Thursday, October 11, 2007

The Newsstand Cauldron Boils

The Newsstand Cauldron Boils
By Baird Davis

The cloak of pessimism hangs heavy in the magazine newsstand trade. As the newsstand business tries to confront the problems poised by its archaic infrastructure, it more and more takes on the appearance of an industry at odds with itself.

Despite its problems, industry sales remained stable in the first half of 2007, which is more a testament to the enduring appeal of magazines, than to enlightened marketing practices. Unit sales of 455 million were up marginally (.2 percent) and retail revenue grew to $1.561 billion-a modest rise of 1.5 percent.

Although the sales were stable, product preference changes continued to reshape the face of the business. But most interestingly, in the year 2007 the industry has been witness to a more aggressive wholesaler community. In this article we'll discuss the product preference changes and more fully dissect the significance of wholesaler initiated changes.

Celebrity Titles Dominate Product Preferences

The sales of People, the market bellwether, dipped 6.1 percent, but this did not impede the continuing sales rise in the celebrity category. The sales revenue of In Touch (+14.6 percent), Life & Style (+9.4 percent) and the British upstart, Ok! Weekly, more than made up for the relatively modest sales declines of People, US and Star.

Overall the sales in the six title category exhibited a dramatic increase-unit sales up 8.3 percent and revenue climbing 7.5 percent. The combined revenue of the six titles was $418 million-or, to put it another way, these six titles by themselves account for an astonishing 27 percent of all money spent on audited publications at the newsstand.

The dynamic performance of the celebrity titles doesn't leave much room for other titles to prosper. Therefore, it was not surprising that the unit sales of the other 545 audited publications sold at the newsstand dropped 3.1 percent and their revenue declined .5 percent. Particularly hard hit was Marie Claire (down 19.9 percent). The sales of this title have fallen steadily-down 41 percent from their peak three years ago.
Entertainment Weekly is another casualty of the celebrity onslaught. Its sales in the first half of 2007 were down 21 percent and off 56 percent from their 2002 peak. In the traditional women's field, Redbook (down 13 percent), Reader's Digest (down 12 percent) and Woman's Day (down 10 percent) also appear to be victims of the product preference changes.

The one women's category that wasn't tarnished in the first half of 2007 by the celebrity titles was the fashion group. The three major titles in this category (Vogue, Elle, Harper's Bazaar) all reported sales increases. As a group, their sales revenue was up a combined 14 percent, with Elle's 24 percent increase leading the way.

The Food, Teen and Laddie Categories

The food, teen and laddie categories do not seemingly have much in common. But their sales performance provides an object lesson in category sales dynamics and the significance of being a category sales leader.

Food-In the last year, the food category has been invigorated by the introduction of two well received new publications-Everyday with Rachael Ray and Cooking with Paula Deen. The Rachael Ray title, after a dramatic debut in the first half of last year, has continued to grow. A frequency increase and a higher cover price have not slowed its momentum: sales revenue grew a robust 42 percent in thefirst half of this year. Its newsstand revenue now exceeds Martha Stewart Living.

Cooking with Paula Deen has also shown dramatic results since its debut in the last half of 2006. Its sales revenue of $4.4 million placed it 51st among checkout titles (see attached chart). It appears as if these two titles have expanded the newsstand sales in the food category. But the sales success of titles new to a category nearly always carries some adverse effect for those publications presently populating the category. The titles most notably affected were Bon Appetite (down nearly 13 percent) and Cooking Light (down 12 percent).

Teen-The teen category provides a different lesson in intra-category dynamics. The sales of the seven major teen publications (Seventeen, Cosmo Girl, J-14, M, Twist, Teen Vogue, and a resurrected Teen) all experienced increased sales. In the aggregate, their sales were up over 14 percent in the first half of this year.

However as a category, their sales, compared to the year previous period, were down 3 percent. How could that be? The demise of Teen People (last published in first half 2006, with sales of over $5 million for the period) left a huge hole to fill. All the teen titles prospered as result of Teen People's demise, yet their large increase was not enough to fully offset the loss of this title.

Laddie-The magnificent "Laddie" era appears to be coming to an end. And what a brilliant run it was. Five years ago, in the first half of 2002, Maxim, Stuff and FHM accounted for over 10 million units sold and more than $42 million in revenue. During this period, Maxim's sales peaked at a nearly inconceivable 870,000 copies per issue.

At the time, these titles re-energized the dormant men's publication field and reshaped the look of many of its peripheral competitors-GQ, Esquire and Details. But the closing of FHM in the first half of the year and the apparent shuttering of Stuff leaves only the giant Maxim standing in this once proud category.

But Maxim remains a powerful brand. Its survival is a testament to the importance of "winning" (within category) at the newsstand. Usually within a category, no. 2 and no. 3 titles in newsstand sales can survive, but in this case only Maxim lives to fight another day.

Food, Teen or Laddie, it doesn't matter-publishing battles are fought on a category by category basis. The results of those newsstand battles usually determine the ultimate winners and losers.

Checkout Sales Up, Mainline Sales Down
Continuing a trend that began four years ago, checkout sales grew in the first half of 2007, with revenue up 3.6 percent; while mainline sales declined (2.4 percent). The overwhelming success of the celebrity titles has enabled checkout sales to grow, despite the declines of many women's service publications.

