Author: Mark Fletcher

Below is a table showing the cash-flow impact of Cosmos on newsagencies over the four months following its launch last year. Cosmos was launched with a fanfare and newsagents embraced the product with strong displays and promotions.

The negative cash-flow from Cosmos is not unique to the title as more than 60% of titles carried by newsagents are cash flow negative. The performance of Cosmos, however, illustrates the high cash cost to newsagents of launching a title like this.

Sales are over the counter sales; Expenses are supply invoice value; Operational expenses are the cost of real-estate, labour and credits received for returned product; Net the net cash-flow for the month.

There is a case to be made to Luna Media, publishers of Cosmos, that they ought to have delayed billing or compensated newsagents in some other way for their investment in the launch of the Cosmos brand.

In my research into the cash-flow implications of magazines on Australian newsagencies, I have uncovered the high cost of new titles, especially new titles in weak categories. Cosmos has come to my attention in the data I have seen for the six case study newsagencies. The experience of these six stores with Cosmos is reflective of the cash-flow impact of many other new titles.

It will take newsagents more than a year before they are cash-flow positive with Cosmos. For this time they are investors in the launch of the new title without any benefit from the longer term success.

While newsagents appreciate new titles and especially a title of the calibre of Cosmos, the impact on their business is significant. If they had exclusivity in return for the effort or were somehow stakeholders in the broader success of a new title then their commitment to building a new title would make more economic sense.

Newsagents are a cost-effective way of getting a new masthead seen. That most new titles are accompanied with a strong subscription push demonstrates a lack of respect for the investment made by newsagents in launching new titles. It would be valuable to know the subscription numbers achieved by Cosmos. It is fair to record that without newsagents and their advertising of the Cosmos brand, the cost of acquiring subscriptions would likely be uneconomical for the publisher.

With the significant number of title launches in 2005 and those projected for 2006, one can soon see the funding difficulties newsagents face with new titles.

Cosmos was challenged from the outset because of its subject matter. The Science and Environment category is in decline in retail. Newsagent sales data confirms this. I don’t have online data but suspect that it’s healthier than retail. Those interested in the category are Net savvy. This is why I am somewhat suspicious of the newsagent launch for a title (brand) which is better suited to online life.

What these figures do not take into account are the additional expenses incurred in supporting Cosmos during its launch: real-estate and labour for feature display space, second location real-estate in store (as some newsagents did for the first few months), poster space and time spent reading and considering material provided in support of the new title.

Behind the data in the table above is 135 pages of data from each of the six case study newsagencies for all titles. Every number has been triple checked in the most comprehensive study into magazine related cash-flow ever in Australia.

The Simpsons Pin promotion by the Herald Sun in Melbourne was a huge success. The result was hundreds of back orders b y newsagents. Imagine the frustration this week when newsagents found out that they will now have to wait until after the Commonwealth Games to supply customers. We were told the backorders would be filled a month ago and then two weeks ago and now it is at least another three weeks off. We have customers visiting every couple of days – looking for us to make good on the promise of News Ltd. Mistakes like this one by News Ltd cost newsagents goodwill with their customers. We have no choice but to point to News as the problem. The promotion backfires. At least really desperate customers can buy their pins on eBay still.

Publishers need to understand that promotions like this can hurt unless the execution is perfect – or at least shortfaslls are fixed quickly.

UPDATE (20/03): The Herald and Weekly Times people have come through and 700 customers in my shop are very happy to get a call from us. yea!

The Office of Fair Trading in the UK has announced that it will look again at how magazines are distributed in the UK – almost a year after pronouncing the existing regime unlawful. The BBC has a good summary of the implications here including:

Many industry groups fear that if magazine distribution is opened to free competition then big magazine retailers, such as supermarkets, will take the opportunity to sign cheaper, exclusive, distribution deals with wholesalers.

The Periodical Publishers Association (PPA) says that would leave independent news retailers to pay more for their smaller deliveries to more out-of-the-way places.

Government has an obligation to small business local communities and organisations like the OFT need to listen carefully to these constituents as they do not have the same lobbying funds as supermarkets and other big business players.

I’ve just completed a study into the cash-flow impact of magazines in Australian newsagencies. Once you account for the cost of stock, labour and real-estate and balance this with credits for unsold stock and revenue from sales, I’ve found that, on average, 65% of all magazine titles carried by newsagents are cash-flow negative. None of the cash-flow negative titles is in the top 100 and none is carried by petrol, convenience or supermarket outlets.

