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Breaking the chain

01 July, 2005
Small retailers could be worse off if Office of Fair Trading proposals for magazine supply chain reform are realised
Page 14 
Independent retailers could be discriminated against by newspaper and magazine wholesalers if the Office of Fair Trading’s (OFT) proposals for magazine distribution become law, according to the National Federation of Retail Newsagents (NFRN).
In response to the OFT’s consultation document on its draft opinion on newspaper and magazine distribution, the NFRN has expressed concern that the OFT proposes to leave newspaper distribution untouched while relaxing the absolute territorial protection that currently applies to magazines.Under existing distribution agreements, newspapers and magazines are distributed to retailers through a system of exclusive territories, reinforced by territorial protection, preventing retailers from seeking a better deal elsewhere. Absolute territorial protection would normally be banned under competition laws.The OFT has said that retailers should be free to seek better deals on magazine supply than those offered by the appointed wholesaler for their territory by approaching other wholesalers – so called ‘passive selling’. “Absolute territorial protection prevents alternative, and potentially more efficient, arrangements for magazine distribution emerging,” it claimed.“Where substantial efficiencies arise from distributing magazines jointly with newspapers, as will often be the case, joint distribution is likely to continue naturally, unforced by anti-competitive restriction.”The consultation document also states that the OFT is satisfied that the restrictions on newspapers must remain to ensure “the benefits that flow from the agreements” – in particular, the very narrow overnight time-frame for distribution and the newspaper Code of Practice, which requires wholesalers to supply all retailers within their exclusive territory meeting the minimum supply level.The OFT sees this obligation, which it claims ensures that even small and remote retailers can stock a full range of newspapers, as one of the key benefits justifying the current system. The newspaper code does not extend to magazines.But while the NFRN welcomes the fact that supply chain agreements between publishers and wholesalers are going to be exposed to scrutiny under existing competition law, Peter Wagg, immediate past president of the NFRN, said: “While the OFT has stressed the importance of maintaining a strong independent retail sector, it is disturbing to see that it has failed to recognise that passive selling without appropriate controls would lead to discrimination between retail types.“While a group of supermarkets or a chain of multiple retailers could negotiate a deal with an alternative wholesaler in another territory, supply to a lone independent newsagent would be prohibitively costly.” The NFRN also refutes the OFT’s assessment that magazines are not time sensitive and Wagg has expressed concern that it has “completely failed to understand the inextricable link” between newspaper and magazine distribution which, by and large, are distributed by the same wholesalers, in the same vehicles at the same time.“Splitting newspaper and magazine distribution by creating different rules could be disastrous,” said Wagg. “This would undoubtedly add further cost to distribution which would be passed on by wholesalers to retailers. Rather than preserve the network of independent newsagents for the benefit of consumers as a whole, this draft proposal could have just the opposite effect.”However, there is an evident split in opinion between the NFRN and the Association of News Retailing (ANR). John Lennon, managing director of ANR, said: “We welcome the fact that the OFT’s provisional ruling has linked newspaper exclusive territories to the industry Code of Practice because with monopolies comes responsibility and the code ensures that all retailers will go on receiving newspapers, and therefore, obviously magazines.“We also welcome the small step towards competition in magazine distribution through the introduction of passive selling but we are continuing our talks with the OFT to push further our case for a more efficient supply system.”Meanwhile the NFRN states that it would have been more appropriate for the OFT to refer the news industry to the Competition Commission for a full market investigation, rather than “attempt a piecemeal solution that lacks logic, backed by a rationale that is contradictory and demonstrates a disturbing lack of understanding”.As an alternative to a full market investigation the NFRN is suggesting that the OFT should use its powers to allow the news industry to produce its own comprehensive and legally enforceable Code of Practice. This would embrace controlled passive selling for both newspapers and magazines (to deal with cases of persistently bad service from a monopoly wholesaler); include improvements within the supply chain to deliver better service to consumers; and introduce better news industry self-regulation, under the watchful eye of an independent industry ombudsman.The OFT is expected to make its final decisions on news supply within the next few months.