THE UPC CONTROVERSY

AL HELLER

NEW YORK -- The magazine industry is grappling with two major challenges: the need to tighten reins on distribution costs and to give retailers data they can use to truly manage the periodicals category.

To those ends, the Magazine Publishers of America here coordinated a major study whose findings indicate tremendous potential gains and a widespread industry willingness to change for the better.

Near-term, actions taken over the next five years could produce $420 million in supply-chain pipeline savings, estimates Peter Kreisky, vice president of Mercer Management Consulting here, who led the research initiative to determine how best to improve distribution efficiency within the single-copy channel.

Moreover, as single-copy magazine sales move from distributor-push to consumer-pull, retailers adept at category management will reap great rewards -- but scan-based trading must first be embraced by the trade.

Long-term, this major controversy must be resolved before a newly productive era in single-copy magazine sales becomes possible: what to do about Universal Product Codes on magazine covers?

Several avenues are possible, and tests are under way, but the industry is nowhere near a consensus, so the MPA isn't recommending any single course of action yet.

"There seems to be no easy solution," said David Sefcik, UPC scanning coordinator for Giant Food, Landover, Md., and co-chair of the MPA Magazine Retail Advisory Council's Logistics Task Force, which recently undertook a separate retailer survey and got responses from 30 chains and independents operating nearly 21,000 stores. One striking result: more than half prefer a "unique UPC code" applied to each issue in order to capture issue-specific information, he told those gathered for the MPA's third annual Retail Conference in Dallas this spring.

That would entail the weekly Time, for instance, moving from one UPC code to 52 or 53 per year, and the monthly Good Housekeeping going from one to 12 or 13. Special editions further complicate the picture.

He voiced doubt that the approach could work for everyone. "The number of UPC codes would rise, on average, 19-fold. If a retailer carries an average of 1,600 magazine UPCs, it would need to carry 30,400 UPCs in its item file. The number of item-maintenance transactions would grow from an average of 20 UPCs per week to approximately 600. The ability to handle this substantial volume increase will be greatly facilitated by electronic data interchange. Our concern is that non-electronic processing would create prohibitive costs and error rates."

Despite this, Sefcik sees clear and powerful benefits: Retailers could better manage the category, perform market-basket analysis, collect promotion payments and move toward scan-based trading.

For all the pluses, however, Michael Pashby, executive vice president for consumer marketing at the MPA, corroborates that issue-specific data continues to be a major resistance point for supermarkets. "Magazine covers today have add-on codes that indicate specific issues, but most chains don't have software to process it. They have to capture and upload it through their system. It's vital. But magazines are still a relatively small category in stores, and one of the few with an add-on code. Why would they want to do it with us?" he asked in an interview with SN.

He noted that Barnes & Noble and Wal-Mart currently read the code, but he knows of no supermarkets that have refined the process. For its part, H.E. Butt Grocery Co., San Antonio, has achieved better than 90% accuracy on monthly titles, and 60% to 70% on weeklies, said Pashby.

Meanwhile, the General Merchandise Distributors Council, Colorado Springs, Colo., is interested in helping the MPA do pilot testing, and the Washington-based Food Marketing Institute wants to monitor results, he added.

While most new scanners can read the add-on code, chains "must accept that software is an investment in building the category," which he claims produces 1% of sales and 4% of operating income in a typical supermarket. "It's a profitable growth category they can build, and the data serve as a fundamental underpinning of category management," said Pashby.

MPA Council statistics show that single-copy magazines currently yield 32.5% gross profit in food, drug and mass on 11 annual turns, and $5.14 in annual gross profit for every dollar invested in inventory at cost.

That profit profile improved in recent years as the industry moved from territory-specific to chain-specific distribution with contracts. Distributors, now competing for business, went from netting 8% to 10% to losing 1% to 4% and retailer margins rose from the 24% range, Pashby noted.

Meanwhile, in a separate interview with SN, Mercer's Kreisky called massive wholesaler consolidation "one of the major enablers of the new blueprint for the industry to make it a dynamic, responsive, modernized supply chain. It allows for common standards and effective partnering between retailers, wholesalers, national distributors and publishers. "We've gone from a tangled web of relationships with no consistency in operating standards or data formats to a few wholesalers who are heavily invested in systems and plant, and are becoming thoroughly modern managers." The industry moved, he said, from 200 wholesalers in 1994, when the five largest had a 31% cumulative share, to a projected 60 wholesalers in 1999, where the five largest will control 91% of single-copy volume.

