I have received a few calls this week from small publishers and people outside the newsagency channel wanting to talk about the problems with the magazine distribution model.  I thought it might be worthwhile putting together a summary…

A brief history

For over 100 years, newsagents had a monopoly over the distribution of newspapers and magazines.  That changed in 1999 when the federal government engaged the ACCC to oversee deregulation.  The deregulation opened access to newspapers and magazines for other outlets but failed to address the supply model which had been created to serve the monopoly arrangements.  Newsagents were poorly represented through this deregulation process. Newsagents were left with a more competitive retail marketplace but without the levers necessary to enable them to make competitive business decisions.

What is wrong with the current magazine distribution model?

Newsagents are treated differently to other magazine retail channels – petrol, convenience, supermarkets and majors.

Newsagents have no control over the titles received nor the quantities received. Our competitors do have this control.

Newsagents are provided some titles with an extended, three months and beyond, shelf life.  Our competitors rarely receive titles with more than a 20 day shelf life.

Newsagents have to pay to return unsold magazine stock.  Many of our come=petitors do not have to do this.

Newsagents are forced to follow time consuming and accident prone processes for handling the return of unsold stock.  Most of our competitors do not have to follow these processes.

Newsagents only make money from sales, our margin is 25% of cover price.  Many of our competitors receive other financial compensation which takes them beyond the 25%.

Recent magazine cash flow studies I have undertaken indicate that  65% of all magazines sent to newsagents are cash flow negative once we take into account the cost of retail real estate, labour and returns costs.  This significant financial burden disadvantages newsagents against our competitors.

I have evidence from many newsagencies where magazine distributors have supplied stock on the basis of a sell through at 20% or even less over a long period of time, knowing that the newsagents will absolutely lose money on such a supply volume.

How would I like it changed?

If newsagents are to be accountable for paying their magazine suppliers on time, we MUST be given the ability to control the level of indebtedness we incur.  This means we must have control over the titles we receive and the quantity of each title we receive.

If we are not given the ability to control titles and volume, we must be compensated for use of our stores as a warehouse and our cash to fund oversupply.  I would suggest a fee based on sell-through.  If a title has a sell through of less than, say, 60%, newsagents are compensated with a fee to reflect the cost of real estate, labour and cash used to support the oversupply.

Why is nothing done?

Magazine distributors make money by trucking stock out and processing unsold stock when it is returned.  There is little or no financial incentive for them to do anything other than to ship out as much stock as possible. This makes newsagents financially responsible for the distributors wanting to keep their trucks full.

While newsagents could use collective bargaining to negotiate more equitable terms, the distributors have demonstrated little appetite to engage in such commercial discussions in the past.  Further, newsagents have had poor leadership for many years and this has led to a decline in newsagent support for representative bodies.

What we should do

Newsagents need to present evidence of gross over supply to appropriate government authorities like the ACCC.  The more evidence from individual newsagents the greater the opportunity for getting appropriate attention.

We ought to also look at state based bodies which could help.  In New South Wales for example,  individual newsagents could easily bring a case to the Consumer, Trader & Tenancy Tribunal. In Victoria, newsagents could engage with the Office of the Small Business Commissioner.

Why we will do nothing

We are tired, weak and scared.

Here is a graph indicating the cash flow impact of magazines supplied by Network Services (excluding ACP Magazines titles) and Gordon and Gotch (exclusive Pacific Magazines titles)to a newsagency between May 2009 and April 2010.  The data was collected and analysed using Tower Systems newsagency software. To determine the cash flow impact of a title, the software considers the cost of goods, cost of retail real estate by title, cost of labour plus revenue from sales achieved.

How can small business newsagents manage cash flow with such peaks and troughs?  With difficulty.  The cash flow challenge is far more pronounced in shopping centre based newsagencies where rent per square metre is much higher than elsewhere.

Newsagents manage by subsidising magazines some months with cash from other parts of their business.

I first wrote about this in my Magazine Cash Flow Report of 2006.  I have spent time this year updating the data and things have not changed.

Magazine distributors control the model.  They will say that the don’t but they do.  They are paid regardless of sales.  Newsagents only make money from sales.  We are the weakest link in the chain yet pay the highest price.

The cash flow peaks and troughs of the current magazine distribution model cannot continue.

Before the magazine distributors complain to each other that I am unfairly blaming them again, I challenge them to look at the cash flow data.  This will show that I am right.  It will show that the current magazine model is cash flow negative for 65% of all magazines distributed.

Some simple changes could turn this situation around.

What is grossly unfair to newsagents is that no other retail channel competing with us in selling magazines has the limitation imposed by the magazine distributors on us.

One day, people will look back and wonder why they acted as they did commercially against newsagents.

We received a new title yesterday, Fatloss.  While Gotch has promised to get our permission before supplying new titles, this one slipped through.  I suspect because of its connection with Oxygen magazine.  regardless, do we really need another weight loss title in Australia?  If this title had to pay, if we were able to charge access to the newsagent network, I suspect it would never get here. I early returned all of our stock but I will miss the end of the month cut off so Gotch gets my money for 30 days.

We received a 35% lift in supply of Uncensored magazine yesterday for no apparent reason.  Other newsagents may want to check their numbers.  While this title has a good following and it nicely anchors a popular segment in our magazine department, a 35% increase in supply is unwarranted from where I sit.