NEGOTIATING COSTS

JOEL ELSON / Additional reporting: CHRISTINA VEIDERS

It's time for renewal in the magazine distribution business. But the question remains, what's it going to cost?

Four tumultuous years after supermarkets led the charge for greater efficiencies within the periodical category through vendor consolidation, chain-store contracts are again up for renewal.

The last go-round produced sign-in bonuses paid to retailers that ranged from $1,000 to $30,000 per store, according to wholesaler executives. "Some of those checks [required by initial contracts] involved millions of dollars," said Frank Herrera, president of Hearst Distribution Group, New York.

In the few short years since Safeway made its move to improve efficiency by trimming down the number of magazine wholesalers it uses to service its stores, other chains quickly followed. Wholesalers soon found themselves struggling for survival at almost any cost.

"Most wholesalers either didn't know or didn't have the time to analyze the possibility of what they were doing, and they were desperate to keep this business at any price," said Herrera.

The high payment structures "were the net result of people trying to survive in a tidal wave of circumstances that happened extremely fast. And in many cases it was a situation of you either competed or died," explained Richard Conway, president and chief executive officer of SCN Services, San Bernardino, Calif., which supplies 3,500 to 4,000 titles to large California chains.

Today, about 60 firms are left to vie for the big chain accounts. In 1990 there were about 200 wholesale companies doing business, mostly under exclusive and profitable territorial agreements. As the next round of contracts comes up for negotiation, tremors are still being felt in the publishing industry. Many say wholesalers can't afford to pay high up-front fees to supermarket chains and stay in business. Others say retailers don't like to give up paybacks. Most look to publishers for a resolution to the situation.

"In effect, some news wholesalers bought the business, and food chains that get discounts off-invoice, or up-front fees paid on a per-store basis, don't want to go backwards," said Scott Dunayer, general manager of the Jim Pattison Group/The News Group branch in Charlotte, N.C., a magazine wholesaler that supplies Harris Teeter, also based in Charlotte.

"Retailers, once you give them something, we don't like to give it back. But on the other hand, wholesalers need incentives to sell more and really push sales and subcategories for publishers," commented Bill Mansfield, vice president of nonfood at Marsh Supermarkets, Indianapolis, when questioned on the subject of slotting fees.

Ray Argyle, president of the Periodical Wholesalers of North America, a newly formed wholesaler association, LOCATION, .... told a group attending the Periodical & Book Association of America Convention in Atlantic City, N.J., last month that it's "unrealistic to think [the renewed contracts] will yield major relief to wholesalers."

Magazine wholesaler contracts are said to be up for renewal in the next several months at Safeway, Albertson's, Kroger Co., Winn-Dixie Stores and Publix Super Markets, said magazine industry executives.

Fred Meyer Inc., Portland, Ore., which inked new contracts last month with three of its six magazine suppliers, may have set the new standard. In Fred Meyer's case, slotting fees were left intact in its agreement with Bay News, Portland, Ore., said Bill Kidd, the magazine supplier's executive vice president.

Bay services Fred Meyer stores in Oregon, southern Washington and Idaho, and the chain continues to use the Jim Pattison Group/The News Group, Arlington, Wash., branch and Benjamin News Group, Missoula, Mont., as suppliers. The chain didn't renew contracts with Aramark, Anderson News or Adams News, according to industry sources.

Although initial food-channel negotiations yielded mostly money-losing agreements for wholesalers, Kidd said, many of them hoped the slotting payments would simply go away. "They have not in all cases, and not in the Fred Meyer case," he said.

Kidd remains cautious on the issue of slotting-fee payments. "Overall, slotting fees appear to be [less of an issue]. But that could shift 180 degrees overnight, and these fees could become the norm and result in fewer suppliers in business."

Wholesalers' margins have been sacrificed to finance sign-in bonuses, they claim. According to Argyle, the added cost to wholesalers is about 10% of sales. He said wholesalers are currently operating at losses of 2% to 3% of sales.

"For many wholesalers, if you took out that sign-in bonus they are back to profitability, although not anywhere where they used to be," said Herrera.

