This is a serious question: Is magazine distributor Ovato hitting small business newsagents with an unexpected cost as a result of an impact on its operations due to COOVID-19?
Many newsagents have reported an unexpectedly high magazine charge. For some, the charge is higher than their cashflow supports, they will be unable to pay the bill.
So, I dug deeper. I have found examples of Ovato increasing supply of titles beyond what is reasonable over the last two months, even longer this year. In one instance, for Reader’s Digest, based on a 25% return rate, Ovato increased supply 37.5%. Then, another 10% and a month later another 16.5%. There is no justification whatsoever in the sales data from the store for any increase.
It’s not just Reader’s Digest. There are other titles too.
Ovato has, as I understand it, a requirement in some magazine publisher contracts that they distribute all of what they receive. If my understanding is right and this clause has not been set aside in the current situation, the closure of most transit location retailers will have increased the volume of inventory that Ovato must place elsewhere, thereby increasing the cashflow obligation on newsagents.
Ovato management need to explain how they are dealing with the shutdown of around 25% of their usual mix of retail outlets. They need to ensure that their allocation systems do not unreasonably increasing supply to newsagents. The evidence suggests otherwise though. If this has been the case, they need to fix it right away. If I am wrong, they need to explain why supply increases where the return rate is 25% or more.
I really thought we were behind the problems of serious magazine oversupply. Research over the last week indicates otherwise. I’d be glad to be proven wrong.
If you are a magazine publisher, look at your contract with Ovato, see whether you require them to distribute everything. If it does, propose that this requirement is set aside for the next six months.
Given the data flow from newsagents, there is no need for oversupply. Indeed, any oversupply ought be considered neglect, a cash grab,. And given the parlous state of Ovato, that is the last thing newsagents need to be exposed to right now.
Here is how we are responding to oversupply to my own newsagencies: we have reverted to weekly tight culls of magazine supply, cutting back to what we know we will sell plus a small buffer to allow of the current unique situation where some magazine categories are in growth.
The oversupply has caused us to invest more time on magazine supply and to be ruthless to protect our business.
For those that still don’t get it with Ovato. Early return today all excess stock. Don’t be caught holding stock. This company is in serious trouble.
Watch EVERY item you arrive today, many titles have increase by 2 or 3 issues, some more. The strategy seems to be increase by small amounts to see if they can sneak under the radar.
spot on Colin.
We have also seen an unjustified increases in many titles over the last few weeks.
Only option is to aggressively manage titles.
Id suggest that if you’re like us, the big bill this month is largely in part due to football cards and albums which of course cant be early returned.
And with no games, no sales. Classic Catch 22.
Ovato reported last week that their lenders waived their 31st March reporting covenants. All staff have also taken a 40 per cent pay cut. I agree with Colin their debt level and trading position is concerning. Having said that I think we need to be mindful of our stock levels right across the board. Discretionary spending is under particular pressure in these strange times.
From Steves post…..
“All staff have also taken a 40 per cent pay cut.”
I wonder if the same has been applied to management.
David Hogan from Ovato has provided this response:
Mark,
Given your recent post about the Ovato business I would like to respond, happy for you to post this message to newsagents. Before I start I must say I have been reading your blog for many years and generally find it an excellent communication piece for newsagents. Although I don’t agree with all your comments, especially during the tumultuous times back in the early 2000’s I have always resisted the temptation to become involved, generally because I believed there was little to be gained by getting into a disagreement via this medium.
This is different, we are all in a very difficult position at the moment, the plight of the wider Ovato business is well documented as we are a public company but I don’t believe our position is vastly different to many other businesses in the current environment. It is also well documented that many major retailers have stopped or reduced printing, especially in the catalogue market and this has forced the business to make some tough decisions on staff working hours until we return to some normality.
In response to the specifics in your post, you indicate that around 25% of our normal mix of retailers have shutdown. The true figure is around 6% of retail space has temporary shutdown. The majority of these outlets are travel, and more recently Target stores have decided to suspend deliveries from next week. To date we have had 51 newsagents either permanently or temporarily close, as you can imagine this number is changing daily.
