Peter Kreisky and John Loughlin: 2004 AMC

October 25, 2004

Changing the Magazine Experience at Retail
Peter Kreisky
Chairman, Kreisky Media Consultancy

John Loughlin
TV Guide Publishing Group

American Magazine Conference
Boca Raton, FL
October 25, 2004

Peter Kreisky:

Good Morning, everyone. 

When Tom Ryder and Nina Link asked me to take a tough, strategic look at Retail nine months ago, I accepted the challenge enthusiastically.

I accepted the opportunity to bring clarity to the fog of retail –  because of its importance to consumers and to the publishing industry

Consumers buy one-and-a-half billion magazines at retail – one at a time. That’s 30 million separate purchase decisions each week, reflecting individual interests, passions and needs. 

For publishers, the retail channel is the most immediate “window to the world”, a powerful barometer to gauge the vitality of titles –and a high quality tool to recruit new readers.

Yet it is poorly – and narrowly – understood.
So today, I’d like to focus on this issue that’s on all of our minds.  Simply put, how do we stimulate demand in the retail channel?

Changing the Magazine Experience at Retail
Today, John Loughlin and I want to address how we change the magazine experience? Where have we come from? What are we doing?  And, what can you expect to see as a consequence of these activities?

Focus on Supply Chain “Fix”

Let’s start with where we’ve come from.

Over most of the past ten years, the magazine industry has been focused on supply chain issues: “fixing” an inefficient, antiquated system of magazine distribution that does not fulfill the modern day needs of publishers and retailers. Through MPA, it has commissioned leading consulting firms, and MRAC a cross-industry group representing publishers, national distributors, wholesalers and retailers to help think through the issues, producing some invaluable insights.

Mercer Management Consulting, Charles River Associates and McKinsey all came to a similar conclusion: that a different model was needed – but, importantly, that the marketplace must drive the process.

As an industry, we have been painfully slow in reaching for it.

Yet, no matter how the logistics and economic structure of our supply chain evolve, we mustn’t take our eye off our real objective – assuring a strong retail presence for our titles – and stimulating retail growth.

The Challenge: Retail Growth 

As you all know, we’ve seen a slow-down in retail growth. The flattening of dollar sales at retail over the past decade masks this, the real problem: the rapid decline in unit volume from 2.1 billion units in 1993 to 1.4 billion in 2003, a drop of 33%!

The root causes are not well understood, but we don’t believe supply chain is the sole driving force; only one among several factors.  No matter how the supply chain evolves, the real threat is this absence of real growth at retail.  

If we can stimulate demand, many of the financial woes plaguing the supply chain melt away, as more fixed costs are covered and sell-through efficiencies improve.

The Challenge: Change in Mix

Where has this decline been the greatest?

As unit volume has shrunk by one-third, a sizeable shift has occurred in the title mix. Smaller titles have become more important. In fact, the only significant $ growth in the past decade has come from the smallest titles.  The 25 largest titles have been squeezed the most, their unit volume declining by one-half over the decade. To be fair, this decline has been driven disproportionately by the contraction of a handful of titles: TV Guide, the tabloids, some of the women’s service titles. 

What we’re seeing here  is a sizeable shift in the pattern of consumption!

The Challenge: Retail Growth

What about the impact of price? You could drive a MAC truck through the gap shown on the right between dollar and unit sales, indexed to 1993. 

Cover price increases have masked the real sales decline.  And as you can see, these price increases have exceeded inflation by a factor of three, too much to simply be a result of the change in product mix. 

However, I believe these price increases have been a reaction to, rather than a cause of retail decline.

And I am reminded of the experience of Lou Gerstner, shortly after he took the helm at IBM. He discovered that for 10 years the heads of IBM’s mainframe business had systematically raised their prices to mask the inroads of an unfamiliar competitor – the personal computer, which was driving a tectonic shift in the Corporate MIS landscape to which they had become accustomed.. 

