MAG COSTS: STILL CLIMBING
Byline: Valerie Seckler
NEW YORK — A barrage of business blows is challenging magazine publishers, who are trying to pump more sales and profits out of their circulation amid a steep climb in paper and postage costs.
Consolidation among distributors and a sharp decline in subscription sales via sweepstake stamps have made it tough for magazines to offset cost hikes of about 40 percent for paper and more than 10 percent for postage this year.
“I think a lot of publishers are quietly panicking,” said Joe Armstrong, publishing director at Meigher Communications. “I hear the stamp people have underperformed by 10 to 20 percent, so a lot of magazines will have trouble making their rate bases.”
Further, the acceleration of consolidation among distributors “is a shock that has hit the industry hard in the last 90 days,” conceded David Pecker, president and chief executive of Hachette Filipacchi. “This has been such a stable business for the last 20 years. Our newsstand costs will probably go up 15 to 20 percent in 1996.”
These pressures have already upped printing and distribution costs — about half the expense of operating a magazine — by 15 to 20 percent in 1995.
“Although paper is back up to 1990 prices, the suddenness of the rise hit hard,” acknowledged Kent Brownridge, executive vice president at Wenner Media. “In the last 18 months, it’s risen 60 percent. That’s a lot of rise in 18 months.
“It’s a major challenge to get it refitted into all of our publishing formula’s,” Brownridge added.
The steep increases forced publishers this year to act on the lip service they’ve paid to building their circulations’ productivity. Fashion and lifestyle magazines, including YM, Family Circle and Garden Design, are raising cover prices; Mirabella, McCall’s, YM and Fitness are moving aggressively to boost single-copy distribution, and some publishers, such as Hachette, are marketing a lot more subscriptions in-house. As noted, Hearst Magazines raised the cover prices of nine core magazines, starting with Esquire in June and ending with Cosmopolitan in November, while cutting “marginal” circulation at the same time.
Observed John Heins, president and chief executive officer of Gruner & Jahr, publisher of such titles as McCall’s, YM and Family Circle, “Many in the magazine community have said for years that circulation has to pay more of the freight, but until recently they were loathe to do anything about it.
“Anytime such a significant component of costs goes up so fast, you have to compensate,” Heins continued. “In the last five years it’s grown tough to build ad revenue to protect margins; unless you increase circulation revenue, your margins take a significant hit.”
With expenses soaring, noted Brownridge, “Publishers tried as always to get additional revenue from advertisers, and now they’re saying ‘Yikes’ and trying to figure out how to get it from readers.”
Paper prices, which fell for about five years starting in 1990, are “a huge driver in the business,” said Heins. “Instead of letting the savings flow to the bottom line, many publishers responded to pressure from advertisers by ‘giving away’ money to accounts. Now they’re in a bind, because paper prices went up faster than expected.”
Adding to the problem, noted magazine executives, is a 25 to 40 percent drop in sales by such firms as Publishers Clearing House and American Family Plan; they typically produce 40 to 50 percent of the subscriptions sold to magazines from major publishers like CondA Nast and Hearst Magazines, among others.
“The decline in stamps sales took 15 percent off our bottom line and lifted our average cost of acquiring a subscription by 20 percent,” admitted Hachette ceo Pecker.
The overall drop of 10 to 20 percent in subscriptions secured by sweepstakes houses caused Hachette to double its direct mail circulation effort in 1995. The publisher of 27 magazines — including Elle, Mirabella and George — mailed 40 million pieces this year, up from its usual 20 million.
“So our mail costs doubled,” Pecker said. “Our effort to acquire subscriptions has been very, very costly.” The downswing in stamp-house sales, he added, “forced many publishers to mail more themselves at $500 to $700 per thousand.”
Media moguls think sales are dropping at stamp houses for a variety of reasons: 20 to 30 percent declines in mailing volume; saturation of readers as most people spend less time reading, and softer sales promotions.
“When 14 states came up with a [false advertising] suit against Publishers Clearing House, they softened their sales solicitation and message quite a bit,” said Pecker. “It’s affected their sales tremendously.”
Meanwhile, the battle for single-copy sales is heating up on newsstands which, in the last two to three months, have increasingly dealt with just one or two key wholesalers. In addition, smaller wholesalers are rapidly being acquired by key players. As a result, media honchos fear they’ll be asked for deeper discounts to distribute magazines.
“The Justice Department is reviewing the impact of consolidation on smaller publishers; wholesalers and retailers are being questioned about their pricing practices,” said a magazine executive who requested anonymity. As early as last spring, U.S. antitrust officials noted they had received complaints about the impact of the distributors’ consolidation on smaller wholesalers and publishers. Justice Department officials couldn’t be reached for comment Thursday due to the partial shutdown of the federal government.
“A point or two of extra margin could mean millions of dollars in extra profits,” the executive added.
Mark F. Miller, an executive vice president at Hearst Magazines, noted the distribution landscape is changing “almost every day.”
“This is making it harder to deliver magazines on time to the stands,” said Miller.
It is crucial to be out on time, said executives, because 70 percent of single-copy sales are made in the first 14 days of a 28-day selling period.
All of these strains have raised the circulation stakes, igniting action at many magazines, beginning with Hearst, where printing and distribution expense escalated 24 percent this year.
Hearst alienated some advertisers when it said in July it would raise ad rates 5 percent at nine core titles while losing about 10 percent of its readers, because it was raising cover prices 18 to 33 percent and subscription prices 7 to 13 percent, as noted.
The plan drew praise from G&J’s Heins for its “fiscal soundness.” However, Heins said the “across-the-board nature of the plan strikes me as not a sign of strength. That every magazine could benefit suggests they could all be contracting instead of growing.”
Told of Heins’s comment, Miller said, “After extensive research we decided to go for more dedicated readers and expect to weed out lower-demographic readers. While it’s a bold move, it’s absolutely the right time to do it, given the outlook for the next 15 years.
“This is a time we have to push more of the burden of these huge cost increases onto the reader,” Miller added, noting Hearst’s overall costs have climbed $43 million in 15 months. He said Hearst will probably hike the cover prices of Harper’s Bazaar, Good Housekeeping and Sports Afield this spring. Hearst delayed raising HB’s and GH’s cover prices due to aggressive increases in subscription rates this year, and waited to hike Sports Afield’s because it was just recently redesigned.
“Hearst could have lowered its circulation 10 percent, gotten more money from its readers and lowered its ad rate bases, holding its CPM for the year,” said Wenner’s Brownridge. “Hearst could have been in the publishing hall of fame. But they were ridiculed for asking advertisers to pay 5 percent more for 10 percent fewer readers.”
Others criticized Hearst for being less than honest in explaining the policy to advertisers. “It was unclear that they were trying to increase profits,” said a publisher who requested anonymity. “It was [positioned] as some high, idealistic move when it was a coldhearted business decision to cut costs by lowering their rate base while raising ad revenue.”
For his part, Miller said, “We did tip off as many key accounts as possible to notify them of the plan.”
Magazine executives said the structural shifts stimulating new circulation strategies such as Hearst’s are probably fundamental. “Whether people who took a tough stand on ad rates or circulation’s new role will back off, remains to be seen,” concluded Heins. “We have to respond to the realities of the situation.” — Fairchild News Service