The speculation about the possibility of News Ltd moving to a free newspaper model sent me back to data gathered for the Q1 2009 Newsagent Sales Benchmark Study last week.  I wanted to check in with how important newspapers were to the average newsagency – from a gtraffic and a financial perspective.

Across all participating newsagencies, newspaper sales account for between 3% and 27% of retail (non agency -lotteries etc) revenue.  The difference between newsagencies is considerable.

Newsagencies with 15% or more revenue coming from newspapers, would be most concerned at the prospect of newspapers moving to a free model or pushing their product into more retail outlets.  Typically, these are newsagencies which are not being managed for change.  I am not critical of these newsagents, just concerned for them – that they are yet to embrace change.

For years, newspaper publishers have been saying it is business as usual.  Retail sales and home delivery activity suggests this is true.  That said, publisher financial performance tells a different story.  Plunging ad revenue, higher distribution costs and alternative distribution platforms mean that change is inevitable – at some point in the next couple of years.

Smart newsagents are running their businesses as if the model has changed today.  These are the newsagents with newspaper revenue accounting for less than 10% of retail sales.

Considering the data I have analysed, my view is that newspaper revenue ought to be below 10% of overall newsagency retail revenue.  This would mean that the business is relying on higher margin lines such as gifts, stationery, greeting cards and service – over most of which the business owner has more control on range, merchandising and other business decisions.

Diversifying in this way need not negatively impact newspaper sales.  It is a matter of adjusting the business away from the traditional approach to newspapers and, most likely, magazines so that it has scope to play in the newer (for newsagents) categories of gifts and related areas.

There are some in the newsagency channel who say that I am preaching doom and gloom when I write about these challenges or deliver a speech at a conference on similar themes.  That would be true if all I did was talk about this in a negative way.  I see many positives ahead, certainly many opportunities.

I see the changes coming in the newspaper distribution model as an opportunity for entrepreneurial newsagents to reinvent their businesses, to become more relevant for today’s circumstances.  This is what many of the newsagents with a lower reliance on newspaper revenue are doing.  It is what I have seen in the latest benchmark study – where newsagents have gone from deriving 20% and more of their revenue from newspapers to 15% without cutting actual newspaper revenue.

Rob Lake, writing at Business Spectator, joins in the discussion about the possibility of free newspapers.

Many newsagents believe they make dollars from selling papers in their shops. In reality, the average profit is around $25 per week. The cash cow is distribution, currently heavily subsidised by the newspapers and dominated by the tabloids. A new pricing model may see this income stream damaged for newsagents.

I think his numbers are off.  Newspapers remain a profitable product for retail newsagencies.  Home delivery, for many, is loss making.

Assume weekly retail sales of 1,500 newspapers at a gross profit of 25% from an average cover price of $1.10 (yes this is low but it is an average).  The GP for the week from newspapers would be $412.50.  Over a year this is $21,450.  The total space allocation is less than one square metre and in most major centres this would cost under $1,500 a year.

If it is a retail-only newsagency then the return will be around half that because retail-only newsagents generally do not have a direct newspaper publisher account.  Even in this scenario, newspapers generate more gross profit per square metre of retail real-estate than most other products in a newsagency.

I know from my basket analysis of sales data from many newsagencies that newspapers sell alone around 70% of the time in the city and 50% of the time in rural areas – that is, there is nothing in the shopping basket but a newspaper.  While this appears to be inefficient, discussions with counter staff and my own experience support a view that today’s newspaper customer is tomorrow’s stationery or lottery customer.

Newspapers are crucial to the habit based trek to the local newsagency – for the paper, magazines, lottery products, greeting cards and home and office stationery.  This is where the free model is a risk for us – it could break the habit connection.

If a publisher did go free and asked newsagents to be the collection point for the free newspaper, I suspect that many newsagents would agree – because they would want to maintain their current newspaper traffic as long as possible.