Our problem appears clear. Growth… or more precisely, lack of it. The root cause is less clear.  Are we seeing a massive shift in the pattern of consumer demand? The impact of alternative media such as television and the internet? The encroachment of new competition at the checkout?  Just what is driving this startling performance?

Drivers of the Retail Slowdown

In my view, retail contraction is being driven by a number of major shifts among consumers, and in the retail landscape:

Consumer behavior has changed.  People are not shopping as frequently.  Supermarket visits are down – from 85 per year in 1998 to 72 last year.  That translates to one fewer shopping trip a month, (6 trips instead of 7).  For magazines, which are so strongly driven by store traffic, this is a serious issue.

The range of product we offer has changed.  We have more titles, a lot more, up from 2,600 a decade ago to almost 5,000 today.  We see more and more niche and special-interest titles, and with that comes the challenge of figuring out which outlets and product configurations will be best for producing optimal sales.

And we should not discount the impact of the aggressive subscription promotion we’ve undertaken over the past decade.  Some of this damage may be self-inflicted. 

On the retailer side, we estimate that there are approximately 30,000 fewer outlets being serviced for magazines today than in 1995.

Retailers have changed too. More checkout lanes. Less wait-time.  Scanning. Bigger stores.  Smaller stores. More specialized stores.  A greater emphasis on efficiency and cost containment.

The nature of our competition has changed too.  Particularly at the front-end, magazines are competing for space with beverage, candy and cigarette manufacturers – some pretty heavy-hitter marketers!

Pressure on the front end continues: with self-checkouts and portable scanners replacing traditional checkout lanes.  These mean less waiting in line with nothing better to do than pick up a publication!

The greatest danger facing the magazine industry is complacency.  Most mainstream retailers are at best ambivalent toward magazines. Many simply don’t understand them, and strong supporters are the exception rather than the rule.

Continuing Changes in Retail Landscape

You can see from this chart where the strongest supporters are. They are the retailers that have gained greatest share over the past decade.

- Mass merchants, which have grown from 9 to 16% of retail sales.

- Bookstores, whose share has doubled from 6 to 12%.

- Newsstands and terminals, which have grown from 9 to 12%

 - In contrast, Convenience stores have declined from 16% to 7%. And mom-and-pop outlets have almost disappeared.

- Supermarkets remain our largest class of trade, steady at around 43%.

There is a good reason why the winners – think Barnes & Noble, Wal-Mart, Hudson News – have gained share. It is because they have paid more attention to the magazine category than their competitors.

Magazines fit into their strategy. 

Like our earlier speaker, Jeff Bezos, they have redesigned their business model from the bottom up for magazines to strengthen their competitive position.

Barnes & Noble, for example, has designed its magazine section as major in-store destination. It bypasses traditional wholesalers with direct delivery and its own in-store merchandisers; aggressively leverages scanned point-of-sale data to customize each store’s layout, optimize assortment store-by-store, even using this data to drive an automated replenishment system.  The result: magazine sales at B&N have outpaced overall growth; sell-through levels are way in excess of industry averages.

Continuing Changes in Retail Landscape

In another significant phenomenon, consolidation of the retail industry has concentrated buying power. A mixed blessing!  But the net result is that the top 9 retail accounts today represent between 50 and 60 percent of retail volume; 23 retail calls will reach over 80 percent.

Emerging Classes of Trade

And the retail landscape continues to evolve, presenting new challenges for us. The Internet has emerged as a serious retailing competitor in just about every product category, including magazines.

Consumers are embracing new types of bricks-and-mortar retailers too.

- There are 25,000 Dollar Stores, like Dollar General and Family Dollar, growing at 12% a year.

- Price Clubs like Costco and Sam’s generating some $80 billion in sales;

- Category Killers like Best Buy and Bed Bath and Beyond;

- Limited assortment chains like Save-A-Lot and Aldi, growing at 3 times the rate of conventional supermarkets.

In many cases, the single copy model does not appear to be a comfortable fit. Where are the magazines in Costco? Or in Trader Joe’s?  We need to create a fit.  Many of these new, rapidly growing channels do not sell magazines simply because our single copy, one-size-fits-all distribution model doesn’t work for them. 