These issues come after a period in which magazine sales have fallen in importance at supermarkets. But Pashby vigorously contends it's a result of the growth in physical size of stores.

"It sounds odd, but stores used to have eight checklanes within 10,000 to 30,000 square feet. All they needed was 10 copies at each lane. Now stores have 40 checklanes, but only eight or 10 open at a time. You can't sell magazines when people aren't passing through the lane. The in-line sell-through rate hasn't changed much over the years. What's changed is at checkout," he explained.

That downward perception was one motivation for the Mercer study, commissioned by a group of more than 20 publishers and national distributors and coordinated by the MPA, to streamline the supply chain, make it more effective, and enable retailers to take greater control of a complex category where every issue is perishable, and every title varies by season.

Mercer's findings, presented at the MPA conference, note the potential for $420 million in annual savings, or nearly 10% of retail sales. As much as 60% of these gains can be captured without major investment by retailers, simply through improved operations and category management -- regardless of whether payments between trading partners are based on scan data.

Since supermarkets account for 40% of single-copy unit sales, Kreisky told SN, they'll "capture a disproportionate share of the savings. For a large-format superstore, the savings are at least twice the scale of a small convenience store. That's because a lot of the near-term savings lie in saving man-hours checking in and checking out, saving as much as eight hours weekly in labor costs in a large store. Also, better category management favors larger stores with higher traffic opportunities to capture benefits." EDI accounts for the rest of the easy-to-capture initial savings.

Phase I of his study included input from Kroger, Wegmans Food Markets, H-E-B, Giant Food, Wal-Mart, Barnes & Noble and others. Phase II, already under way, includes the formation of a best-practices group and pilot testing with retailers. The MPA is discussing such tests with Wal-Mart, Barnes & Noble and several supermarket chains. Kreisky plans to present those results at the American Magazine Conference in Boca Raton, Fla., Oct. 28 to 31.

As part of its category-management philosophy, Wal-Mart sees magazines as an opportunity to increase the frequency of customer visits, whether they buy or not. "A wife wants to shop, the husband will read and see what's new," said Kreisky, adding that "chains that stock a wide range of titles can differentiate one store from another.

"Data complexity is unbelievable in this category. It's amazing how little good data exists on what really drives it. Retailers need to look at each title as a brand, except there's little substitution between them. With some 200 car magazines, you'd think there'd be redundancy. Then you look closely at titles that prosper by carving out a specific consumer franchise," he observed.

Kreisky noted further that Time Distribution Services, New York, is trying to match customer demographics to titles, and that the Barnes & Noble Top 10 magazine list "bears no resemblance to what sells in Wegmans or Safeway because of the different nature of customers."

While many category managers seek to tailor assortments by store, magazines offer possibilities for even greater refinement, he added.

"We'll ultimately get to the level where we say, 'express checkout customers tend to buy these titles,' rather than putting the same range of magazines in each lane."

Moreover, said Kreisky, wire racks at checkouts are paid for by a consortium of publishers who get space proportionate to their payments. Retailers should create similar racks elsewhere in the store, to display cooking titles by gourmet foods, or fashion and beauty magazines within health and beauty care, for example.

"Magazines increase the depth of a department within a store. They give the perception of higher value, such as a cooking magazine for the same price as a piece of cheese, which will be consumed within days," he continued.

"Crossover displays also sell more titles when shown with related categories, and sell more product because they're featured in articles or ads. Of course, supermarkets have less freedom to do this than mass, which sells many more categories."

In all, Kreisky extrapolated that category management, shared by all trading partners, coul add a 4-percentage-point increase in average sell-through, from 39% to 43%, which coupled with a 4% climb in sales, would produce the estimated $200 million in industrywide benefits.

Raising single-copy sales isn't just a technological challenge, it's a business-practice challenge, Kreisky asserted. "It's very important that chief executive officers understand the opportunity and the issues. Once they get through their Y2K problems, they might be more open to this."

As an outcome of the study, Mercer urges the development of Cooperative Standards for Magazine Retailing, to be agreed to and implemented by all parties in the supply chain. The standards would cover partnership, operations and information-management standards, yielding significant gains, for instance, in avoiding time spent on shrink-reconciliation errors.

"Industry experience shows that without effective common standards, reliance on scan data will be unproductive, resulting in wasted time and reduced profits for retailers, wholesalers and other trading partners," the MPA's Pashby concluded.