Meanwhile, retailers have benefited with an average gross margin of 32.5% and gross-margin return on inventory investment of 5.14%, well above the average in many other categories, according to the New York-based Magazine Retail Advisory Council surveys. For example, council statistics show gross profit in liquid laundry detergent to be 23%; pet food, 22.9%; and ready-to-eat cereal, 26.2%.

"When combined with off-cover price benefits, such as retail display allowances, signing bonuses and pocket payments, one can understand how reading matter generates up to 4% of store profitability from only 1% of store sales volume," said Argyle.

Publishers also are enjoying increased retailer interest in the category, as stores are devoting more space to their publications and dollar sales are rising. (In 1997, magazine dollar sales were up 1.7%. However, unit volume fell by 4%, Argyle reported.)

"The present economic regime, if it continues much longer, can only bring a further reduction in the wholesale sector," said Argyle. "At some point, if profitability continues to be nonexistent, there will have to emerge a supply-chain oligarchy, whether this involves just a few national wholesalers or some new variety of national distributors," said Argyle, who called on the publishing sector to help maintain the viability of newsstand distribution.

There have been several attempts by both publishers and distributors to resolve some of the economic inequities that have emerged in today's distribution. These efforts apparently haven't led to any type of uniform program that satisfies either side, executives said.

Some publisher-initiated programs introduced this spring with wholesaler incentives built in have ranged from additional funds paid based on additional copies sold above certain levels, or on additional copies above last year's totals.

Other publishers have stripped discounts down, offering wholesalers an opportunity to earn them back by complying with service requirements like regularly providing sales data and other information, making store-level deliveries three times a week and improving chain-store efficiencies.

On the wholesale side, some distributors have proposed being paid 2 cents a copy on distribution and 1 cent a copy for returns. Herrera described that as "an incentive to waste copies so that the wholesaler actually ends up making more money wasting copies than selling them."

Publishers have found wholesaler-initiated incentive programs developed for their retail accounts on a regional basis to be unworkable, preferring programs that can be implemented on a national scale.

Under a program started last summer by Aramark, each magazine must generate 11 cents for every copy handled both going into stores and on unsold copies. Publishers have not been happy with this arrangement, said Herrera. Officials at Aramark corporate headquarters in Philadelphia had no comment.

"Most wholesalers have been disenchanted with what publishers have come up with. And if they are counting on publishers' money to make up for the gross margin they have lost, they aren't going to get there, and retailers aren't giving back any money," added Herrera.

Mansfield recommends that publishers raise magazine wholesalers' base sales by an amount that would carry a built-in additional percentage off the cost of the goods. Magazine wholesalers working with retailers could highlight a group of publishers' titles or a particular category to drive the business. In such an arrangement, incentives could be shared, he said.

For magazine wholesalers to remain viable, Dunayer said, contract adjustments that reflect realistically the cost of distribution must be made. "Unless each piece of the distribution channel can be profitable, there will be serious problems," he said.

Consolidation within the distribution network has forced magazine suppliers to become more disciplined organizations, with closer control of the product mix and improved retailer communications, said some wholesalers.

"We are a more disciplined and stronger organization with better coordinated service functions, merchandising and communications," said Conway of SCN, which once comprised eight news distributors but three years ago was condensed to one.

Several supermarket chains operating in California, like Vons Cos., Ralphs Grocery Co., Lucky Stores, Albertson's and Stater Bros. Markets, "have had magazine sales growth of 8% to 15% by focusing on demographics and offering titles conducive to their neighborhood," Conway said. Distributors like SCN now try to better match title selections with a store's demographics, he added. Golf and healthy-eating titles, for example, are delivered to stores located near senior-citizen communities.

Conway calls this not category management but a "refining of the distribution process." He said he doubts his firm "would ever have the resources to take on a category management project ourselves."

Conway said he'd be much more enthusiastic to see an industrywide effort embraced as a partnership between magazine wholesalers, retailers and publishers. "But when all three sit down, they all would have different objectives and goals."