We need greater flexibility in how we serve these retailers.

Threat of Commoditization

In Supermarkets– our mainstay – we face a number of challenges.

The great danger here for magazines is commoditization: decline and loss of relevance in this class of trade.

In this chart, plotting growth and profitability as seen through the eyes of our supermarket buyer, magazines sit as a no-growth, average margin category way over on the left hand edge of this chart.  A blip on their radar screen compared to their mainstay categories.

We cannot afford to let magazines be regarded in this way, be compared  to frozen foods, or health and beauty care products on a dollar-for-dollar basis.

The Retail Challenge

The magazine industry is at a fork in the road.  I’ve labeled the choices: Display… or Destination.  The low road or the high road.

In one direction, if we do nothing new at retail, magazines will remain a low priority display category for retailers. A low growth, moderately profitable, labor intensive, messy and difficult-to-understand category that competes for display space with beverages or greeting cards and that may over time be eased out to make way for more dynamic products. 

This is a treacherous path. After all, there are fewer outlets selling magazines today than 10 years ago and a whole bunch of rapidly growing channels that don’t sell any magazines at all!

Alternately, we can take the high road by paying greater attention to the retail channel – invest, promote, and communicate Magazines’ virtues as a destination within stores.  If we do there’s a pretty good chance that we can change retailers’ perception and make Magazines an essential department in every store that generates customer traffic, enhances the shopping experience, and promotes greater satisfaction and loyalty. 

To accomplish this we must promote the incredibly important connections – the visceral relationships – between magazines and their readers, supermarket shoppers. We must convince retailers of the truly attractive economics of magazines.  We must show them why Magazines should be a mainstay of every store – like the service deli – and show them how to turn Magazine Displays into Magazine Destinations. 

Up to this point the magazine industry has for the most part followed Yogi Berra’s advice:  if you see a fork in the road, TAKE IT!  We intend to change that. We must make sure that we choose the high road and – with your support – transform magazines from just another Display Category to valued and vibrant Destination Department.

So that’s where we’ve come from.  Now I’ll hand over to John Loughlin, President of TV Guide, to explain what we’re doing … and what to expect.

 

JOHN LOUGHLIN:

Good Morning.

Peter certainly got the MPA Board's attention when he presented these eye-opening facts at our retreat in January. Tom Ryder asked John Griffin, President of National Geographic, and me to lead the magazine industry's response, overseeing a number of initiatives aimed at stimulating the retail sector.

GROWTH GOALS

Simply stated, the magazine industry must focus on both changing retailer perception and on-the-ground reality. We must engage in the present and anticipate the future.  We must develop new approaches to magazine retailing that incorporate how the retail marketplace behaves today, no less 5 years out. We need to change the industry's traditional, operationally-driven mindset to a new, more strategic focus. We have to convince retailers of magazines' relevance and importance for their customers and their stores, to give magazines the position they deserve. And, we must have a consistent and coherent industry position on the contribution that magazines make to store profitability.

These are serious and demanding goals, but I'm pleased to share some real progress.

WHAT WE'RE DOING

We have six initiatives in support of these goals... First, we have been mobilizing the industry around the task. Second, we have developed a clear message to retail and have begun communicating it broadly in the retail community. Third, we have started strengthening retail relationships through our top-to-top program. We are opening doors and engaging long ignored, but high potential channels such as Costco. We have established and agreed to common performance benchmarks to change retailers' perceptions about the magazine category.

And finally, we have initiated programs that will support and build momentum around efforts to shift the current retail paradigm from Display to Destination.

1. MOBILIZATION

First, industry mobilization.

Six working groups have been set up, with members broadly representative of the industry.  Their objectives were near-term, to define new practices to stimulate growth in existing and emerging channels; and, longer term, to establish industry goals for the next five years. These teams have already put in many hours and a great deal of thought and importantly, demonstrate the industry-wide commitment to improving our collective position at retail. 

2. COMMUNICATION

Initiative # 2: Clear and consistent communication.

