Newspaper and magazine industry professionals believe the looming regional monopolies of wholesale giants Smiths News and Menzies Distribution will leave small, independent UK publishers facing an uncertain future. They also believe newspaper and magazine publishers are guilty of "short-termism" in helping to engineer a two-wholesaler system.
Historically, the news wholesale industry has accommodated three multiple wholesalers - Dawson Holdings, Smiths and Menzies - and numerous independent wholesalers.
But Dawson Holdings is winding down its magazine and newspaper distribution division, having lost £528m-worth of contracts to Smiths and Menzies, including Trinity Mirror, Frontline, Comag and Marketforce. From July, Dawson will also lose £81m of business from News International, publisher of The Sun and The Times.
News International has also terminated its contracts with all independent wholesalers, placing this business with Smiths and Menzies. The loss of the bread and butter contracts means that from 5 July, all but three independent wholesalers face an uncertain future and could be forced to cease trading.
The plight of the independents and Dawsons, which employs 2,800 people in its news division, means it is now almost inevitable that Smiths and Menzies will operate vast, unopposed regional monopolies. Menzies will hog the North of England and Scotland, while Smiths will dominate the remainder of the territories.
This prospect has prompted Dawson Holdings chief executive Peter Harris to write to MPs, urging them to call for the Office of Fair Trading to re-examine the distribution of newspapers and magazines - just months after the OFT concluded a protracted probe into the sector.
Following a six-year consultation process, the OFT decided last October that the newspaper and magazine distribution market need not be referred to the Competition Commission.
UK wholesalers have traditionally enjoyed "absolute territorial protection" to distribute newspapers and magazines, meaning they have exclusive access to specific areas of the country, and that retailers stocking newspapers and magazines cannot choose between different wholesalers.
The OFT said newspaper distribution would continue to be protected by an opt-out from competition law, citing the time sensitivity of newspapers, but declared magazine sales were not subject to the same time sensitivity and that there should be scope for competition. The OFT stressed its views were guidelines only, but has urged the industry to adopt them.
The Periodical Publishers Association - which counts the major magazine distribution companies (see box) among its associate members - attacked the OFT's opinion on publication of the report. Then PPA chief executive Ian Locks said at the time: "The OFT has clearly recognised there are benefits to the system of exclusive wholesaler territories. It would be helpful for this principle to be recognised for magazine as well as newspaper distribution."
But Harris says the Smith-Menzies situation "has driven a coach and horse through the intention of the OFT opinion" and that instead of promoting competition in the marketplace, "you'll have two entrenched regional monopolies".
He says it was Frontline that "decided to go from a three-wholesaler magazine network to a two-wholesaler network" when, in March, it took £116m of Frontline and Seymour business away from Dawson and awarded it to Smith and Menzies.
"This meant we were excluded from all Frontline titles in the UK, which made it almost impossible for the other magazine distributors to use us, because we can't offer a full sheet to retailers," explains Harris. "As such, there would be two magazine suppliers calling on all retailers, which is not economic to the retailers or distributors."
Harris describes the move to a wholesaler duopoly as "short-termism" on the part of newspaper and magazine publishers and predicts: "They will come to regret it in the years to come."
Asked if Smiths and Menzies will look to pass on the costs of bidding all competition out of the market to publishers - so obliging publishers to raise cover prices - Harris says: "I think that's a very believable scenario."
However, Stephen Hirst, managing director of IPC's distribution arm Marketforce, counters this view. He says: "There is every reason to believe both Smiths and Menzies will be able to operate more efficiently with larger territories and we would expect such benefits will pass through the chain through investment in service improvement for retailers and publishers."
Andy Taylor, head of magazines at Carat, warns that publishers are already "touching the bottom of their pockets" and that if Smiths and Menzies impose big price hikes, they face a "savage rejection" from publishers.
He says: "Ad revenues are dropping on average by 15 to 20% year on year. When magazines can't get this back in cover price, titles such as Arena and Maxim are closed down. Magazines can't take a further push from the other side of the business."
