Elaine Watson finds out if there’s a good case for newstrade deregulation

Publishers baulked, trade bodies panicked and a well-timed report from Professor Dobson of Loughborough University predicting ruin for thousands of corner shops whipped the Mail and the Sun newspapers into such a frenzy of righteous indignation that national distribution was dead in the water before it even got off the ground.

Publishers, by contrast, will lose little sleep over such inefficiency, claims Lennon, because magazines that are not returned count as sold, thereby bolstering the ABC circulation figures that drive ad revenues, where the real money is made.

Mention vertical agreements - a term bandied about in the news industry, but hardly anywhere else - and most of us will probably be left scratching our heads.

Come the end of the month however, and all that could change as the Department of Trade and Industry reviews whether such agreements, which allow publishers to appoint wholesalers exclusively to serve a particular geographical region, should come under the remit of the 1998 Competition Act.

If the government decides vertical agreements should go, it could spell the end of a news distribution system that retailers claim is unequivocally unfair, inefficient and wasteful, and publishers insist is the only way to ensure the public has access to papers at an affordable price.

So what would happen if the DTI gets tough on vertical agreements and retailers could get their papers from wherever they liked?

It would not be the first time vertical agreements have come under threat and not everyone is convinced that the end of exclusive territories - whereby retailers can only get their news and magazines from a wholesaler designated by publishers - will follow if the DTI decides vertical agreements breach competition laws.

The response from publishers at the last attempt to break up exclusive territories, when Tesco and WH Smith News proposed national distribution for magazines in 2000, was swift and devastating.

Three years later, however, and retailers at least would argue that the status quo is as firmly entrenched as ever. There is now a national title file for magazines, a more robust complaints procedure to address retailer complaints over poor service from wholesalers and all manner of joint industry initiatives to drive efficiency and tackle shrink. But the basic distribution system for news and magazines - whereby publishers appoint wholesalers exclusively to supply all outlets in a particular area - remains intact.

Tesco declined to comment, but smaller retailers, who were taken by surprise by the multiple’s national distribution plans last time, would not stand in their way this time round, says the Association of News Retailing, which represents retailers such as Spar, Londis, TM Retail and the Co-operative Group. If national distribution raised its head again as a result of the DTI review, says MD John Lennon, the ANR at least would “welcome it wholeheartedly”.

Dobson’s thesis - that deregulation would put thousands of small retailers out of business as wholesalers focused on the lucrative national retail accounts - simply doesn’t wash, says Lennon.

There is no system to safeguard the supply of other short shelf life products such as bread and milk to independent retailers, yet wholesalers still do business with them, he points out. Moreover, mechanisms such as buying groups that help independent retailers compete in the marketplace would work just as effectively for news products. “Organisations like Spar would ensure that members got magazines - as would the National Federation of Retail Newsagents."

NFRN trade relations manager David Daniel is more cautious. Partial deregulation “could drive a bit of competition,” he says, but it does not necessarily mean national distribution. Besides, the end of vertical agreements does not address the fact that publishers can still call the shots - as they did in 2000 - by restricting, or indeed refusing, supplies to wholesalers wishing to offer national distribution.

Publishers and wholesalers, meanwhile, are standing resolutely behind Dobson. Association of News and Magazine Wholesalers MD Terry Perry and Periodical Publishers Association CEO Ian Locks both insist that newspapers and magazines are not like other grocery products.

Exclusive territories preventing the big wholesalers and retailers from getting into bed with each other and abandoning independents are the only way to ensure that you can still buy a paper from your local store - “fundamental in a democracy”, says Perry. Meanwhile, magazine sales are growing ahead of inflation because of constant innovation, claims Locks, who points out that 40 of the top 100 bestselling titles have all been launched in the last 10 years. And innovation, he argues, is only possible because the current distribution system is designed to push products in front of consumers without burdening retailers with unnecessary risk.

If too many copies are sent out, says Locks, the publisher pays for the inefficiency, because magazines are distributed on a sale or return basis, whereby retailers can return unsold copies to the wholesaler and get their credit reimbursed.

Lennon, however, has no truck with this “paternalistic and patronising” approach, which in any case has proved, he says, to be catastrophically wasteful. “If the present system is the most efficient way of driving copy sales why is one in three magazines pulped?” he observes.

Likewise, the publishers’ argument that sale or return places the financial risk of oversupplying the market onto publishers' shoulders is disingenuous, he suggests. Retailers are charged for magazines after seven days whether they have ordered them or not, and must return unsold copies within a fixed deadline to recoup their cash.

Disallowed credits - where retailers do not return copies on time - amount to a whopping £10m a year, a cost borne by retailers, not publishers. Add to this the estimated two to 15 out of every 100 magazines that a retailer is charged for and then doesn’t sell because of shrink, and the costs to retailers of flooding the market with magazines begin to stack up.

Locks admits the system is not perfect, but dismisses suggestions that publishers are cynically capitalising on the situation.

“Ultimately publishers want good, solid, firm retail sales or subscriptions. Besides, ad sales as a proportion of publishers’ total revenue are actually going down.” While the alleged £10m in disallowed credits is a lot of money, he adds, it is “not significant” in the context of total magazine sales above £2bn.

Moreover, retailers are not forced to accept ‘boxed out’ titles they have not ordered, he emphasises. “You get 24 hours’ notice, and you don’t have to take them.”

Shrinkage issues aside, the crux of the problem, according to Lennon, is that exclusive territories provide no incentive for wholesalers to up their game (through better service, sales based replenishment, better delivery times, pay on scan or increased terms in place of sale or return), because they effectively have no competition. “If you don’t like the service you are getting from your wholesaler,” points out Lennon, “it’s bad luck, because you can’t get your magazines from anyone else.”

Publishers, meanwhile, continue to insist exclusive territories are the only way to guarantee delivery and standard prices to 55,000 outlets nationwide - from central London to the remotest parts of rural Wales.

Says the PPA’s Locks: “I do not wish to sound complacent. But I can’t understand why independent retailers are calling for an end to a system that guarantees their supplies.”

By the end of the month - when the DTI is expected to report back - the matter will be out of publishers’ hands, says Lennon, and events will take their course. “It depends on what the government decides to do. It could just argue for more competition in the tendering process - or it could decide to break up the [regional] monopolies, in which case, it will shake up the entire network.”

Frenzy of indignation

But Pandora’s box had opened, warned trade magazines across the country, and whatever happened in the weeks and months to follow, magazine distribution would never be the same again.

Bolstering circulation