Tom Ryder charged MPA with communicating better with our retail customers the unique role magazines play in stores... selling our product more effectively if you will.

Magazines Make Connections, launched at the March Retail Conference, presented a new theme to change retailers' perceptions. For the first time it linked together, cogently, the unique assets magazines bring retailers under the theme of Connections.

* Connected to customers with buying power and influence through our brands, our content, our relevancy: 140 categories to match every consumer passion.

* Connected to stores through a unique logistics and distribution system that handles incredible product complexity and assures freshness.

* Connected to retailers' bottom line, providing value beyond pure profits.

* Connected to the future, through constant innovation and renewal.

What was key to this message is that for the first time, it celebrates the differences of magazines from the rest of the store, rather than apologizing for them. Magazines have unique strengths and we need to aggressively articulate them. Since the Retail Conference in March, this message was extended and amplified through the retail community.

It was reformatted into a 24-page advertising supplement in the FMI issue of Supermarket News, translated into discussion and presentation materials, and has been presented to numerous audiences, notably at major retail industry conferences, such as FMI, NACDS and GMDC.

3. RELATIONSHIPS

We've also embarked on a top-to-top program to raise the visibility of magazines to the top management of our retail customers. With the increasing concentration of buying power, just 23 retailers represent over 80 percent of volume.

How many of us have called on our major retailers?  We don't flinch at flying to see Procter & Gamble at a moment's notice. But, few of us ever make it to Kroger, America's largest supermarket chain, also based in Cincinnati.

Top-to-top means CEO-to-CEO, and we are finding this can mean a very different, more strategic discussion than the magazine industry has had before.  For me, these meetings have been an eye-opener into the retail community's perspective on magazines.

* For many, we are a low priority category, a blip on their radar and it's been tough getting through.

* It was startling to hear the COO of the nation's third largest magazine retailer tell Nina Link and me two weeks ago that our meeting was the first time a publisher had crossed his threshold.  Nonetheless he was thrilled to see us.

* At another top-to-top, the president told us how critical the magazine industry's high level support was to his chain's repositioning and turnaround.  We're working to help him further his goals.

These meetings are invaluable.  We are listening carefully, communicating the strengths of magazines, learning a lot, and critically, we are being heard.

4. EMERGING CHANNELS

We are rethinking our traditional business model for important new channels where magazines are not sold today, in particular price clubs like Costco and Sam's, limited selection retailers such as Trader Joes, and dollar stores like Dollar General.

The team has profiled key players, focusing in particular on understanding how their business model compares to the standard retail formula; developed hypotheses for magazines' potential role; and generated practical options to break through.

For example, Costco, one of our primary targets, operates about 435 warehouse stores worldwide serving 41 million members (who renew at an enviable 86% rate).  Revenues of

$48 billion are growing at 13% annually. Costco is now the fourth largest food retailer in the U.S., behind WalMart, Kroger and Safeway. This is a retailer we need to be in.  Servicing Costco stores through the traditional wholesaler delivery and service model is problematic. There is no permanent mainline or front-end display with assigned pockets as in supermarkets or other channels. There is no established mechanism to process returns.

In Canada, Costco stores do sell magazines, a very limited selection (32 SKUs) packaged on specially designed pallets delivered direct to the stores. Here's a picture of the Canadian pallet rack. 

While Costco rejected the same idea for the U.S., other tests are in progress, and we are energetically pursuing this critical new channel. We are exploring all the strategic and operational variables at our disposal -- beyond the single copy model -- to assure magazines are not left behind as Costco and these other channels grow.  We've begun a dialog with them -- and are optimistic as to the outcome.

5. BENCHMARKS

Next, Benchmarks.

The purpose of this work is to level the playing field when we visit with our retail customers: to shift their often negative perceptions with fact-based reality.

* Retailers' perception is that magazine profitability is no better than average.  The reality: once you add in the trade allowances that local store management does not see, magazines' true gross margin is at least 6 points higher than chain averages.

* Retailers' perception is that magazines' inventory turns are no different than average. 