I will not dispute your comments on Readers Digest supplies in one outlet, but one thing I will not do is take an allocations staff member off their normal role to investigate, I actually find it infuriating when examples like this are highlighted given the enormity of the current situation, I believe there are far more important things to get right at the moment. As we have stated in our recent communications to newsagents sales of many magazines are holding up quite well and we are hoping this may continue. We are constantly in contact with our publishers asking them to supply us more copies of magazines where required and less when certain titles are struggling in these circumstances. Our contact centre has had far more requests to increase supplies over the past three weeks than the other way.
We do understand how fluid the situation is, retailers in shopping centres are finding it more difficult and we are working with them as required to reduce supplies. General emails from marketing groups asking us to reduce supplies randomly don’t actually help, individual calls from agents to our contact centre are much more productive. Our credit department is also working with a number of newsagents on payment plans to attempt to help those who need some assistance over the coming months.
We have both been around long enough to know that when a newsagent requests supply changes it does take a bit of time, we generally have product packed 5 to 7 days in advance (except for weeklies) but we are making changes as quickly as possible.
Although a number of our staff have had their hours reduced to assist the business during this period, the only areas that are still full time and fully staffed are our Allocations and the Contact Centre, I do think this shows we are trying very bloody hard to get things right. You also mention publishers having contracts that that make us put out their total supply. This has not been the case for a while now and all publishers have been very responsive over this period and should be commended for continuing to produce great magazines in very difficult circumstances.
We have also over the last week produced and distributed 5,000 A2 posters sent to newsagents to support their social distancing measures and also made the business decision to help newsagents magazine management costs and temporary stop full copy returns in 1,800 newsagents until the end of June.
One final point before I finish, thanks to all the newsagents that have supported TheMarketHub, a small shining light in a difficult time, we hope to find more puzzles and games over the next few weeks for the newsagents using the site.
As always – any newsagent that requires any assistance please contact our call centre either via email at contactus.retaildistribution@ovato.com.au or 1300 650 666
Rather than pollute David Hogan’s comment above, I’ll respond here.
Ovato’s situation is of its own doing. Sure, the current coronavirus situation isa factor, however, Ovato was sick long before this.
There are plenty of examples of oversupply beyond Reader’s Digest.
Supply change request changes take way too long. Worse, they stay in place for 3 months or so before supply creeped up.
The tech at the core of the Ovato model is poor and is a factor in oversupply. People should not have to be involved in managing allocations. Ovato has the data and it should act on the data. Instead, it acts based on its needs ahead of newsagent needs.
For sure some magazines are performing better right now. however, from the overall title mix I’d say it is no more than 10% of available titles.
What is a reasonable return rate – 25% or less I say. My understanding is the channel average is 50%. This reflects a loss making situation for newsagents.
Nice plug for the Market Hub too, a business taking business from others who brought many of these suppliers to newsagents for the first time.
David, you serve the shareholders of a public company. I serve a community of independently owned small business retailers here. Ovato is a powerful supplier, almost in a monopoly situation. Had the company served newsagents well, my post would never have needed be written.
David,
Now that you have confirmed we have your attention, consider the background and a following question.
The magazine distribution system saddles newsagents with excess stock, poor sales to stock levels, and as a result impacts newsagents in tied up capital and return on capital.
Q : can you categorically assure newsagents that the monies tied up in magazines is backed and assured by the publishers and is in no way dependent on Ovato’s survival. ie it is a flow through, monies for unreturned magazines are guaranteed.
If the answer is in the positive then you can be assured newsagents are with you. If the answer is in the negative or not forthcoming………..
Are you fucking kidding David Hogan? Your company has ripped newsagents off for years. Over the last two months our magazine bill has gone up and up because dump magazines on us that your own data systems tell you we will never sell. You are stealing our cash flow. It is inexcusable. It is criminal.
Yep, load of tripe.
Downloaded tomorrows magazines and 30% of the delivery is being early returned due to blatant oversupply (why an increase to 7 Wine magazines when we normally sell a single copy ? ).
Will go through the rest of the magazines tomorrow and the Rugby League season guides will be heading back along with quite a bit of other stuff too. While we’re in the current situation and two other parts of the business are doing extremely well in part as a result it might be time for me to finally make the call on cutting magazines back to a top 50 or 100 titles only and making more profitable use of the space.
Also I don’t support market hub when I can source nearly everything there cheaper directly from other suppliers.
