Broken Frontier

In my last installment, I discussed reasons why publishers are reluctant to return to the newsstand market.  In essence, the newsstand market is rapidly declining.  Over 70% of titles have declining newsstand sales, and the average sell through rate is only 38%.  This means even the best selling comics would only break even.  Publishers wouldn’t make any profits, and would likely lose money!

But if the current newsstand market doesn’t work for comics, is there a model that could?  I think so.  I believe a new model would need to be retailer driven.  But what does that mean?

The Retailer

For any new model to work, it must motivate the retailer.  By retailer, I’m initially talking about big chain stores like Wal-Mart, Target, Meijers, etc.  Eventually, this model can service smaller chains and even be adapted to mom-and-pop stores.  So, what is it retailers look for in a product?  While I’m sure there are dozens of answers to this question, I’m going to hit on those I see as the top six.

1. Profits: Retailers typically target a minimum return on investment (ROI) of 20-30%.  This figure factors in cost of merchandise, sale price, returns, and cost of racking and sorting, etc.  The ROI for most newsstand outlets is 20% on magazine sales.

2. Discounts: Major retailers typically offer discounts on magazines and books.  The discount ranges between 10-30%.

3. Scan Based Trading (SBT): SBT is using point-of-sale data to order and stock new merchandise.  It allows the retailer to see what they are selling, how much of it they are selling, and how fast the sell.  SBT services are highly desired by large retailers and essential for them to gauge the wants of their customers.

4. Contracts: Large companies like to do business by contract.  They want a fixed price and set rules.  Both allow for dependable, stable business. 

5. Returns: When it comes to magazines, retailers are accustomed to being able to return the full quantity of any unsold magazines.  However, this isn’t true for every product they sell.  The comic industry wouldn’t have to offer full refunds for every unsold issue.  However, I think that since retailers will still view them as magazines, there must be some limited returns to bridge the gap.

6. Floor Space/Displays: Space is always a limiting factor in the retail environment.  Further, studies have shown that in the newsstand environment, a magazine’s cover is the #1 source of impulse buying decisions.  Retailers will want to display a large number of comics, in a compact area, using a method that clearly shows the covers.

Reviewing these six items, it seems like a pretty tall order.  Exactly what kind of system would work for retailers?  What does the industry need to implement?  Here are my thoughts for action items:

• Establish Contracts With Retailers
• Use A Three-Tier Purchasing System
• Install Scan Based Trading Systems
• Address Returns of Unsold Comics
• Offer Compact Display Solutions

Establish Contracts With Retailers

My vision of a retailer contract is much like a cellular contract.  The distributor will provide X number of comics for X amount of dollars.  The contract can span one year, or multiple years.  Naturally, the higher the volume, the lower the unit price.  There will be 5-6 standard contact levels, anywhere from a few thousand comics a year to a few million comics a year.

As an example, Wal-Mart has approximately 3,000 Wal-Mart brand stores.  If Wal-Mart believes that they can sell an average of 50 comics per store each month, they would sign the two million comics per year contract for $3 million.

Also like cellular contracts, the retailer can increase the level of their contract without penalty.  They can also decrease it, but a fee or penalty may be imposed.  This allows the retailer flexibility to adjust for higher or lower than expected sales.  These contracts will also spell out what perks are offered, how returns are handled, etc.

This type of contractual purchase fixes the price for the retailer and guarantees sales for the publishers.  It also addresses the need to offer discounts.  A typical retailer wants at least a 20% return on investment (ROI).  They also want to offer a 10-30% discount on books and magazines.  If you factor in another 5% for overhead costs, such as racking and sorting, a retailer would need to purchase comics for a 35-55% discount.  I don’t think this number is outside the realm of possibility, particularly when you consider publishers are guaranteed to move millions of extra units.  Any publishers or distributors care to chime in?

Use A Three-Tier Purchasing System

In my opinion, a key concept for making this system work for all sizes of publishers is a three-tier purchasing system.  It also gives the retailer variety.  Each month individual stores will get a catalog that is divided into three tiers.  Tier 1 contains the best selling titles (direct market performance will initially determine sales levels), which sell 50,000 issues or more per month.  Tier 2 titles sell 25,000-50,000 issues per month and Tier 3 titles sell 10,000-25,000 issues per month.  Titles can also move up or down tiers as sales increase or decrease.  Tier placement will be determined on a quarterly basis by the distributor.  The distributor also determines new title placement, based on past performance of similar titles.

