtain a “bucket report” to make distribution adjustments on behalf of the client publishers. Consultants will be very interested in making operational changes, but it is too late to stop the wholesaler edict.
Second, publishers will find little assistance in making this decision because national distributors cannot guide them on the new terms and conditions.
Most importantly, publishers need to know that with this fee, the old newsstand model is dead and a new model is needed immediately.
SH: What would you do if you were a publisher?
LM: Publishers must accept the fee and create a deadline of six month to negotiate a contract with all wholesalers.
SH: A contract with a wholesaler?
LM: Yes. TNG’s unilateral action demonstrate why a contract is necessary. Publishers cannot live in a world where on any given Monday, business models can be radically modified. Other wholesalers are watching closely to see how to make the next move so it would be wise to preempt other unilateral wholesaler actions as well.
SH: What would the contract entail?
LM: For the purposes of today’s discussion, I recommend two payment vehicles to the wholesaler: a fee that covers retail margin and a second cost-to-serve fee.
SH: How would that work?
LM: First, the publisher should reduce wholesaler margin to an amount commensurate with the retailer margin. For example, if the publisher believes a retailer receives 30% margin on all sales, then the publisher should offer that amount.
Second, the publisher should offer a generous cost per copy fee on all copies shipped. The publisher should calculate this fee accounting for perceived wholesaler margin and the new subsidy.
Publishers should insist that wholesalers accept publisher distribution work on each title. I also recommend publishers sign a contract with MAGNET to receive data directly and publishers then should hire analysts, not consultants, to recommend distribution models to meet publisher needs. TNG should be allowed to audit the distribution process but publishers should have control over its destiny.
SH: How does a wholesaler audit publisher distribution?
The same way a wholesaler distributes books: publishers will submit the standard size (the width of the magazine is most important) of magazines to the wholesaler.
A wholesaler audits distribution by ensuring the amount of copies can fit in the space allotted for the title. Since they are now paid on copies shipped, the only wholesaler concern is that too many copies are shipped. The audit process will ensure that does not happen.
For example, magazine “A” is 0.5 inch think and a mainline space is 8 inches deep. This publisher can ship no more than 16 copies to the store and any number greater than 16 is reduced by the wholesaler.
SH: Is this the “Cost-to-Serve” model recommended by some national distributors?
LM: Yes.This is the first stage in changing the business model to a cost-to-serve model.
SH: Your new recommended model still seems a little confusing.
LM: I simply recommend consolidating expenses: one for the wholesaler and one for the retailer. The long-term strategy is to adjust the entire system to Scan Based Trading (“SBT”). But that is for a later time.
SH: So sum it all up for me:
LM: 1. Publishers must accept TNG’s new terms. Sorry, there is no other option.
2. Contract with MAGNET to acquire data directly, and hire professional analysts to help analyze your data for opportunities, both in savings and in increased sales. Each title has enough waste in the system to cover the majority of the new expense. (FULL DISCLOSURE: I use MAGNET data for all my reporting, and I support its mission.)
3. Six months from now, the publisher must sign a contract with the wholesalers to:
a. Ensure consistency in terms going forward.
b. Gain inventory management control over its business
This has been a scary week for the publishers and they need to come to grips with new terms and conditions.
SH: Well, I guess we have to wait and see. Looking forward to more of this discussion. Stay tuned and thank you Luke.