The reality: Frequent wholesaler service guarantees freshness, and direct store delivery eliminates the need for warehouse or backroom inventory. Magazines turn almost twice as fast as average.  Retailers' return on investment is very very high.

* Retailers' perception is that magazines are labor intensive. Checking in deliveries plus checking out returns. The reality: wholesalers supply the merchandising, so little or no store labor is involved in stocking shelves and displays.  In fact, labor costs are 2 points lower than the average.

* Retailers' perception is that magazines are only moderately profitable.  The reality, putting above-average gross margin and below-average labor costs together, is a contribution margin for magazines of 25% versus 17% for the total store, and that's pretty impressive.

* Retailers' perception is that magazines are irrelevant to the rest of the store. The reality: Magazine purchase is associated with incremental sales throughout the store. Recipes lead to the produce aisle. Beauty tips lead to the cosmetics aisle. Product reviews lead to equipment purchases. Advertisements and coupons drive product trial and repeat purchase.

* Finally, retailers' perception is that the magazine category is a "no-growth zone". Not true.  The reality is that there are many rising thermals, magazine segments that have been exhibiting very impressive growth.

Here are some of those segments:

- Teen Girls,

- Hispanic,

- Gamers,

- Modern Men's Lifestyle,

- Shopping. 

There are many growth stories to be proud of.

6. SHIFT PARADIGM

We are aiming for a fundamental shift in magazine retailing. We need to change the magazine experience in retail stores from Display... to Destination.

Our goals are crystal clear.

1. Stop magazines competing for display space with commodity categories

2. Reposition magazines as a destination department that drives customer traffic,

    enhances customer satisfaction, and strengthens store loyalty

3. Promote the entertainment value of magazines

4. Establish the magazine department as a high value mainstay of every supermarket.

DESTINATION DEPARTMENT

We have research to support this shift. We know that Magazine departments generate store traffic... and provide entertainment.

In best practice supermarkets, 75% of magazine purchasers surveyed pre-planned their visit to the magazine section before entering the store.  Of these, 80% entered looking for a specific title or type of magazine. The same piece of research showed that for every magazine purchaser, there are as many as six customers who browse but do not buy. 

This is of value to the retailer because it means that the presence of an attractive magazine destination department enhances the store experience for secondary shoppers, buying time for the primary shopper to shop longer and spend more.

EXAMPLE: 7-ELEVEN

When we met 7-Eleven's top management recently, they were extremely bullish about Magazines.

Their research shows that Magazines are a destination in 7-Eleven stores that drive customer traffic and add-on purchases.

7-11 PUB. VISION

This is a slide they showed us of their objectives for magazines. They see magazines as a destination in 7-Eleven stores to be carefully designed, refined and leveraged, using store-by-store category management to tailor assortment to customer demographics.

Incidentally, the meeting also demonstrated the value of benchmarks -- they were using erroneous data in looking at magazines. Our new benchmarks were welcomed enthusiastically.

DISPLAY TO DESTINATION

We are working on several initiatives to support the display-to-destination shift.

For the first time, we are commissioning primary research into the role and relevance of magazines to supermarket shoppers: their attitudes and behaviors around magazines; magazines role in enhancing the shopping experience and impact on customer loyalty.

We would also like to apply the best of design thinking to innovate how magazines are sold at retail; to design the form and function of an effective supermarket destination. 

We are at an early stage of discussing how best to do this.

WHAT CAN WE DO

I hope that this chart serves as a wake-up call for each of us! We must all pay greater attention to retail. And so I hope you're asking yourselves "What can we do?"

The magazine industry must work harder to make retail work better. 

1. By building relationships with retailers

2. By supporting category management

3. By applying discipline to retail economics

4. By putting marketing talent against retail channels,  and...

5. By pushing the boundaries of the historical "one size fits all" single copy mind set.

MEETING CHALLENGE

The choice, I hope is clear. We ignore retail at our great peril. We have the roadmap, we are developing the tools, and with your support and involvement, magazines can and will have a much more vibrant place at retail.

Thank you.