It will be interesting to see if distribution channels similarly lead to
shakedowns in the movie and music industries. Book publishing is
already starting to follow the trend as well.
Then again, this is another case of the filtering problem. When a
content shakedown happens, the stuff with the widest appeal survives,
regardless of whether or not those are actually the "best bits"...
> How Magazines Make It to Stores -- And Why They Soon May Not
> By G. BRUCE KNECHT
> Staff Reporter of THE WALL STREET JOURNAL
> February 26, 1998
> In the little-known world of magazine distribution, there's a
> revolution going on. And if that doesn't faze you, consider that sooner
> or later, you may have trouble finding that one particular title you've
> always counted on ferreting out among hundreds of others on the racks of
> newsstands, drugstores and supermarkets.
> For years, distributing magazines was a simple, though inefficient,
> business: Most cities had one wholesaler delivering new issues and
> picking up old ones. The retailer, the wholesaler and the publisher each
> got a cut from every magazine sold; unsold copies went back to the
> publisher. With so little downside, wholesalers were willing to put just
> about any title on store shelves. Retailers were happy to oblige.
> But about 2 1/2 years ago, all that began to change. Safeway Inc., a
> large supermarket chain based in Pleasanton, Calif., told wholesalers in
> several Northwestern states that it would stop awarding contracts to
> single-city wholesalers, and it opened several large regions to
> competitive bidding. Other big retailers followed suit. Wholesalers, to
> meet the demand, could either expand or die. The result: The number of
> independent distributors has plunged to about 60 now from about 180 in
> 1995, and the number continues to slide.
> Fewer Checks to Write
> That's a happy outcome for retailers. In order to win contracts for
> larger regions, wholesalers are offering them better terms. And fewer
> wholesalers mean fewer hassles. During the past couple of years, Kroger
> Co., a Cincinnati-based chain of roughly 1,300 stores, has gone to five
> distributors from 95; Albertson's Inc., a Boise, Idaho, chain of more
> than 800 supermarkets, to seven from about 100; and Walgreen Co., a
> Deerfield, Ill., company that has more than 2,000 drugstores, to six
> from more than 100.
> Bill Long, the Wal-Mart Stores Inc. executive who oversees magazine
> sales for that retail chain, told a recent magazine-publishers'
> conference: "Trying to pay the invoices for 305 distributors, and trying
> to make sure everyone was paid on time, was an absolute nightmare." Now,
> Wal-Mart, which accounts for 9% of newsstand magazine sales nationwide,
> deals with just three distributors.
> But what has been a boon for retailers is becoming the bane of
> publishers. Most fear a profit squeeze as wholesalers demand better
> terms to compensate for the richer deals they have given retailers. More
> alarming, perhaps, would-be publishers and publishers of small magazines
> fear that they won't have a place on store shelves as wholesalers focus
> on best-selling magazines.
> The venerable New Republic is already feeling the effect. Single-copy
> sales of the weekly fell to 4,907 in the last half of 1997 from 6,830 in
> the same period of 1995, according to the Audit Bureau of Circulation,
> while subscriptions remained flat. Because of consolidation among
> wholesalers, says Jimmy Smith, the magazine's circulation director, "the
> number of newsstands we're on has been shrinking."
> And as for launching new magazines, says David Getson, founder and
> publisher of Icon, a one-year-old men's magazine: "The kind of
> entrepreneurs and visionaries who started most of the great magazines
> won't have a chance anymore." He says that appearing on newsstands was
> critical to his magazine's gaining credibility among potential
> advertisers and subscribers. "If we weren't on newsstands, we would have
> needed millions of dollars to promote the magazine with direct mail --
> and we didn't have millions of dollars."
> Unprecedented Squeeze
> So far, though, the change has been most wrenching for wholesalers
> themselves -- mostly family-owned companies unprepared for the
> rough-and-tumble of competitive bidding in overlapping
> territories. Before consolidation, retailers paid wholesalers 80% of a
> magazine's cover price; now, they typically pay just 70% to 75%,
> according to John Harrington, publisher of the New Single Copy, a
> newsletter about magazine distribution. At the same time, wholesalers
> themselves have continued to pay publishers 60% of the cover price, so
> they have, in effect, shifted much of their margin to retailers. Many
> wholesalers also have offered big upfront payments to retailers who give
> them contracts.
> Carol G. Kloster, president and chief executive of Chas. Levy Co.,
> Chicago's dominant wholesaler, says her company didn't have a
> choice. "When somebody says to me, 'Why would you bid that high? That
> was stupid' -- well, those of us who were stupid and bid that high are
> still in business," she said at the publishers' conference. "We're not
> making money, but we're alive to try on another day."
> And that's the rub for publishers and their readers: Distributors say
> they have only two ways to regain profitability: by winning better terms
> from publishers and by cutting costs -- the latter mainly by trying to
> reduce returns, an expensive and unprofitable part of the business.
> Anderson News Co., which through a spate of acquisitions has emerged
> as the nation's largest wholesaler, with about 25% of the market,
> recently sent a memorandum to publishers saying that for new titles it
> carries, they will have to provide a "minimum discount" from the cover
> price of 44% (meaning it would pay no more than 56%, compared with the
> current 60% norm).
> Anderson officials decline to comment about the proposed
> change. Publishers say Anderson told them the change was necessary
> because new magazines have return rates higher than the industry average
> of 50%. While Anderson, a unit of Anderson News Corp., Knoxville, Tenn.,
> said the discount rate for new publications could be adjusted later,
> depending on a new title's eventual sales, publishers say it is hard to
> project profits with a 44% discount.
> Moves like Anderson's scare some publishers. "The wholesalers are
> becoming so concerned with efficiency that they are much less willing to
> take a chance on a new magazine," says Jeremy Miller, circulation
> director of the Source, a seven-year-old magazine that covers rap
> music. "If we were starting today, it would be 10 times harder than it
> was then, and it wasn't easy then."