Ovato shares have declined from 0.08 in twelve months to 0.01 today OVT Ovato has bought more insider share than they have sold in past 3 months.
Lindsay Hannan bought $132,000.00 of shares
AusD @$0.011last few days.
Revenue. Income $669.30m Net Income -$84.25m.
And we think we’ve got Cash Flow problems.
The advice here you are giving each other is the best advice, you don’t need their cash flow problems to be yours. Minimum stock based on previous sales records, maximum returns to achieve this before have to be billed for them.
N.B This is not Davids fault it’s the company it could be handled better but he would be under instruction if you look at the above equation.
My thoughts.
David firstly thank you for taking the time to communicate to our channel via this forum. We all probably need to take a deep breathe and appreciate how challenging a time this is for you and your management team. Your ongoing communication to our channel should be encouraged.
Colin I suggest that your question to David is a non issue. Ie our returns are credited against monies owed by us to Ovato for our stock purchases. They reduce the liability owed by us to Ovato. They do not result in an account receivable from Ovato.
Paul S I believe that your comments may be solution to the issues raised in this thread. Ie Is it time for Ovato to restrict their direct supply to their largest customers in our channel? I suggest that the old 80/20 rule would probably ring true for Ovato.ie they probably derive 80 per cent of revenue from 20 per cent of their customers. Should direct supply be restricted to the top 20 per cent this would allow the other 80 per cent to concentrate on “ more profitable use of their space”.
Naturally if such a model were to be adopted both the sub agent and the publishers would need to take a hit to their margins. Publishers of less popular magazines would need to take a greater hit.
Ps We use Market Hub and believe this to be a great initiative by Ovato. Whilst we can and do source stock from other suppliers we find Market Hub to be far more flexible on minimum supply orders thus allowing us to free up capital invested in our stock. Competition is always healthy.
The core issue is that Ovato has the data and have had the data consistently for years. the average 50% return rate is unacceptable. 25% is okay.
Whereas supermarkets pay on scanned sales, newsagents pay for everything and then have to claim a refund on what has failed to sell. This and that Ovato charges publishers a fee on returns disadvantages newsagents.
Ovato has to many conflicting interests, they print, distribute and get revenue from returns. They’d be silly not to oversupply where they can. I doubt there is any forecasted supply algorithm, at least not a good one, using the ton of data supplied back to Ovato. Data which the newsagent has to pay to do. My guess is the forecasted supply is magazines supplied by publisher divided by available newsagents.
There is no other way to explain why the forecasts are so terrible and very rarely show a decrease when the majority should be decreasing. As newsagents close or cancel/alter supply the excess is simply redistributed. Of course newsagents aren’t just exploited by Ovato, the continuing oversupply and needing to early return means XChangit stays relevant, adding unnecessary expense. And the whole system forces the use of specialised software all for a category that is declining in sales through no fault of the newsagent.
Reading back a previous email from Ovato from the 17th of March regarding the COVID-19 situation and their operations. The quote here sticks out to me.
“From a magazine sales perspective we have reviewed last week’s EDI sales via XchangeIT and overall newsagent sales were flat week on week.”
This is why Mr Hogan your company has lost faith from newsagents. You have the means, you have the data and you have shown you can use it for your own propaganda but unfortunately your company still does not use the data to stop oversupply issues.
Newsagents still float the bill for this use of data whenever it suits you by paying for XchangeIT and still being forced to use archaic measures to send returns and returns data.
You had the opportunity to help this industry when we screamed out for help over the last 10 years. We had the opportunity to turn into niche market magazine locations and those days are now gone. We all take the steps to limit our exposure to this market.
Steve,
Maybe you are on lucky position of your magazine stock value being less than your monthly bill. I guess most have at least 2 months of stock. So what happens if all stock is returned ? Ovato owe you !
If Ovato go under, do newsagents get their full stock value back is my question.
Colin, it’s obvious that you have looked as I have at the financial stus of Ovato the shares were 0.001 cent at close today The forecast of cash flow effeciency is 12 mos. and there is a whole lot more including the placement of $130k by one Director
Colin you know as well as I do that this can’t even cover ther cash flow for a day let alone a month.
you summary is 100% correct if Ovato was to close.