Under this type of system, the retailer has the flexibility to order comics that they can sell.  They aren’t just given a random assortment of comics.  They also get a broader variety to choose from, not just superhero books from the Big Two.  Per the terms of the contract, the retailer must select 60% of their monthly purchase from Tier 1 comics, 30% from Tier 2 comics, and 10% from Tier 3 comics.  This type of split means that small publishers have the chance to get their books to the market, alongside the large publishers.  This will hopefully entice all publishers to participate and contribute to this new system.

Also, retailers won’t want, or need, to place their orders three months in advance like the direct market.  They also won’t need reorders.  Retailers will order their merchandise 6-8 weeks in advance.  This should still give publishers time to set their final print runs.  It also gives publishers more time to determine if they can meet their schedule, thus making sure late products aren’t solicited

There are other benefits to the three-tier system that will be covered later.

Install Scan Based Trading Systems

Scan Based Trading (SBT) systems are a major advantage for retailers.  They tell them what items sell, how many of each sell, and even how quickly they sell.  The industry can go a long way in establishing contracts if it can offer a SBT system to retailers for free (as long as they are under contract).  It would allow the retailer to select comics that sell successfully in their store, without much guesswork. 

In addition, publishers can use the network of SBT systems to determine what comics actually sell.  It would essentially be for comics what Soundscan is for CD’s.  The current direct market system shows inflated numbers for hot comics.  Retailers stockpile comics, or don’t sell everything that is ordered.  There is no way of knowing what comics actually walk out the door.  With a SBT system, publishers would know exactly.  A SBT system has benefits for both publishers and retailers.

The SBT system could also serve as the delivery system for electronic catalogs, industry insights (e.g. which comics are predicted to be hot), and even order placement and tracking.  If done correctly, a SBT system would streamline the ordering process and provide valuable metrics at the same time.

So, who would develop the SBT system for comics?  Any volunteers?  Realistically, it would take a partnership between publishers and the distributor to develop the software.  Each would have to share in the cost and responsibility.

Address Returns Of Unsold Comics

Another item addressed in the contract is the return of unsold merchandise.  At a minimum, comics must offer limited returns to bridge the gap between magazines and general merchandise.  My initial thought is to allow up to 25% of a monthly order to be returned, for a full refund.  However, there may be some economies for publishers to give even steeper discounts, but only offer a 60-70% refund on up to 25% of the product.  This will require some further analysis.  It may only work in favor of large publishers.

The three-tier system described previously also gives some protection on returns.  The contract would state that of the 25% of comics returned, they must conform to the 60/30/10% split for purchasing.  Let’s look at our 50 comic contract example again.  In that case, up to seven Tier 1, four Tier 2, and one Tier 3 comics can be returned each month.

This means better selling, more popular books potentially have the most issues returned.  However, they are the titles least likely to have large numbers of returns, because they are the most popular.  Returned comics can be offered again through the direct market if enough are returned. They also have other uses such as replacements for damaged comics on the direct market. The amount of returns on less popular titles in Tier 3 is much smaller, so the risk for publishers in this category is reduced. Any losses should be offset by the gains they get from other issues that aren't returned.

Also, if a publisher with a 50 comic per store contract finds that they are only selling 50% of their comics and returning 25% (thus loosing money on 25%), they can always lower their contract level to average fewer than 50 comics per store, thus cutting their losses and lowering returns.  Maybe there should even be incentives for doing so, instead of penalties as I suggested earlier.

Offer Compact Display Solutions

For comics to work in a retail environment, they can’t just be thrown on the shelves with magazines.  The spinner rack is dead too.  Comics need their own eye-catching displays that are modular, clearly display a comic’s entire cover, and have a small footprint to minimize floor space usage.  Also, they will either need to be cheap to purchase, or even offered for free to retailers at certain contract levels.  Again, publishers and the distributor will need to work together to design this new display system.

Summary

I think these are the needs of the retailer that the comic industry must meet to become a viable product in that market.  I’ve thrown out my thoughts on how they may meet these needs.  I’m sure there are many more.  Like I said at the beginning of the previous installment, this may not be the right answer, but maybe it will spark some ideas to get us thinking towards the right answer.  I’m just thinking Outside the Box.

The main concepts to take to heart are give retailers choice, sell at a price they can profit, share responsibility, and offer the tools that will help them sell comics.  This is how the industry will get its foot in the door and start getting back to the masses.

For my next installment, I’m going to elaborate a bit more on the role of the publisher in this new distribution concept.  But will publishers like what I have to say?  I hope you stick around to find out!

- Will Norris