> A Sense of Obligation
> Back when they held monopoly-like control over a local market,
> wholesalers were inclined to carry just about every magazine. "There was
> the notion that ... if I didn't, no one else would," says David Moscow,
> who was president of Chas. Levy from 1976 to 1991. "Wholesalers don't
> have the luxury for that kind of thinking anymore... . The titles that
> don't produce a profit for them are vulnerable now."
> In recent months, some wholesalers have tried to impose higher costs
> on established publications, based on their profitability to
> wholesalers. For example, publishers say, Aramark Magazine & Book
> Services, a Los Angeles company that has become the nation's
> second-largest wholesaler, recently told them that it would start
> charging a new fee for magazines deemed unprofitable -- two cents extra
> for copies shipped to stores and four cents for copies returned.
> Publishers fought back. American Media Inc., which owns the National
> Enquirer and the Star tabloids, declared that it would no longer provide
> the tabloids to two Aramark-owned wholesalers, in Minnesota and
> Wisconsin. Aramark, a unit of Philadelphia-based Aramark Corp., backed
> down, and when it later asked American Media, based in Lantana, Fla., to
> allow it to handle its publications, American Media said no. In
> December, Aramark agreed to sell the two distribution companies to
> Chas. Levy.
> "This is an industry in the midst of a revolution," says Michael
> Gummeson, Aramark's president. He declines to discuss the spat with
> American Media.
> Publishers appear to have won the battle in that instance, but most
> acknowledge that eventually, they probably will be forced to give a
> bigger cut to wholesalers. Indeed, several other distributors are now
> saying that they will begin assessing the kinds of fees Aramark
> "The biggest wholesalers are trying to set up rate structures that
> penalize magazines that put only a few copies on shelves or have high
> returns," says a senior executive at a company that owns both large and
> small magazines. That, he says, could force some publications off
> newsstands: "The higher costs will be impossible for most
> special-interest publications," he says, "so there will be a creeping
> form of censorship as they get priced out of the market."
> Harper's magazine, with a total circulation of 216,000, is a potential
> casualty. The magazine says the portion of its total circulation that
> comes from newsstand sales has declined slightly since 1995. John
> MacArthur, the monthly's publisher, threatens to use the legal system if
> he finds that wholesalers are dropping his magazine. "If they start
> shutting off distribution to magazines that aren't profitable enough to
> them, there will be lawsuits," he warns. "They're a common carrier like
> AT&T. They have to carry us."
> 'Too Many Magazines'
> Of course, not all publishers are frightened. Some that put out
> high-volume magazines expect to do better as marginal titles disappear
> from newsstands, reducing competitive clutter. "There are too many
> magazines going through the system," says Don Logan, chief executive of
> Time Warner Inc.'s Time Inc. "Any category you pick, there are 10 -- or
> hundreds -- of magazines. That's too many."
> Wholesalers have always played a crucial role in determining what
> titles reach store shelves. Most retailers have "authorized lists" of
> titles that wholesalers can ship to stores, but it is wholesalers that
> often choose the titles from those lists, and their employees stack new
> issues in racks and remove unsold ones. Many retailers don't know all
> the magazines that appear on their shelves.
> But as wholesalers invest in information systems, they can collaborate
> with retailers to fine tune their displays -- and cut unprofitable
> titles. Time Distribution Services, a Time Inc. unit that oversees
> distribution of its magazines and others, has worked with several large
> retail chains to improve the way magazines are selected for display.
> In one experiment, Ralph's Grocery Co., a West Coast supermarket
> chain, cut the number of titles displayed in several stores to fewer
> than 500 from 1,100. As a result, its overall magazine sales increased
> because the titles were more carefully chosen and given greater
> prominence on shelves, according to a person familiar with the
> company. Ralph's, based in Compton, Calif., declines to comment.
> "There are thousands of magazines out there, but most of them don't
> contribute much to anyone's bottom line," says Dwight DeGolia, a senior
> vice president of Source Information Management Co., a St. Louis company
> that represents retailers in dealing with publishers. "You don't need 40
> titles on how to play golf," he says, adding that he believes a
> reduction in magazine offerings would represent "a healthy purging."
> Paperbacks, Too
> Wholesalers that are looking for ways to squeeze more money out of
> magazines are doing the same with the mass-market paperback books they
> also distribute. New York-based St. Martin's Press has long published
> about 10 science-fiction paperbacks a month, "but now, while we might
> sell more of the No. 1 title, Nos. 3 through 10 don't sell at all," says
> John Sargent, the company's chief executive. The reason: "They are
> taking a whole wall" and giving it to best-selling authors such as
> Danielle Steel.
> The emphasis on best-sellers mirrors a similar trend among large book
> retailers such as Barnes & Noble Inc., New York, and Borders Group Inc.,
> Ann Arbor, Mich. -- and it holds the same concerns for
> publishers. Speaking about the narrowed range of mass-market paperbacks
> reaching stores, David Shanks, the chief operating officer of New
> York-based publisher Penguin Putnam Inc., says: "It means that midlist
> is gone because there is no place to sell them. It makes it hard to
> develop the next generation of best-selling authors."
> The ultimate fear for publishers of magazines and mass-market
> paperbacks is that a concentrated wholesaler industry, working closely
> with retailing giants, eventually will wield the kind of power over them
> that Barnes & Noble and Borders have over many book publishers, using
> their buying power to demand bigger discounts and other concessions from
> "Wholesalers will end up being pitted against publishers," says Chris
> Meigher, a former Time Inc. executive who now runs his own
> magazine-publishing company. "And I wouldn't bet against
When in doubt, empty the magazine.