Dawson News has lost contracts to Smiths News and Menzies Distribution, sparking fears of a duopoly. Beth Phillips asks what it means for the industry

If a week is a long time in politics, then six weeks must seem an eternity in newstrade. During this time, Dawson News, the UK's third-largest newspaper and magazine wholesaler has lost six major distribution contracts, culminating in the loss this week of its £75m contract with magazine distributor Marketforce.

In each case, the contracts were handed to rivals Smiths News or Menzies Distribution, and a further contract with Trinity Mirror Group is expected to head the same way when its new terms are announced early this month.

Dawson News claims the loss of the contracts has unearthed fresh competition concerns in a sector no stranger to the scrutiny of the competition authorities. It is calling for the Office of Fair Trading to re-open its long-running newstrade investigation amid claims that a 'duopoly' is being created as more contracts fall into the hands of Smiths News and Menzies Distribution.

But does it have a case? And what impact could a duopoly have on independent newsagents?

Dawson News says losing the contracts threatens the future of its business and could put as many as 2,800 jobs at risk. Its parent company Dawson Holdings reported total sales of £775.2m and operating profits of £12.4m in the year to 27 September. Of this, Dawson News recorded sales of £690.2m and operating profits of £10.1m.

The six lost contracts will wipe £382m off sales when they end, a figure that has sent Dawson News' share price tumbling from a 52-week high of 92p in May 2008 to just under 10p this week.

A look at the players' respective market shares gives weight to the argument that a duopoly is fast emerging. Before losing the contracts, Dawson News had a 22% share of the market, Smiths News had a 40% share of the magazine wholesaling sector and a 36% share of the newspaper wholesaling sector, while Menzies Distribution commanded a 30% market share. A handful of independent wholesalers made up the rest of the market.

Since being awarded the new contracts, Smiths News claims it has secured 90% of the magazine sales in the new territories awarded to it by publishers. Menzies says it has grown its market share with Telegraph Media Group by a third and has added seven major new territories with Comag and Associated Newspapers.

Dawson News' claims of unfair competition are rooted in the Office of Trading's conclusions following its investigation into the sector, which ended last October. In newstrade, wholesalers are granted exclusive distribution territories by publishers and distributors.

The OFT ruled that although this set-up worked for time-sensitive newspaper distribution, there was scope to increase competition for magazine distribution. This paved the way for passive selling - where retailers are able to choose their own magazine supplier.

Dawson News writes to MPs In a letter to MPs, seen by The Grocer, Dawson News claims this recommendation has led to publishers renewing contracts with wholesalers well in advance of the time they are due to expire to avoid passive selling.

"In the period since the publication of the OFT's opinion, the contract decisions that have been seen have had the perverse consequence of contradicting the OFT's overall aims and intentions for the wholesaler newspaper and magazine market," the letter states.

A loss of competition means retailers will be unable to influence wholesale suppliers on price, that magazine publishers will fail to pass on lower prices to consumers, and that it will become impossible for new wholesalers to enter the market, adds the letter.

"We therefore fear that the emergence of a two-wholesaler network will drive a coach and horses through the OFT's overall aim of increasing competition in this market and will lead to poorer outcomes for retailers, and thus consumers," it concludes.

The strong tone of the letter is having the desired effect. Kerry McCarthy, a Labour MP for Bristol East, where Dawson News has a depot, has tabled a question in the House of Commons calling on the OFT to re-examine the market, while John Thurso, a Liberal Democrat business spokesman and MP for Caithness, Sutherland and Easter Ross, has asked the OFT to make the issue a "top priority".

"Some 284 jobs are at risk in Bristol, and in this particular economic climate, we need to do all we can to protect jobs," explains McCarthy. "I've asked the Secretary of State whether he can use his powers to look at the issue again."

Anger from the newstrade

Newstrade associations the Association of News Retailing and the National Federation of Retail Newsagents are also fuming.

"It's a two-fingered salute by publishers and wholesalers at the OFT's opinion," says John Lennon, MD of the ANR. "We have written to the OFT to outline our concerns because there will be no competition for the newspaper or magazine market if Dawson News leaves. We will be asking for a full referral to the Competition Commission because there is too much power with newspaper and magazine wholesalers."

The NFRN, meanwhile, claims a loss of competition could have a disastrous effect on independent newsagents, which are already battling declining margins and increased carriage charges. It claims 510 of its 18,000 member newsagents went bankrupt last year.

The new contracts could be the "final nail in the coffin" for newsagents, warns head of news and magazines Stefan Wojciechowski. "Newsagents are already closing at an alarming rate because of competition from supermarkets that now operate in suburban areas. Changes in the newspaper distribution industry will only make things worse.

"With exceptionally inconsistent service levels and no choice of supplier, an industry contracting to just two wholesalers can only spell danger for independent newsagents as they fully expect to be dominated and abused by their monopolist suppliers."

Retailers would be powerless to fight rising costs and needed to be protected, Wojciechowski adds.

Neither Smiths News nor Menzies Distribution are prepared to comment and the OFT refuses to be drawn on whether it will re-examine the sector, saying only, "if we do receive any complaints then we will look into them".

Dawson News, meanwhile, is carrying out a detailed review of the implications of the contract losses. "We hope the OFT will look into this," says Dawson Holdings CEO Peter Harris. "We are a good business, employing 2,800 people. It would be a great shame if this had to change."

12 March
Dawson News announces its contracts with Frontline and Seymour Distribution, worth £116m, will not be renewed when they expire in April 2010.

24 March
Dawson News loses contracts with Associated Newspapers and Comag worth £139m. The contracts expire in October 2010 and December 2010 respectively.

3 April
Dawson News' £52m contract with Telegraph Media Group, which expires in autumn 2009, goes to Smiths News and Menzies Distribution.