The Australian newsagency channel was created by publishers in the 1800s. It would seem from the June 7 2005 editorial in the Australian Financial Review, that at least one parent may want to to divorce and even suffocate the child.
The business model which emerged from the 1800s was finely balanced. The various pieces brought together then and enhanced with time created a successful small business channel with each part relying on the other to create viability. It ensured easy and on time access to newspapers and magazines across this vast country.
Then, in the 1990s, responding to the needs of competition policy and to appease some who would compete with newsagents, the channel was deregulated. However, the deregulation failed to address business practices which, while acceptable in an era of regulation, became inequitable in the era of deregulation.
Deregulation broke a more than century old operational convention between publisher/Magazine distributors and newsagents, replacing it with fixed contracts, some of which are soon to expire. No compensation was provided by publishers and or government for the valuable asset they stripped from newsagents.
The ACCC watched over the deregulation process at the request of the Federal Government.
Deregulation has left the newsagent channel half pregnant. There is open competition for what newsagents sell yet supply arrangements have not changed from the regulated era.
Newsagents represented themselves in contract negotiations with publishers and magazine distributors. It was a profoundly unequal match, something which the Federal Government ought to have acted on rather than walking away after feeding newsagents to publishers and their lawyers to hammer out a deal in secret and without consultation of the 4,600 family business owners who would feel the most significant impact of the changes to come.
If the Federal Government was serving its constituency properly it would have not only shepherded in deregulation for retail of newspapers and magazines, it would have ensured that the result was not going to shackle the newsagent channel with operational practices and economic circumstances which would leave them severely disadvantaged.
That’s all history now. It’s 2005 and we’re six years into this deregulated marketplace. Newsagents have accepted the change.
The AFR editorial was factually inaccurate. Not all newsagents charge the standard fee for handling sub agents. The fee depends on volume and the work involved. For the fee, newsagents deliver product, load in store display stands, retrieve unsold product, prepare returns paperwork and provide additional product during the day as required.
The only reason a newspaper publisher would want to place product in a McDonalds store is to achieve incremental sales. Rather than trying to starve the child they created in the 1800s Fairfax would do better in working with newsagents and leveraging incremental sales from the excellent foot traffic newsagents get through their retail outlets every day. Sales are there to be made if we are smart and if all of our suppliers remove some of the operational shackles from past decades.
Newsagents’ competitors possess negotiation, buying power and control that newsagents dream of. These outlets’ costs per square metre are lower; they are not forced to take the vast range of product newsagents carry. Sell through rates for the top 50 magazine titles are more than double the sell through rates achieved by the other 1,200+ lesser performing titles newsagents are forced to carry.
Whereas in 1999 a newspaper was a product afforded respect through specialist retail support, today it is sold as if a can of soft drink. This affects how consumers perceive the product and, some suggest, accounts in part for flat or falling newspaper sales.
Around 80% of what newsagents sell (magazines, newspapers, greeting cards, transport tickets, soft gambling) has a fixed price and therefore fixed gross profit per item sold.
Further, many magazines, newspapers and greeting cards are provided by suppliers without request. The newsagent is then required to carry the stock for the period determined by the supplier, even if there is little likelihood it will be sold.
For newspapers and magazines the gross profit is fixed at 25%. (Some recently opened newsagents have the gross profit on newspapers fixed at 20%). For greeting cards the gross profit varies by supplier from 40% to 50%; tobacco product 10% to 20%; confectionery 15% to 33%; transport tickets 2% – 5%; and soft gambling 4% – 7%.
In a shopping centre newsagency, the retail space lease costs 12% – 14% of turnover; wages 11% – 14%; theft 3% – 5%; and operational costs 5%. The average overall gross profit for a newsagency is 32%.
Newsagents plead for better economic terms rather than their current pre-deregulation terms. In the magazine category, more than 50% of product supplied is returned unsold. Newsagents wait at least 30 days, sometimes longer, before a credit is received. This means the unsold stock has been carried for 60 to 90 days without return. This costs in floor space, time and capital. The newsagent also pays to return unsold stock to the supplier.
The labour cost of processing magazine stock into and out of a newsagency accounts for, on average, 25% of the earned gross profit from magazines.
The fixed price nature of newspaper and magazine product means newsagents are dependent on suppliers increasing prices to maintain gross profit growth in list with costs growth. The Melbourne Herald Sun, for example, sells for $1.00 today just as it did in 1999. Prices, and therefore gross profits, have not increased commensurate with operating expenses. In each year since 1999 newsagents have absorbed, on average operational cost increases of in excess of 10%.
