Can magazines really compete as online retailers?

Magazines are perfect for ecommerce. Or are they?  Well, the major online women’s retailers – like Net-a-Porter, ASOS, HauteLook, TopShop and Groupe Gilt – use content in magazine-like ways. They employ a raft of former editors and, tantalisingly, either collaborate with magazines or advertise (just a little) in them. They also produce online magazines. And ASOS even publishes a hard copy one.

These powering sites represent the fusion of retail and media, just like Amazon with its film production and ebook publishing. The ecommerce pioneers are moving quickly to build strong retail-media franchises. Magazine publishers now know that online retailing is the competition. They hope it is also their opportunity.

Like the rising tide of free magazines (see recent Flashes & Flames post), these sites are also effectively giving consumers free editorial with the convenience of click-through shopping. Advertisers are building sales and data – and paying only by results. And even the Gilt and HauteLook membership-only approach strikes a chord with consumers, familiar with the ‘community’ of their favourite magazine. So everybody’s happy – except, perhaps, paid-for magazines watching enviously from the sidelines.

That is the temptation and the challenge for the world’s magazine publishers, at a time when copy sales and advertising in most developed economies have continued sliding – and when ecommerce is widely considered to be the salvation.  But there are three fundamental questions:

1. Can magazine publishers successfully compete as online retailers?
2. Will ecommerce slash magazine advertising revenue?
3. Will it accelerate the growth of free publishing (and does this matter)?

The Hearst Corporation might be expected to have the answers. It is the world’s largest women’s magazines publisher – and the most international magazine business of all.

Hearst is a comforting web of cosy contradictions. It was founded 125 years ago by Citizen Kane himself, the late William Randolph Hearst – the first Rupert Murdoch. As if in the old man’s memory, his company carried on piling into newspapers long after it was fashionable – and into money-spinning cable TV long before it was. It has become the much-envied leader in the international licensing of magazines: its legendary Cosmopolitan (still sexy after all these years) is published in 64 countries and 35 languages. And, just as magazines were in a tailspin and being divested by major companies across the world, Hearst enthusiastically paid Hachette $900m to create a worldwide business of 300 magazines in 80 countries.

Hearst is now breathing down the neck of the leader, Time Inc. But there is a big difference: Hearst loves magazines and Time Warner wishes it didn’t have to. Hearst Corporation is booming. This year’s revenue is expected to reach $9bn – an increase of 400% in 25 years. CEO of the family-controlled media group is the affable and sharp-as-tacks Frank Bennack. He is (you would not guess) 79 years old and has been with Hearst for 50 years. In this, his second spell at the helm, Bennack has a plan. And, of course, it is very digital.

But who would have bet on Hearst setting the pace for magazine publishers searching for a new role in ecommerce? Well, soon after buying Hachette, the company started picking the brains of its managers in iCrossing, the digital marketing agency it had acquired in 2010. iCrossing began life all of 14 years ago as a search marketing agency before we had heard of SEO. It can now be seen as a highly strategic investment for a traditional media company in pursuit of transformation.

Hearst is using iCrossing and Core Audience, a newly-acquired data management company, to explore new ways of targeting specific website content at readers based on their interests and personal information. When searching for hair care hints, a fair-haired reader might see suggestions for achieving the perfect shade of blonde. And although Hearst’s E-Commerce Council sounds just a shade bureaucratic, it has been learning fast from relationships with Amazon, Net-a-Porter  (now owned by Swiss luxury company Richemont) and HauteLook (owned by US retailer Nordstrom). Two Hearst ecommerce ventures, cladmen.com and giftinggrace.com with retailer J.C.Penny, failed along the way. There’s been a lot of experimenting.

Marie Claire et al notched up c$2m of revenue from the HauteLook deal. The Amazon deal runs right across Hearst’s US magazines: On Good Housekeeping‘s web site, editorial product reviews are tagged with click-to-purchase availability at Amazon. But it was the company’s prestigious 150-year-old Harper’s Bazaar click-through deal with Net-a-Porter that really turned Hearst heads. It confirmed for the publishers what they already thought: that Net-a-Porter is a highly-successful magazine-like business – and they could do it.

This month, Harper’s Bazaar took the plunge and launched ShopBazaar. It’s an online marketplace with editorial content and editor-selected product that readers can click to buy without having to move away to retailers’ web sites. The site is all but sponsored by Saks 5th Avenue (which is supplying some 80% of the merchandise) and the tablet editions are sponsored by American Express but it is clearly a major strategic move.

The service is starting as membership-only but is thought likely to go free very soon. As part of the increasingly blurred distinction between editorial and money-making content, “shoppable” items will also appear in the print magazine with icons indicating their availability on ShopBazaar. Beginning early next year, readers will be able to shop the magazine’s pages by smartphone. The publisher says: “This is our brand moment. We will be a brand you read about and a brand you shop.” Just like the London-based Net-a-Porter.

