Crisis? What crisis?

Newspaper circulations, particularly in the red top market, are suffering serious declines in sale. The Times has made its move; the Telegraph, in the longer term, appears to be stuck between a rock and a hard place. Free newspapers are killing newsstand sales and making what is already a tough time for retailers, even tougher. The home delivery industry might be losing around 2,000 retailers per year as they trade the early morning unpredictability of news for late night liquor sales.

In the meantime, national newspapers are probably committing over £250m in marketing spend trying to slow the decline. The body representing most independent retailers has been lobbying for a level of freedom that could have the effect of accelerating the decline of the independent newsagent. They know this but appear to be focussed on trying to get a commercial win for their membership; it seems to be a case of small members or non-members having to take their chances. I sense that it is an attitude born out of frustration rather than a strategy. Meanwhile, along with the independents, some multiple retailers are seeking to challenge the structure of the supply chain because many magazine publishers have chosen to bury their heads in the sand in recent years and avoid issues that were obvious to anyone who had looked closely at worldwide supply chain trends. To be fair, it is a trend that is beginning to change, but why has it taken the threat of supply chain Armageddon to focus their attention?

Waiting on the OFT

Each link in the supply chain should have a vested interest in ensuring the survival of our industry. My concern is that retailers are seeking to use OFT interest to secure a trading advantage and hoping to recover margins from days gone by. Wholesalers are trying to maintain barriers to entry that will help them avoid competition at the time of tender. Publishers are frustrated at their own inability to change a wholesaler (should the need arise). Thankfully, the OFT has, on all previous occasions, come to the conclusion that our industry works well for the consumer and its provisional conclusions, at the time of writing, seem to confirm that view. They have supported the structure that makes our industry perhaps the most efficient newspaper route to market on the planet, I refer to exclusive wholesale areas. However, its decision to allow passive selling in the case of magazines could easily lead to a form of national distribution all over again if any link in the chain gets greedy or loses its nerve. It has indicated that it believes that the supply chain might weaken but it won’t break. I can see its point, but I’m not sure that the issue of economic and operational cross subsidy in our business is well understood by anyone other than the wholesalers.

The retailers have to understand that we have a supply chain that needs to improve, not one that needs to be destroyed simply because they don’t understand it, or because it doesn’t fit with their view of what a supply chain should look like. As publishers, we need to raise our game and remember that without investment in the route to market, availability, systems and industry partnerships then we have no long-term future.

The first instance of a retailer exerting editorial control was reported by the Telegraph on 24th June 2003 and referred to Wal-Mart in the US. By November 2004 we had witnessed the first UK example from Tesco. The Tesco position was actually less aggressive and more reasonable than was reported but it still happened. The scrap ended with a ‘decency policy’ written by Tesco and agreed by all parties. While this is going on, the OFT has suggested that a change to the code of practice might present a possible solution to the pressure being felt by smaller newsagents. They want to encourage sub retailing and therefore overcome the minimum entry level (MEL) or carriage service charge (CSC) issues that cause much of the hardship. In doing this they have failed to see that the same ruling could be used by a wholesaler to avoid being replaced with a more commercially viable or superior competitor. There are now two examples of publishers exercising their right to choose the best wholesaler in a given area and then facing the former wholesaler, supported by a number of local retailers, demanding much of the copy back, this time as a sub retailer. If this is allowed to happen then the likely result is a supply chain that becomes less efficient, more unstable and the wholesaler with the deepest pockets wins but only after a bloody fight.

Spokesmen for the independent retailers want cash. They seem to believe that they have the sympathetic ear of important people and therefore it’s payback time for perceived injustices in the past. If the consequences of that demand are news deserts, small retailers driven out of business or falling circulation then the answer from the retailers seems to be ‘tough’. Who speaks for and protects the retailer victims and the consumer in this? Only the publishers.

Wholesalers: too costs focused

It is my impression that the job of a multiple wholesale director has evolved into a role whose sole focus is to manage cost - to try and hold on to as much money as possible for as long as possible. We’ll deal with WHS separately but, in general, my opinion is that there is not one wholesaler focussed on sales. Not one that can explain trends (without prior warning) and offer explanations for that trend, not one that has a strategy to grow new routes to market or invest in display. Ask any wholesaler what he would rather do. Sell another 1,000 newspapers a day or sack the van driver on route 37 and consolidate his round into route 36. They will take option two every time. I’m being facetious but I’ll bet it’s not far from the truth.

Some would argue that we are reaping what we have sown. Certainly, that is the standard defence of any wholesaler challenged on his levels of investment. ‘We have to make a living you know’. He means that he has to deliver shareholder value if he is to keep his job. The multiple wholesalers make a fair living. Any all-titles wholesaler makes a good return but unfortunately, where all-titles go, complacency often seems to follow.

There are plenty of examples where a wholesaler has ring fenced his area and locked it down with a carriage charge tariff that makes it impossible for any single publisher to leave him - regardless of service or cost. This is usually followed by a refusal to negotiate in the knowledge that the odds on being replaced are almost zero.

In a world where it is illegal to agree co-terminus contracts or agree an appropriate successor through some sort of horizontal agreement, wholesaling is a job for life. OK. That’s not strictly true because if a publisher was prepared to spend a small fortune creating a competitor business then it can be done - but go into it with your eyes open because it will be painful, at least until like-minded publishers join you and you can reach a threshold where the economics of the business stack up.