While newsagents understand business costs ebb and flow, the fact they cannot respond by adjusting the prices of the majority of their product nor by controlling much of what they sell, makes for some challenges.
At the same time newsagents have been dealing with a deregulated marketplace, they have been encountering increased competition from Federal Government owned Post Offices. These retail stores compete aggressively with newsagents on stationery, greeting cards, money transfer and bill payment. There is anecdotal evidence suggesting that the government owned retail post offices get considerably more favourable rent deals than newsagents. There is also concern that the mail distribution side of Australia Post may be propping up the retail operation so that Post can better compete.
The Federal Government ought to divest itself of its Australia Post retail operations.
To better understand the economic circumnutates of newsagents and to complete the task only half done through the deregulation process, I call on the Federal Government and Opposition for bipartisan support for a Productivity Commission inquiry into the impact of deregulation on newsagencies.
While there are risks associated with any inquiry, appropriate Terms of Reference could direct the Commission’s attention to the specific aspects of the newsagent channel which are broken or close to breaking, as opposed to setting forth on a wholesale review of newspaper and magazine distribution.
Specifically I propose an inquiry into
1. The impact of deregulation on newsagencies (delivery and/or retail) between 1999 and 2005, having specific regard to:
A. Fixed and variable business costs;
B. Gross profit earnings from product where newsagents to not control retail price.
C. Operational cost changes (wages, lease, insurance, vehicle);
D. CPI change;
E. Impact on sales of newspapers and magazines as a result of deregulation since 1999;
F. Operational practices by publishers and distributors and their financial impact on newsagencies including:
• Lack of supply of electronic invoices and statements – requiring newsagents to spend many hours weekly manually reconciling complex accounts.
• Supply decisions without consideration of up to date sales data to determine an economically viable scale out number.
• Refusal to allow newsagents to cross promote other product with newspaper and magazine product.
• Requirements for newsagents to increase workload servicing product without equitable compensation.
G. Overall economic performance of the channel and the future prospects, given the prospects of further deregulation.
2. The competition between newsagents and Federal Government owned Australia Post retail and distribution operations.
A. The operational cost differences between retail newsagents and post offices in a like-store comparison, with regard specifically to lease costs, labour costs and other key fixed business cost differentials.B. The differences between cost of goods as negotiated by Australia Post versus the cost of goods for like items sold in newsagencies. (To determine if newsagents are disadvantaged.)
C. The difference in consumer benefit delivered by newsagencies compared to Australia Post.
D. The extent Australia Post, under its current corporate structure, is likely to pose a threat to Australia’s newsagencies and if so, the risk for consumers.
E. The commercial benefit to each party of exclusive products and or services they each have – i.e. postage for post offices and magazines for newsagencies.
F. The change in competition between the two channels over the last six years. Particularly in the sale of postage products, greeting cards, stationery, Western Union services and in-person bill payments (Bill Express and Post Billpay).
G. Barriers, hard or soft, used by either party to stop the other party entering what is traditionally their ‘space’ – specifically in-person bill payment.
H. The likely impact on either channel of any trend identified.
Despite what the AFR editorial writer would have us believe, newsagencies are not anachronistic. Our businesses are vibrant local hubs. We employ local people. Our profits remain local. Our businesses are deeply integrated with the local community. If we accept the AFR pitch, the newsagent channel will starve and eventually die and one day a historian would get to write the story of how Australia has lost something unique and culturally valuable and this loss was aided and abetted by those who created it in the 1800s.
Newsagents are not looking for a free hand out. Nor are they looking for protection. We seek commercial viability through fair trading terms and business practices and we seek engagement with our suppliers in pursuit of incremental sales.
Newsagents will always be more engaged in selling news and information product than a global burger chain.
FOOTNOTE: Since publishing the editorial executives from Fairfax have worked hard at distancing themselves from the views expressed by the editorial writer.
Mark Fletcher is owner of newsXpress newsagency Forest Hill and a founding member of United Newsagents Australia – a new national body forming to provide national representation to newsagents. He is immediate past Deputy Chairman of the Australian Newsagents’ Federation. He also owns Tower Systems, a 24 year old software company which supplies computer software to newsagents and serves in excess of 1,300 newsagents nationally. 0418 321 338. 03 9524 8000.
emef@ozemail.com.au