The Rapid Rise of The News Group

The breakneck growth of The News Group in 2009, thanks largely to its acquisition of Anderson News’s assets, has given it close to 50 percent market share—almost double its previous footprint—and unprecedented leverage with retailers. The impact of the wholesaler’s size and influence will be a major factor in the years ahead.

The News Group U.S. is the Smyrna, Georgia-based division of the Canadian distributor and part of the massive Vancouver, BC, Canada-based Jim Pattison Group, which had sales of $6.7 billion in 2009 with holdings in the automotive dealership, packaging, food sales and distribution, and export and financial industries.

The News Group entered into the U.S. in the late 1990s by partnering with several regional wholesalers and grew its footprint in the country with a model based on limited partnerships. “[The U.S. Group] was created that way to service the U.S. without having to invest in the infrastructure,” said David Parry, president of The News Group U.S. “It gave us the ability to go to national chains and service those locations in a broad sense.”

Now, the Pattison-owned portion of the group is 65 percent, with 35 percent representing LP-agencies. Those distributors are separately-owned and operated with their own P&Ls, said Parry, who added that Pattison has first right of refusal. In other words, if one of the LP agencies wanted to break away, they’d need to go to Pattison first.

The limited partnership model gives The News Group a shared resource structure and fixed-cost efficiencies. “It’s a marketing, promotions and accounting joint venture,” said Parry. “We can work with our retailers on a national basis and bid with them. It’s the same thing with purchasing—we’re one voice to the publishers. We can consolidate our data and look and feel as one entity to simplify the process.”

The Anderson Factor

In February 2009, wholesaler Anderson News abruptly shut its doors, blowing a chunk of the supply chain right off the rails and brought, for several months, magazine distribution to a standstill. About 25 percent of the market was suddenly up for grabs. The event spooked everyone—from publishers to retailers—and highlighted in stark relief the frailty of the distribution channel.

The News Group quickly stepped into the void and hammered out a deal to purchase what was left of Anderson. That action is widely credited with mending a fatally broken supply chain after the Anderson implosion.

The News Group picked up 15 of Anderson’s major distribution centers, 60 depots, 1,300 trucks and hired 4,000 employees. “We hammered out the deal in about 48 hours and did the rest in about 60 days,” said Parry.

All told, Parry said The News Group spent in the high seven figures, with investments ongoing in scan-based trading and other infrastructure.

Bigger Size, More Leverage

Now, however, we’re left with a very different distribution landscape with The News Group commanding a 46 percent market share, according to Parry. That size gives the wholesaler some obvious benefits, but those benefits trickle back to publishers, too, he said.

Along with Anderson’s assets, The News Group took over distribution into 10,225 stores.

News Group’s new size and the shock of the near-collapse of the distribution chain helped the wholesaler negotiate more favorable terms with retailers, which have historically been the 900-pound gorilla in the room. Parry said he struck new, multi-year contracts with retailers, and confirmed rumors that he shaved a “couple of points” on the terms in his favor.

“The fragmented nature of the business was the biggest point of leverage,” said Parry. “The fragility of our business was our greatest asset to reworking the deals. The retailers had to reconsider the margins they were getting in the category.”

Those terms may be favorable now, but what happens when contracts are up for renewal in a few years? “They’re sustainable,” reassured Parry, who seemed to think there was only one direction to keep moving in. “It’s human nature to try to get more,” he said, referring to retailers who might try to negotiate terms back in their favor. “That might be the situation, but the question back to the retailers is how steadfast they are in maintaining profitability. I can say we will not go back. We were 12 years with losses.”

Over the last several years, those losses have been diminishing. The News Group, prior to Anderson’s closure, had already been working on improving its deals, consolidating its infrastructure and distribution centers, and reorganizing management. “We saved $10 million to $15 million in operational expenses,” said Parry.

Those actions will result in a projected profit in 2010. “It will be a mild profit, but it’s better than losing money,” said Parry.

Going forward, Parry said that they’ll continue to look at operating costs and try to keep them as low as possible without impacting service levels. He said the company will turn to publisher accounts and examine them for efficiencies, promotional involvement, cover pricing and “which ones pay their way and which ones don’t” in an effort to adjust margins wherever possible.

“There’s no way around the fact that they took on so much business that costs skyrocketed,” said Rodale’s senior vide president of retail sales Richard Alleger. “In my view they must have looked at every account and how valuable it is and how many resources they could put against it. As a publisher I applaud that. Anything they can do to make themselves more financially solid is a good thing.”

SBT Still on the Table

Scan-based trading is still a looming and contentious issue. Parry said fully 60 percent of News Group’s volume—driven by Wal Mart, Target, Safeway, Kroger, and others—is handled with SBT, noting that represents “millions of dollars sitting on wholesalers’ books. We’re taking all of that inventory as a receivable and creating a liability. The banks look at it as debt, not equity. That’s where, in the future, the wholesalers are going to need help from the publishers.”

Yet publishers, who’ve long used their national distributors such as Comag and Time/Warner Retail Sales and Marketing, as a shield-like go-between in deals with the wholesalers may not be ready to get directly involved. “‘Publisher’ is an open-ended term,” said Alleger. “While I’m a publisher, I don’t have a contract with the News Group, my national distributor does that. Any discussion on that line will have to go through the national distributor, regardless of how I feel. That is where the discussion is going to have to happen.”

Keeping Product on Shelves

With all the business that The News Group picked up, publishers are concerned over its ability to merchandise magazines consistently. Rife with turnover, merchandising requires bodies in stores to make sure titles are stocked and restocked. “[The News Group has] to find all these folks to merchandise on a regular basis,” said Alleger. “Most of those jobs are the most difficult in retention. I can’t even imagine the juggling they have to do.”

Parry, however, is confident the merchandising end is taken care of. “With the addition of our Select Merchandising team and our partners, we have over 7,000 merchandising employees working our retailer displays today. We have never been in a better position to service and execute on behalf of the publishers.”

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