Honourable exception - WHS

WHS might be smarter than the rest. It has a strategy built around systems and subtlety. I think that publishers, in general, have been lazy and greedy and are reluctant to invest if they can persuade someone else to foot the bill. Many have not re-invested in supply management systems, data warehousing and analysis facilities. WHS has. They have created state of the art, highly sophisticated systems that negate the need for any publisher to invest in his own system. I can see how this might lead to a contingent bid - you can rent my systems for x or I can improve on that if I secure y % market share. Industry folklore says that many publishers have had conversations with major wholesalers where the wholesaler says, ‘if I don’t secure that area then I’m afraid that you will lose your volume discount in the other areas where you have no choice’. Only those who have found themselves in that position can say if that kind of thing really happens. If it’s true then it is an example of the wholesaler simply refusing to be fired. News International (NI) has no experience of such treatment but there are those who say that it does happen. The point here is that it is not possible to compete with such a strategy unless you have very deep pockets and a belief that a competitive, sustainable and stable route to market is more important than achieving an unrealistic budget.

A cynic would say that those wholesalers who have the resources to compete would no more consider competing on each other’s footprint than they would contemplate giving up the company Porsche or Florida villa. That said, there are always just enough examples to point out that competition does exist - but its just playing to the gallery. Scrapping over a couple of hundred retailers in a remote outpost is not the same as tendering competitive bids for key territories each time contracts are being renegotiated.

Role of magazine publishers

So, what are other publishers doing about this? The magazine publishers are bonding together in the hope that the major retailers don’t make them do anything that might disturb their siesta or affect their bottom line, but the OFT looks like it has put paid to that. Magazines, in circulation terms, tend to be run by people for whom competition is an anathema. There are exceptions, but consider this. When was the last time a magazine publisher rocked the boat? Never. I know what you are thinking - what about when Frontline made the move from WHS to a number of the independent agents? The independents already existed thanks to News International. They tendered at rates that WHS probably believed were being used to drive down margin. WHS played a game of bluff and lost. Frontline didn’t create any competition, they simply used the competition that had been created by NI. In the UK industry, the bottom line is, no News International = no competition. There is another danger however. What if the link in the chain that loses its nerve is the distributor and not the retailer? I think that this scenario is a real possibility - national distribution orchestrated by a magazine distributor. Regardless of whether it’s a retailer or distributor, the consequences are the same.

What about newspaper publishers? The truth is that these are the guys most likely to cause positive change in the supply chain. Having said that, the competitive instincts that make these animals so fierce in protecting their sales, also mean that the probability of two of them ever working together in supply chain activity is slim. There is an argument that says that competition begins in the newsagents - after all, it’s not unusual for publishers to share printing facilities. History however, shows us that in spite of their size and influence, no one publisher can break away from the lure of the multiple wholesale shilling, the CSC ‘lock in’ and the grip of contingent bidding.

NI initiatives

It would be churlish to criticize the supply chain without saying what News International is doing to improve it. We won’t be constrained by wholesalers quoting veiled threats about future cost increases. We are the only publisher in the UK to own its own wholesale business. News Retail Services Ltd (NRSL) serves News International titles to around 10% of the country. We’re the only publisher to have removed its dependency on traditional routes to market. In addition, we have built probably the most sophisticated supply management and wholesale administration system in the UK. Not content with that, we are building data warehousing and data interrogation facilities that will be the envy of what we used to call Fleet Street. We are also testing ‘direct to retail’ services that by-pass any potential bottlenecks at wholesalers. Some might draw links between these tests and future publishing arrangements.

The systems created by NI are cutting-edge and offer a complete business solution for NRSL and the independent wholesalers. This will remove the dependency of up to 30% of the wholesalers on antiquated or inferior systems. It will also allow them to compete with WHS, JM or Dawson on a more level playing field.

As a wholesaler we have already developed web based satellite tracking so that the wholesaler and retailer can monitor the delivery service. We know that only through understanding and measurement can we make positive improvements. None of these innovations was born out of an industry focus group or five years of joint industry discussion; this comes from a desire to grow sales through setting aspirational standards.

We are currently focussed on seeking new routes to market and have been conducting trials that, in any other wholesale area would have been abandoned for failing to meet the MEL or, more likely, failing to meet budgeted profit criteria. The other wholesalers are right of course, because in isolation and in the short term, this type of outlet probably won’t make a profit. However, when expressed as part of the bigger picture and considered in the long term, NI believes that some of these new outlets can be made to work.

Meeting our readers’ needs

Don’t misunderstand me. This is a great industry. Full of dynamism, energy and drive, and it allows us to do something that we love to do; compete on every level for sales. The readers are the beneficiaries of this attitude but their buying habits and the social trends that drive them towards out of town shopping, or to cancel home delivery mean that we have to constantly change the way we operate. That means challenging the way we do business. In the end, the only thing that matters is that our readers can buy their favourite newspaper or magazine regardless of where they are in the country and it’s our job to make certain that will happen for years to come and not just for our term of office.

Industry in meltdown? I don’t think so, but I do think that there are times when we need reminding that, regardless of whether you are a publisher, retailer or wholesaler, it’s about our customers, our readers, not about us. We have to focus on maintaining a safe route to market for our newspapers and magazines so that our readers continue to spend their money on our products. We must meet all of our readers needs, regardless or where or when they want to buy their favourite newspaper or magazine. Equally importantly, this has to be sustainable. We are the best in the world at what we do. Nowhere else does it in such a cheap, efficient, consumer friendly way or guarantees such widespread availability of news. Not bad for an industry that is so often presented as being in dire need of repair!