Scan-Based Trading’s Hold-Up
Fully adopting SBT is a complicated, gut-wrenching situation.
One’s perception of the value of scan-based-trading (SBT) for magazines varies widely depending on whether you are a retailer, wholesaler, national distributor or publisher. If you’re a retailer, you love it, but the other channel participants are far less sanguine about it. But regardless of one’s position, there is no mistaking SBT’s inevitability or its critical place in determining how business will be conducted in the newsstand channel.
SBT has resided on the periphery of the newsstand industry for nearly a decade. It’s been reviewed, tested, discussed and exhaustively analyzed by chain retailers, wholesalers and national distributors. But only in the last year has the process achieved sufficient scale to help demonstrate its inevitability as a trading option for magazines. Today, more than 25 percent of magazines distributed by wholesalers are done under SBT agreements. In the next few years, SBT is realistically expected to exponentially expand.
Conceptually, SBT will significantly reduce expense, improve efficiency, ease the return handling burden and generally help streamline an archaic system. It sounds like it’s a pretty good thing, right? Well, not exactly.
What’s Holding Back Full Adoption of SBT?
The central problem is finding a way for the newsstand channel partners to equitably share SBT’s costs and benefits. This would seem to be a relatively easy task. (On the contrary, fully adopting SBT is the most complicated, gut-wrenching situation ever faced by the magazine distribution industry.)
To understand the severity of the SBT issues facing the industry, a little background information may be useful. The most important thing to know is that SBT is not currently an industry-wide initiative. It is being conducted between only retailers and wholesalers. National distributors and their publisher partners have chosen not to participate in the process. That, of course, raises the question: why haven’t national distributors/publishers joined the SBT party?
The answer to that question lies deeply rooted in the history and culture of the newsstand business. The magazine distribution system, unlike most systems bringing product to sale at retailers, has two middlemen—wholesalers and national distributors. The relative complexity of the magazine product line (thousands of different products, return processing, etc) requires the services of both. But having two middlemen has greatly escalated the prospect for disagreements and conflicts of interest.
If truth be known, there has always been an uneasy truce between wholesalers and national distributors. Compounding the inherent difficulties of the wholesaler/national distributor relationship is the lack of unanimity of thought and action within either the wholesaler or national distributor communities. This has led to “intramural competition,” which, from time to time, has been detrimental to the best interests of newsstand channel efficiency.
Business life in the newsstand channel has never been without tension or conflicts of interest. Now SBT has been tossed into that messy stew. SBT has heightened areas of contention among all four major channel participants. But it’s the issues that divide wholesalers and national distributors that are the most critical. Wholesalers, largely out of competitive necessity, developed SBT agreements with retailers. But in doing so, they’ve taken on a huge financial burden.
National distributors have held back from participating mainly because they felt that the SBT financial terms are too heavily weighted in favor to the retailer; that the agreements did not meet minimum system and security guidelines (all the major national distributors have published papers outlining their SBT system requirements); and, in general, they felt that wholesalers entered into these agreements without proper due diligence. Wholesalers, for their part, believe national distributors (and by inference, publishers) have not been properly sensitive to the changing market conditions that have made adopting SBT a priority for retailers. Nor do they feel that national distributors have been empathetic to the SBT-related financial burden they have assumed.
The SBT Stalemate: A Lose-Lose Situation
The hope for industry-wide SBT program is now stuck in a stalemated situation. This poses a grave danger for the entire industry. SBT has, in effect, been endorsed by the mass merchandiser retail community and it’s going to move forward with or without national distributor/publisher participation. But—and this is the critical consideration —it can never achieve its hoped-for efficiencies without national distributor participation.
The Importance of Breaking the Stalemate
Now let’s be frank about SBT’s benefits. Even a more equitable division of costs and benefits is still likely to heavily favor the retailer. The retailer derives immediate and substantial benefits from SBT. For wholesalers, national distributors and publishers, it’s unlikely there will be any significant benefits in the short run. But it will undoubtedly provide significant long-term cost saving benefits that accrue from an improved and more efficient distribution channel.
In addition, wholesalers, national distributors and publishers must, to some extent, look beyond prospective cost savings and take the long view in considering SBT’s merits. They have to carefully consider the importance of what SBT can do in simplifying, for retailers, the often-convoluted process of selling magazines. It is the single most vital action that the channel partners can take to cement relations with retailers and help insure the long-term viability of the mass merchandiser participation in the sale of magazines. SBT requires upfront sacrifice from wholesalers and national distributors, but in the long run, it’s likely to be the best alternative for protecting the newsstand business.
Let’s Get It Done
It’s imperative that SBT become an industry-wide initiative. This means wholesalers and national distributors must settle their differences. I don’t want to underestimate the difficulty of reaching agreement. The issues (shrink, inventory control, system security and transparency) dividing wholesalers and national distributors are unbelievably thorny.
But in a SBT study conducted by John Harrington and myself (copies of this report can be obtained by contacting John Harrington at email@example.com), it was revealed that there were no issues dividing the parties that were so intractable as to be considered as “deal breakers.” What’s required is for wholesalers and national distributors to immediately begin the process of negotiating, in good faith, a SBT accord. It’s possible to do this. Stop wasting time —let’s get it done. As the Harrington/Davis SBT report indicated, “no less than the future viability of the newsstand trade with mass merchandisers is at stake here.”