The supply of national newspapers: A report on the supply of national newspapers in England and Wales

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Summary

On 19 August 1992 we were asked (see Appendix 1.1) to investigate the supply of national newspapers in England and Wales at two separate levels: first, the supply from publishers to wholesalers, and second, from wholesalers to retailers.

The newspaper industry handles a perishable product. Each night publishers despatch over 12 million copies for distribution within a few hours through wholesalers to retailers in England and Wales. By mid-morning most copies have either been home delivered or sold over the counter and by the end of the day those left are no longer in demand. We have borne these special features in mind in considering the somewhat unusual distribution arrangements in the industry.

We identified 22 daily or Sunday national newspapers supplied by ten publishers or publishing groups. These newspapers are distributed through almost 80 wholesalers. During the 1980s there were major changes in the way in which newspapers were printed and distributed. Publishers switched distribution from rail to road and moved from a system under which all wholesalers would handle all newspaper titles at their depots, to the current arrangements where each publisher has established about 180 distribution areas within which a single wholesaler is appointed with exclusive rights to distribute its titles. Some wholesale depots carry only a limited range of titles; others carry all titles but distribute for different publishers over differently defined areas. The net result is that no retailer has a choice of wholesaler and about 60 per cent have to draw titles from more than one wholesale depot. All newspapers are supplied to wholesalers and onward to retailers on sale or return (SOR) terms.

The scale monopolies

We identified a scale monopoly at each level of supply. In 1992 News International plc supplied over 31 per cent of the copies of national newspapers sold by publishers; W H Smith Ltd was responsible for a little over 30 per cent of the copies sold by wholesalers. We did not find either scale monopoly against the public interest.

The publisher complex monopoly situation

We found that the publishers' display of cover prices on newspapers and the setting of common retail margins, together with their adherence to these exclusive distribution arrangements, formed the basis of a complex monopoly situation.

We considered the effects of each of these practices. We found no evidence that cover prices had encouraged price leadership and led to higher prices. We concluded that even if they were removed, or if it were made clear that they were recommended prices only, it was unlikely that the change would lead to lower prices to consumers.

If retail margins were freely negotiated between wholesalers and retailers we would expect a system of variable margins to emerge, probably favouring the large volume and multiple purchaser but not on a scale likely to lead to price cuts to the consumer. While the present system may to some extent protect the inefficient retailer we considered that it had some advantages in maintaining availability at smaller and more remote outlets and in easing the entry of new titles.

The exclusive supply system offers retailers no choice of wholesaler; it thus removes a stimulus to wholesaler efficiency and inhibits entry and expansion into new areas. Publishers argued that the allocation of exclusive areas provided a rapid and effective distribution system for their titles and enabled them to maintain wide availability and to require the wholesaler to maintain supply throughout its designated area, even to outlets not directly profitable to the wholesaler.

We considered the effects of the present supply arrangements on costs, prices and availability in particular. Studies we carried out suggested that significant cost benefits would only occur if the removal of the exclusive supply restrictions led to fewer wholesalers each distributing all titles within a given area. This would arguably be less competitive and certainly offer no greater choice. We were not confident that, given the special circumstances of the industry, any cost savings would result in lower consumer prices. We were also concerned that a free market system in which all wholesalers distributed all titles would not be stable and would lead to greater concentration in favour of the four multiple wholesalers.

We therefore concluded that the publisher complex monopoly situation was not against the public interest.

The wholesaler complex monopoly situation

Not all creditworthy applicants who wish to retail newspapers are able to do so. It is long-standing practice for wholesalers to refuse supply where, in their view, `the area is already adequately served'. The practice is reinforced by a condition that the retailer must sell the newspapers only by retail and from his own retail outlet. We concluded that these two practices formed the basis of a complex monopoly situation.

With SOR terms available on all titles, newspapers are a virtually risk-free, and thus attractive, product to retailers. Currently about 60 per cent of applications for supplies of newspapers are refused and we received large numbers of complaints from would-be retailers, particularly convenience stores. The restrictions were, however, defended by wholesalers and by virtually all publishers on the grounds that, in a market where total sales had been declining for many years, if all outlets which wished to sell newspapers were free to do so, sales would simply be fragmented, and the home delivery and early opening hours offered by the traditional newsagent would be at risk; availability and sales would therefore suffer. They also argued that the present system, with higher proportions of applications by supermarkets and petrol stations being granted, was already responding to changing consumer demand.

We understood the concerns about availability and the protection of home delivery. We do not, however, consider that increasing the number of retailers need reduce the number of outlets offering home delivery. If, contrary to our expectations, fewer newsagents offered home delivery, it should be promoted directly by publishers and wholesalers rather than by restrictions on over-the-counter sales.

The present arrangements for considering retailers' applications for supply are inherently judgmental and result in some apparently arbitrary decisions. By favouring existing outlets, they protect poor performance by existing retailers and slow down the speed with which changing consumer needs are met. The wide variation between wholesalers in the proportion of applications granted indicates that some consumers are receiving a lower level of service and availability than would otherwise exist. We concluded that the restrictions operate and may be expected to operate against the public interest.

Recommendations

We considered a range of remedies for the detriments arising from the refusal to supply restrictions. We did not think the existing appeal system could be improved in ways that would meet our concerns. On the other hand we were concerned that complete removal of the restrictions could lead to a surge of new outlets and thus to sharp increases in unsold copies and higher costs. This would be likely to result in upward pressure on newspaper prices and might also put some existing outlets, and the service they provide, at risk.

We were aware that to introduce competition at one point in a distribution system which at present is regulated by essentially non-competitive rules is not easy. Remedies that would deliver clear benefits for consumers, by introducing more objective and market-related criteria, are difficult to find and their effects hard to foresee. We have not, therefore, pursued some of the remedies we examined.

We identified one remedy, however, which we consider would go some way to deal with the detriments we have identified. This would allow existing retailers to pass copies to other outlets or to sub-retail; it would enable such retailers to move supplies to respond sensibly to consumer demand, and provide a useful safety valve, within the limitations imposed by time and margin constraints, for those outlets at present unable to receive supply.

We consider that this relaxation would provide a useful, but not complete, remedy to the detriments we have identified and we recommend its implementation. We envisage that the Office of Fair Trading (OFT) will keep the situation under review and, if it became clear that the intended effect of the remedy was being frustrated, it would be for the Director General of Fair Trading (DGFT) to consider whether further action was necessary.

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