The magazine supply model was created back when newsagents had an authorised monopoly. It needs to be modified to reflect today’s circumstances. If this is not done newsagents will continue to bleed cash in the magazine department to the gain of their competitors. Cash-flow negative titles take money and resources which could otherwise be spent in newsagencies to promote the successful titles. This is the advantage supermarkets and others have over newsagents.

The current newspaper distribution model in Australia was created and remains ‘owned’ by newspaper publishers. Publishers control the cover price of newspapers as well as the fees which can be charged for home delivery, who can own a distribution territory, whether territories can be amalgamated and (most) efficiencies newsagents can implement to cut costs out of the operation.

Until newsagents create a distribution system they own they will remain the working poor.

There is anecdotal evidence to suggest that around 80% of newsagents lose money from their home delivery operations. Few newsagents make even a basic wage for their effort, believing that the distribution side of their business is crucial to retail sales – a point I disagree with.

Publishers must be brought to the negotiating table by newsagents. They must allow newsagents to amalgamate territories. They must allow variable delivery fees based on real costs. They must free newsagents to be entrepreneurial in cutting costs and leveraging the delivery service. They must provide commercial incentives for newsagents to pursue home delivery growth – this means that newsagents must be given control over marketing in their territory.

The current home delivery system can see neighbours receive the same newspaper on very different pricing models. There is one suburban street where each of the five home delivery customers is on a different pricing model, meaning that the newsagent gross profit from home delivery services ranges from 12% to 25%. That newsagents have no control over pricing and marketing means they have little control over the profitability of their businesses.

If newsagents do not create a newspaper distribution system they own and present this to the publishers in the next two months they run the risk of being presented with a new model developed by publishers to serve publisher needs.

While newspaper publishers increase their focus online, as seen in acquisitions and at industry conferences, most Australian newsagents remain oblivious to this. Relatively strong newspaper, lottery and magazine sales shield newsagents from a global trend which will impact their businesses. Newsagents continue to focus on macro issues and ignore the global challenge of online.

Ideally, I’d like to see newspaper and magazine publishers brief newsagents about their online strategy. I am not talking about revealing secret plans, but more of a briefing on trends – so that newsagents are encouraged to evolve their businesses. Such a briefing from a publisher is more likely to gain newsagent attention. However, I doubt any publisher would want to provide such a briefing as they would fear an outcome of newsagents diluting attention to their product.

In my own shops we remain aggressive in pursuing newspaper and magazine sales. We are also developing additional revenue generators so that we will be less affected by a drop in one or more product categories. We are also embracing trends as they affect us. For example, with computer magazine sales collapsing, we are halving the space we provide for this category of magazines.

The challenge of online is the only issue newsagents should be discussing at their conferences this year and it would be helpful is publishers would drop their guard enough to encourage a look at the horizon by newsagents.

The Office of Fair Trading in the UK has announced that it is to refer to market for the supply of groceries, including newsagent lines, to the UK Competition Commission. Any independent analysis of the power of major chains has to be welcomed by small business. (I just wish we could achieve similar traction here with the ACCC and the Productivity Commission.) The OFT announcement, in part, observed:

There is also some evidence to suggest that the big supermarkets’ buyer power has increased, and that there are aspects of the big supermarkets’ pricing behaviour – below-cost selling and price flexing – which could distort competition. Although consumers have benefited from lower prices, the data does not allow the OFT to reach a firm conclusion on whether choice and variety for consumers in local markets – whether choice of fascia or on-shelf product variety – have increased. Because pricing practices and buyer power interact with local concentration to affect product variety and choice of fascia, the OFT proposes also to refer to these features in making the reference.

The OFT could have been writing about Australia.

We’ve had Commonwealth Games programs on sale for the same period and displayed next to a preview of the 2006 AFL season. The AFL season preview has outsold the Commonwealth Games program 10 to 1 – until this week when sales for the Games program (finally) took off. At last the Commonwealth Games is getting some retail traction.

It’s when the elderly female customer asked this question that I realised we need to touch more in our retail businesses. Not in an offensive way. The odd touch here or there at the right time provides a connect no internet business can get close to. Two people, connecting on a common interest, touching skin provides a warmth critical to our success. I understand that the social networking facilities online will change the way we interact with each other, until that is ubiquitous retailers like me ought to exploit the opportunity to touch our customers. Yes, you can touch me for luck.