Inside the Wholesaler Distribution Dynamic

It's a living that depends on system irregularities.

BY LINDA RUTH

http://www.foliomag.com/2014/inside-wholesaler-distribution-dynamic#.U3p2uPldWMM

While readers of my blog often contact me with intriguing and sometimes unexpected information or ideas, it isn't often that anyone brings up topics that I don't think I already know something about.

Larry Scheur succeeded in doing that in a recent series of communications.

Larry is a real old-time independent wholesaler from Buffalo New York. He created "The Buffalo System," which pioneered the use of title- and retailer-specific formulas into order regulation. And he asserts that NO ONE truly understands the economics of magazine distribution from the wholesaler standpoint.

Based on what he's been telling me, that is certainly an assertion that applies to me.

What the wholesalers are saying about being unable to make money under existing conditions, Larry told me, is absolutely true. In fact, he says, wholesalers rarely-if ever-made money from sales. Profits, he says, came from "service charges, retailer under claims, retailer bankruptcies, return over claims, shortages, unreported overages, and special deals with national distributors."

Naturally I-like anyone who's been in newsstand distribution for enough years-had heard rumors of some irregularities in the old days of our business; but the concept that these irregularities might be so institutionalized as to provide the very basis of the survival of our business was (and is) astonishing to me. Larry, however, was willing to provide many examples.

"A highly respected EVP of a major national distributor once took to me to lunch," he offered. "He said he would approve all my affidavits, no matter what the claim, for a 10 percent fee. I was shocked and upset. He called after me as I ran from the restaurant, 'It's all right, I already have three wholesalers on board.'" 

The Buffalo System was, Larry tells me, the first single-entry returns system. The purpose of the single-entry system is to ensure that the total (bulk) sales on the wholesaler system reconcile with the sales tracked by individual retail outlet. 

As an example, Larry told me about a wholesaler whose system showed two programs. One was designated "OverReturn" and the other was named "ShortReturn." OverReturn added the totaled retailer returns for a title and issue and compared it to the wholesaler bulk record file for the same title/issue. If the retailer returns were higher, the program added a compensating amount to the bulk record for processing to the ND. The ShortReturn program functioned similarly. If the O&R returns totaled less than the bulk return, the program determined the missing amount and either created a stock account or multiplied returns over a determined number by the factorial difference.

Improvements in auditing and tracking must have cleaned up these irregularities to a fair degree, though Larry maintains there is still an element going on today. Although, he admits, there were some wholesalers-Bob Cohen of Hudson News was one-who kept everything strictly above-board. "He wanted everything legit," Larry said. "A very clean system."

Regardless of what may have happened in the wild-west days of magazine distribution, the situation is considerably more precarious today. I told Larry about a consultant who contacted me with to talk about "Plan B"-code for, "how are we all going to keep our jobs?" This consultant asked, "Even with all of the recent technology, how are returns going to be handled if, as some people have suggested, we bypass the wholesaler? What happens to the affidavit? Can the retailers scan returns the way the wholesalers can? And doesn't setting up direct relationships give the retailer a license to steal?"

Larry thinks there are possible direct-distribution-based solutions to our current predicament; and to put them in place he suggests, as another former independent wholesaler did not long ago, going "back to the future." 

His suggestions:

1) Re-implement the once highly successful Family Circle/Woman's Day direct model, devoid of national distributor involvement, utilizing cross-docking. (Cross-docking is a term used in shipping logistics that involves moving product from truck-to-truck without the intermediate warehousing; WalMart has used it to move retail product since the 1980s).

2) Similarly, Larry suggested, the industry should take a look at the once highly controversial Kresge/TV Guide system. This system, Larry explained, was similar to the Family Circle/Woman's Day model, with the addition of expedited delivery. "TV Guide printed on Saturday and shipped 20 million copies with over 170 editions to wholesalers expecting Monday on sale," Larry explained. "TV Guide made deals with national chains-Kresge, Neisners, F.W. Woolworths, W.T Grants, etc.-that were not typically wholesaler serviced. They required the wholesaler to deliver the predetermined allotment as well as collect the unsolds (if any) for a small fee paid by TV Guide. A store stamp verified delivery. As some of these stores were in rural areas, wholesalers sometimes used busses and trains, hiring a delivery agent in these areas. A reship allowance was paid by Triangle Publications to wholesalers providing this service.  

These solutions, I thought, appear tailored to the large general-interest publications whose day has come and gone. What about the special interest publications and the independent publishers?

Systems today, Larry pointed out, are also tailored around those mass-market publishers. "Look at the Order & Regulation systems," he said. "Prior to UPCs, only 10 percent of titles were tracked issue by issue. Comparatives worked. They built the crosswords category. Wholesalers maintained O&R on the top two or three crosswords and used those sales to determine retail store allocations for the rest of the line."

What does that mean for the special-interest publisher? I asked. Was he expressing the idea that a more targeted publisher can be hurt by over-regulation?

But Larry was talking about more than a publisher or a publication. His point was that a whole category-a whole industry-can be hurt by over-regulation. "O&R destroyed comics," he said. "You start a downward trend which then negatively affect allocations. Thirty percent sell through-what you get with the niche publications-needs no O&R. Look at history, and you will see how it works."