OBSTACLES REMAIN IN PATH OF SCAN-BASED TRADING

MARK HAMSTRA / Additional reporting: Stephanie Loughran

Some supermarkets are taking a few hesitant steps toward scan-based trading of magazines, but many in the industry are starting to question whether the system, in which retailers pay for their inventory only after it has been sold to customers, will ever be adopted for the category.

In a recent survey of retail chains by Willard Bishop Consulting, Barrington, Ill., 60% of those who responded said they planned to launch tests of scan-based trading in the magazine category. Most of those who are moving forward with pilots in this category said they planned to do so this year.

"There's always a lot of distance between the cup and the lip in terms of preparation and readiness, but that seems to be the way it's going," said Bill Bishop, president, Bishop Consulting.

Although both retailers and publishers are pushing for the adoption of scan-based trading, several obstacles remain in place, according to analysts.

"The hard part is negotiating away the shrink," said Pete Abell, director of research, retail, AMR Research, Boston. "It is absolutely going to happen except for that one piece."

Currently retailers assume the financial liability for the cost of magazines that are lost to shrink, which is estimated to be as much as $40 million per year. That model would have to change in a scan-based trading system so that other participants in the supply chain share in the losses.

Another issue is technology. Speaking at the Magazine Publishers of America Retail Conference & Expo in Dallas earlier this year, MPA President and Chief Executive Nina Link said retailers' inability to read the so-called "add-on" codes that contain issue-specific information about magazines could prevent implementation of the scan-based trading process.

The MPA's Magazine Retail Advisory Council last year unveiled a white paper that outlines standards for the initial testing of scan-based trading, which includes as a requirement that retailers be able to track magazines on an issue-by-issue basis.

"No. 1, the retailer has to be able to read the add-on code that tells which particular issue of a magazine has been sold," she said. "Right now, there are two retailers that have that capability -- Wal-Mart and Barnes & Noble."

The white paper proposes that if retailers do not upgrade their technology to be able to read add-on codes, they should at least be able measure the time period that the issue was on sale.

"We recognize that this is something the supermarket retailers are really looking to do, and as an industry we are showing that we want to work with the retail community to find a way that everyone can work with this," Link said. "Frankly, we may find from this that none of these methodologies are the wave of the future and that some new way of doing things may come to light."

In fact, Bishop said that technology limitations were a key reason that retailers responding to his survey said they were not moving forward with testing scan-based trading. Another reason cited was that progress had been made in improving the efficiency of the category without using scan-based trading.

Wal-Mart, which is estimated to sell 10% to 12% of all single-copy magazines, is reportedly moving forward with its own version of scan-based trading in which it has a more direct financial relationship with publishers. Distributors would be paid on a cost-to-serve basis for providing merchandising and delivery.

Some traditional grocery store operators, including H.E. Butt, San Antonio, and Giant Food, Landover, Md., were reportedly looking into the possibility of conducting tests of scan-based trading of magazines. H-E-B was not available for comment, and a spokesman for Giant Food said the chain was not currently using scan-based trading for magazines.

Retailers stand to benefit from the technology because it reduces the amount of time they spend checking in deliveries and because it takes the cost of the unsold inventory off their books.

A 1999 Mercer Group study concluded that more than $400 million in efficiencies could be derived from implementing scan-based trading and other changes in the magazine distribution system.

Retailers and publishers agree that the current distribution model for single-copy magazine sales must change because the middlemen are struggling to make a profit. Exactly how the trading method will be implemented remains a matter of debate, however. Some in the industry predict that some key elements of scan-based trading, such as data sharing between the retailer and the publisher, will be adopted, while a full-fledged rollout of scan-based trading is still possibly years away.

"I don't think anybody has a clear picture of how scan-based trading would impact the magazine distribution channel," said John Harrington, partner, Harrington Associates, Norwalk, Conn. "Does it mean retailers paying for only what their scans tell them? Does it just mean more rapid exchange of data for retailers, wholesalers and publishers? It's hard to say exactly how we're defining the whole subject here, and there are not enough examples in other businesses."

Bishop said the fact that some retailers were working with wholesalers to improve distribution efficiencies in the magazine category without using scan-based trading was encouraging.

"If you will remember back to the Mercer study, they said there are a number of things that can be done to improve the efficiency of the system before scan-based trading," he said. "That would be half [of the $400 million], and the other half would be available through scan-based trading."

Some participants in a wholesaler/publisher panel at the MPA conference said they thought scan-based trading might never be implemented in a pure form, but that pieces of it would be adopted.

However, one magazine category manager at a large supermarket chain, who asked not to be identified, said, "Eventually everybody's going to be doing it."