The following table ranks the cash-flow impact of nine titles for each of six newsagents in my research into the cash-flow impact of magazines. Positions 1 through 5 are the worst performing titles by the cash-flow measure. I have included positions 20, 30, 40 and 50 to illustrate the distance between these and the worst titles.
This cash-flow research has uncovered the bottom performing titles as the problem. While newsagents complain about the impact of competition t the popular title end of the marketplace, these titles are strongly cash-flow positive. It is at the end of the marketplace which newsagent competitors do not touch where the cash-flow problems occur.
In the six case study newsagencies, the annual cash-flow of the bottom 50 titles ranges from $-3,739.00 for the rural newsagency to $-16,655.00 for one of the suburban newsagencies.
The bottom 50 titles account for between 18% and 20% of all negative cash flow. Put another way, eliminating the bottom 50 titles in the case study newsagencies would cut negative cash-flow by between 18% and 20%.
Given the way newsagencies are valued, a cash-flow savings of $4,000 conservatively equates to a $12,000 increase in the sale price sought for a newsagency by between $12,000 and $60,000.
There are some titles which the data suggests ought to be eliminated altogether and others which will need to be considered on a store by store basis. Network wide title elimination cold be undertaken by analysing consumer satisfaction within categories. Newsagents carry too many magazines in the Wedding, Hair, Computer and Car categories. Titles cold be eliminated without consumers noticing. Newsagents would save millions in cash-flow terms over a year.
These numbers are an indictment against the magazine supply model and the companies in control of that supply model. Newsagents cannot sustain such losses from a small number of titles.
Newsagents need to consider cutting the bottom 50 titles from their product mix. Doing this would not impact their range point of difference. Magazine distributors have an obligation to work with newsagents on this. I would be interested to hear what the ACCC would say if a magazine distributor continued to supply product in a situation where a newsagent has proven that continued supply creates a loss situation for them.
Magazines are important to newsagents, especially the range they carry which no other retail outlet carries. However, equity has to return to magazine supply arrangements and I content this begins with elimination of the bottom 50 titles from each shop or at least supply on terms which are equitable than those imposed by distributors today.
In the article ‘The trouble with magazines’ there was a serious flaw in the calculations (or if you wish to be kind, in its nomenclature). The footnote advised that “real estate cost” was deducted for a category of titles, in calculating a “cash flow negative” impact of those titles. The problem is that the lease on the overall premises is clearly a “fixed cost” (basic microeconomics) and does not vary according to whether certain titles are offered or not (unless you wait some years till the lease expires and move to smaller premises). The more appropriate methodology is to calculate a ‘return per square metre’ after certain tightly-defined direct.variable costs (including labour directly associated with stocking). The results of this analysis would show that newsagents received a lower return per square metre for the slower-selling titles. The misleading part is that “cashflow negative” implies the operators are actually worse off in terms of “cash” as a result of selling these mags, whereas the truth is that the mags bring in cash, though not as much as the average ‘per square metre’ rental payment the newsagent has agreed to pay. Like most businesses, newsagents assess the overall – whether the overall gross margin generated from the mix of products is sufficient to justify certain costs, including rent. Supermarket analysis of ‘gross profit per lineal metre of shelf space allocated’ consistently shows lower returns for some product categories that consumers insist upon. As a generalisation, the more a supplier spends to sell his product to the end-consumer, the less margin is allocated to the stockist, due to the large advertising spend and resultant brand awareness… but if a supermarket decided to not stock a consumer’s favourite cola drink, would that drive the consumer to go to a competitor for his/her groceries? That is the question for any retailer who also stocks low-margin complementary goods. However, I am NOT suggesting that the issue of low return newsagent titles should not be publicised – only that alarmist terms should not be used, especially if they would be misleading if used in that way.
Graeme Harrison, Lurline Bay
By way of background, I have formal qualifications in Engineering, IT, Pure & Applied Maths, Business Management and Accounting. I was on the team of five which developed the very first electronic spreadsheet (‘VisiCalc’) at Harvard Business School in 1987, of which Lotus 123 was a copy (agreed in an out-of-court settlement) and Excel is in turn a copy of Lotus and VisiCalc. I was a Harvard Consultant to The White House. I worked as a consultant for Deloitte Touche in San Francisco. I regularly do complex financial analyses (as an expert witness) for large disputes in the Federal Court, and sometimes in the Supreme Court of NSW. In 1984 I was made a Fellow of the Australian Institute of Management. I can be contacted at prof @ post.harvard.edu (without spaces).
Newsagents have a fixed magazine area in their shops as required under contract to magazine distributors. The allocation of space cost per title is performed based on the quantity of each title received. We have undertaken shpping basket research to determine the value of business ‘brought in’ by magazines. Elsewhere in my paper on this topic I discuss the benefit of this business. It is not significant enough to warrant newsagents carrying many titles. My paper concludes with a recommendation that newsagents eliminate the bottom 50 titles from their product mix. 50 titles represent around 4% of the titles carried. So, I am not proposing a wholesale reduction to a point that consumers would notice change.