By way of contrast, mainline sales since 2004 have been declining at an annual revenue rate of about 3 percent. The mainline sales drop is largely a result of the sales decline of male oriented titles. We discussed the sales fall of laddie titles, but other leading male titles have also declined.

Particularity significant has been the sales reversal in the gaming category. Official Playstation Magazine, which was one of the top ten male oriented newsstand sales leaders a year ago, is no longer being published and the sales of the other leading game titles, including Official Xbox Magazine, have fallen rather sharply from their 2004 highs.

Pricing and Industry Revenue Could All Dramatically Change

The average price of copies sold in the first half of 2007 rose 1.5 percent to $3.43. This breaks a two year trend of flat average sales prices. But this modest increase will seem very shallow when compared to the potential pricing and revenue affect caused by Bauer's announced intent to raise the cover prices on all its audited publications in the fourth quarter of this year.

The affect, most notably for its women's service and celebrity titles-First for Women, Women's World, In Touch and Life & Style-could potentially raise Bauer's average sales price from $1.94 to $2.62, an increase of 35 percent. The prospective impact of these changes is far reaching, because of Bauer's enormous share of the newsstand market.

In the first half of this year Bauer sold 111 million units (see attached chart), producing retail revenue of $215 million. These changes (assuming a 15 percent unit sales decline and 35 percent average price increase) could, hypothetically, lower Bauer's six month unit sales to 94 million, but increase its revenue to about $247 million.

The net result of Bauer's cover price increases, further assuming Bauer's unit sales decline would be fully offset by sales of other publications, would be to increase industry revenue about 5 percent. This would amount to a very sizable annual industry revenue boost of $160 to $170 million.

The hypothetical unit sales and revenue scenario outlined above is probably a best case situation. However, it highlights the enormous potential industry significance of Bauer's unprecedented price increase decision.

Battle at Top of the Newsstand Sales Pyramid

Six publishers-Time Inc, Bauer, American Media, Hearst, Wenner, and Conde Nast-dominate the newsstand scene. Their combined sales represent 60 percent of the audited consumer magazine market. These six publishing companies are fiercely contesting with one another for newsstand buyers.

But at the top of the sales pyramid, it's not simply a publisher battle. In essence, it's a battle that pits the National Distributors against one another. Time Warner Retail, Comag (owned by Hearst and Conde Nast), Curtis, Kable and marketing and merchandising service provider Distribution Services, Inc (owned by American Media) are actively involved in helping shape the industry to their own needs.

Each has a slightly different vision of how the newsstand should operate. Their divergent interests often make it difficult for them to agree on reform strategy. Unfortunately, among national distributors, self interest typically rules.

Wholesaler Initiated Change

Wholesalers, lacking industry leadership from publishers and national distributors, have started taking matters into their own hands. The wholesaler community has begun to fill the market reform vacuum with much more aggressive (albeit self motivated) action. Let's review what wholesalers have done in the last year or so.

1. Unilaterally Reduced The Number of Copies Distributed-Two of the largest wholesaler groups, Anderson News and News Group, have made unilateral decisions that have taken as many as 140 million copies out of distribution. Wholesalers have reported (confirmed by most national distributors) a four to five percentage point improvement in efficiency without any appreciable loss in sales.

2. Combined Distribution Operations-Anderson News and the News Group have formed a separate company, Prologix, to handle distribution for both companies in selected high traffic locations. By most accounts the results, after a shaky start, indicate that performance at these distribution centers has greatly improved. This has produced operational costs, without seriously impairing the level of service.

3. Formed Wholesaler Industry Group-Anderson News, News Group and Hudson News formed a group (Magnet) to share information and other things of mutual interest. Their combined influence, especially as a purveyor of information, is now being felt across the industry.

4. Influenced Publisher Cover Pricing Decisions-Wholesalers, reportedly, helped persuade Bauer to increase the cover prices on all its titles. These changes will take effect in the fourth quarter of this year and undoubtedly will have a profound industry effect.

5. Increased the Number of Scan Based Trading (SBT) Agreements-Wholesalers, in an attempt to satisfy retailer requirements, have recently been aggressive in expanding the scale of their SBT agreements. It's believed that SBT agreements currently represent about 25 percent of wholesaler sales. The percentage is expected to go much higher in the next few years.

6. Tightening Their Relations with Retailers-Wholesalers, by offering SBT, more in-store merchandising service, tightly controlling "authorized" lists and managing more promotion programs are forming tighter bonds with their retailers. This, in turn, has made it more difficult for publishers and national distributors to exert influence with retailers.

Balancing the Newsstand Playing Field

In the "post-consolidation" period, the surviving wholesalers were forced to the financial brink. But in the absence of unified publisher and national distributor effort, they are now fighting back. Many of their initiatives appear to have improved industry services. However, for publishers and national distributors there is a real danger in allowing wholesalers, often in conjunction with retailers, to act in such an independent manner.

In order to balance the newsstand playing field, national distributors and publishers must step up to the plate, not individually, but in a unified manner. If they don't, they risk not playing a significant role in what now appears to be a burgeoning wholesaler-led industry reform movement.

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