Taylor suggests that should the cost of getting to retail increase, publishers may well lean more heavily on subscriptions - a move that would be viewed favourably by advertisers.
"Advertisers and media agencies absolutely adore subs," he says. "With subs you are not talking to a dip-in, dip-out readership, you are talking to what we class as the DNA of a magazine - the religious monthly reader."
Candis magazine, a bi-monthly, paid-for women's title published by Newhall Publications, might provide a template for publishers seeking to bypass increased wholesale costs. It is the eighth best-selling magazine in the women's lifestyle sector, yet relies exclusively on subscriptions, which currently stand at 275,919.
Both Smiths and Menzies deny they plan to increase the price of wholesale. Mark Cashmore, Smiths News chief executive, says it is "nonsense" to suggest it will raise distribution costs to publishers. "We have just agreed new five-year contracts that give certainty on this issue."
Menzies Distribution managing director Ellis Watson says: "The magazine industry is in a prolonged, gradual decline, which means we're unlikely to see big sales growths on the horizon. The best way for us to protect and increase our profits is to remain extremely competitive. On that basis, you'll see Menzies competing harder than ever for new business in five years' time."
Yet Dawsons' Harris is adamant that publishers face "a much more difficult renewal in five years", because "there will be no leverage whatsoever for the publishers, distributors or retailers against the wholesalers". He says: "Those contracts will be a lot more expensive. Volumes will be down because the industry is declining and that will be used as the excuse to ramp up prices."
Yet it is the small, independent publishers of regional and niche titles that face the most uncertain future. While major publishers can insist Smiths and Menzies "piggyback" low-margin, niche titles to retail on big-selling titles, boutique publishers have no such option and many rely on independent wholesalers to get to news-stand.
The managing director of one doomed independent wholesaler told Media Week that small publishers are faced with two options: being bought out by a major publishing house or paying extremely high margins on their cover price to Smiths and Menzies.
The wholesaler, who asked not to be named because he wants "as many of my people as possible taken on by Smiths and Menzies", says: "It's going to be so difficult for the smaller niche publications that aren't covered by a major publishing house umbrella outfit like Frontline or Seymour.
"Smiths and Menzies have gone in at silly rates to win business, but it's not sustainable, so they'll have to go back and ask for more at the next round of contracts. But niche publishers who do not have existing contracts with Smiths and Menzies will go in at high rates from day one."
Market forces: How Smiths and Menzies came to dominate distribution
Last week's loss of the £65m distribution contract with Trinity Mirror was the nail in the coffin for Dawson Holdings, which now intends to close its entire magazine and newspaper distribution operation.
Dawson Holdings, which reported a pre-tax loss of £17.4m for the six months to 28 March, is set to lose eight major distribution contracts in the next 18 months.
These include the £75m contract with Marketforce, the £55m business with Comag, the £83m Frontline deal and the £33m contract with Seymour.
When these deals expire in 2010, the distribution deals for the UK's leading magazines will be split between Smiths and Menzies, which will take a 55% and a 45% share of each contract respectively.
The four major magazine distribution companies are:
Frontline Jointly owned by Bauer Consumer Magazines, BBC Worldwide, Haymarket Media and H Bauer.
Seymour Distribution Half-owned by Frontline and Dennis Publishing. Combined with Frontline, Seymour accounts for 42% of the UK's magazine market.
Comag Joint venture by NatMags and Condé Nast, with a 23% market share.
Marketforce Part of Time Warner, Marketforce is the newstrade sales, marketing and distribution arm of IPC Media.
Clarification (16 June, 2009)
News International would like to clarify that it has not terminated all its contracts with independent wholesalers. The newspaper publisher revised its wholesale contracts in 2008 and retains contracts with Dawson, Smiths and Menzies, in addition to independents Weller and Dash. These contracts come into effect on 6 July, when, as previously announced, News International will also begin a direct to retail service in the London and Birmingham areas.