It is possible to work out Ovato’s break even point and it’s not in sight however how much the Hannan Family want to rescue it we don’t know. We don’t know why they are onlt putting in token monies. Is it a requirement of the asx as a ratio to what ? is needed to comply.
Meanwhile to support your claim of stock versus equity and Sales I would suggest newsagents get a sell through report from Ovato gp through the excel spread sheet see what sells and how many and reduce sales to say stock retained as a copy of one left over after adjustment. the newsagent then has to use the sell through rate as a base to keep and early return the rest immediately upon delivery. Otherwise all the hardwork will be just a hair cut and will grow unless supervised.
If Ovato goes under depends upon the circumstances about whether stock is re credited by whom? Best to be cautious as you alert to in the first place rather than hope for catch up later.
Yes Colin I guess the key is the return rate. As Mark states anything approaching 50 per cent is excessive and puts the newsagent at risk. Ovato could reduce both theirs and our own working capital requirements simply by reducing this wastage rate.
Steve,
If wastage is reduced 25% then newsagents stock levels will similarly fall which will be a achieved by reduced monthly Ovato bills.
Ovato will have less income but I do not believe they will recover this from publishers. Nothing will convince me that Ovato has been paying publishers for sales that will never happen.
Ovato’s working capital is funded by newsagents. Don’t expect a response from Mr Hogan anytime soon.
Back in the good old days magazine oversupply was never a problem. Magazines were universally popular and everyone was making a quid, distributors included. I think therein lies the problem. Not sure what the solution is. If Ovato moved to a tighter supply model that might be the end of them. But should newsagents have to subsidise their survival, I don’t think that’s fair either, but what is the lesser of two evils?
Peter, back in those days newsagents were the magazine specialists, they guaranteed a level of traffic and sat at the core of efficiency for our businesses, like newspapers and lotteries. Now that all three of these categories are easily accessed elsewhere, primarily due to suppliers making that so, it’s reasonable we focus on their under performance.
50% return is an appalling failure rate. That Ovato supplies to this level of performance is unfair on small business newsagents. Yet, we take it and do little about it.
The most recent of my own shops does not sell magazines for this reason.
COLIN,
I think you’ve summed it up. Cash Flow – Profitabilityand inventory are the key issues.
The motivation behind oversupply you have identified as with the action. The more I read the more I understand of the real issue.
Any claims that Newsagents are in a position of owing money to Ovato and not the other way around obviously weren’t around when NDD / RDS were operating. The stock you carry always outweighs your monthly bill.
Mark, I agree with your assertions regarding oversupply. 50% plus is not acceptable in today’s market conditions. My concern would be Ovato. If they have cut all their non essential expenditure to the bone( I don’t know this, but it’s what I’d be doing) then based on their results and the current environment, survival would have to be questionable.
Peter, when I have talked with administrators over the years they have talked about a pathway out of difficulty for businesses. Keys to this are cost containment and sources of revenue. On the latter, Ovato is challenged because each of its revenue sources is in for a period of sustained pain, 12+ months.
Cost containment will buy some time but the company does not appear, from what we can see publicly, to have the reserves necessary for long term.
The challenge for Ovato in the context of the newsagent is that as a result of years of disrespect, there is no equity from our side to be all that supportive them when they may need us more.
Had the company provided a better tech platform, supply based on actual sales, payment based on scanned sales and no physical returns we may see the supplier differently today.
In terms of tech, a model where there o=is no human intervention required to set allocations could cut staff. Less oversupply would mean fewer call centre people needed. Payment based on scanned sales would mean fewer collections people needed.
Small business retailers right now value businesses that are helping them in the middle of the COVID-19 situation. That is not about discounts. rather, it is about being valuable in a two-way business relationship. Ovato has not played in that space with newsagents.
If Ovato goes under what are the flow on effects, not just for magazines, but newspaper distribution as well? Also I tend to think, particularly now, that small businesses would value tangible help, ie dollar savings, from current business relationships.
From what I see Peter, small business retailers across multiple channels value relationships that help them drive revenue and / or cut costs more so than dollar savings.
In our channel, most in regional / rural locations are stable or even ahead. Plenty on the high street are similar or if down, only slightly. Those in shopping centres are, overall, in a world of pain, down between 20% and 80%.