So this is the start of a fightback  by magazines against the magazine-like online retailers which have been been eating their lunch.  And it’s not just that. It’s the the chance to see if one of the world’s best magazine publishing groups is up to it. And also to see whether ‘it’ will be worth fighting for. (After all, few retailers of any kind have margins to match the best publishers).

Women’s magazine editors the world over have admired Net-a-Porter for the past 12 years. And many have those distinctive sturdy black ‘Net’ boxes same-day delivered to their offices in London and Manhattan to prove it.

After all, the most stylish of online retailers was founded by one of their own, Anglo-American fashion journalist Natalie Massenet. She had cut her teeth on Woman’s Wear Daily in New York and Tatler in London before founding Net-a-Porter in 2000. She sold her stake to Richemont for £50m a decade later.

Ms Massenet is still executive chairman of Net-a-Porter, has reportedly reinvested £15m in the business, and has extended it with an ‘outlet’ brand and a men’s site, Mr Porter. Turnover is now said to be more than $300m and climbing fast. This stylish business is growing in great style, even in recession.

So ‘Net’ – and also the fast-growing, mid-market fashion digital ASOS – comprise one type of ecommerce competitor for traditional publishers: online specialists which have built strong shopping audiences with a magazine flavour. But there are many others. A reminder that deep-down editorial skills are not the exclusive preserve of traditional magazines comes from New York-based  (but coming soon to London) Refinery29. This six-year-old site describes itself as “a fashion-focused online lifestyle magazine” with a monthly readership across America of  5million. It has been able to carve out a niche for itself as the city-by-city promoter of emerging fashion designers. A big niche.

Refinery29 has some $20million of advertising revenue and, after two years of  offering discounts and special offers to readers, it has just launched fully into ecommerce. Readers can now add editorially-featured items into a shopping cart, choosing from multiple brands and retailers. This relationship with key retailers will make Refinery a logical acquisition for one or more of them in the next few years – as retail sites become more media. Something else for magazine people to worry about – or beat them to it.

Hearst is not, of course, the only media company hoping to push hard into ecommerce. US readers of People, Wired and Coastal Living magazines are able to tap on their digital editions to buy products respectively through iTunes, Amazon and homes site Wayfair. And many US publishers are going all out to make Kindle Fire editions shoppable by linking products to Amazon – in exchange for a cut of sales. Time Out  in New York and London sells event tickets online, Time Inc’s Real Simple magazine has released a mobile gift guide that allows users to purchase from advertisers’ web sites. And there is ecommerce water-testing everywhere.

In August, Conde Nast’s Lucky’s site featured thousands of editor-approved items, and slimmed-down versions of websites from retailers, such as Sephora and Macy’s.  At the time, it told The New York Times that it expects to earn about 3-15% of each sale. In menswear, GQ has partnered with retailers Nordstrom and Gap, featuring “editor-curated” items which can be purchased on the retailers’ websites; and will also appear in a monthly print feature.

Many magazines have increasingly blurred the line between editorial and commerce, lending their names to products and shopping sites. Now, they are tempted to close the circle. There are obvious dangers in a perception of  ‘pay-for-play’. As publishers tighten their relationship with retailers and make money directly from sales of products they review, they risk losing the editorial independence which might be all that separates them from being, well, retailers. Bang go the paywalls.

Rodale, the family-owned publisher of Men’s Health, Prevention and Runners World, may be diving deepest into ecommerce with Rodale’s, due to open in Spring 2013. Rather than “merely” being a platform for ordering items from retailers, the company plans to be in full control of the business by buying the merchandise itself and holding the stock. “This is a stand-alone business,”  Rodale says. “When you do these affiliations with a Gilt, you’re just getting a piece of the pie. We’re going to buy these at cost and sell them at retail, just like a specialty store, so there’s a bigger margin there.”

That feels like a bit of a leap for a publisher. But, then, specialist media may be able to pull off this ultimate role as a ‘mediatailer’ whereas larger groups in more competitive markets might find it more difficult. That may be the thinking too behind a smart initiative by the UK-based specialist publisher Future, which has announced the launch of an ecommerce craft site called “The Making Spot”.

The digital-savvy UK publisher has been trailblazing the use of iPad apps for its international portfolio of mainly tech and hobby magazines where digital editions may, over time, become a more profitable alternative to its international licensing and copy sales.

Future is now bringing together content from across its lesser-known but extensive craft portfolio (knitting, stitching and making stuff) to offer readers: “thousands of projects and patterns, including both free and paid-for downloads, to inspire and excite. Users can enjoy a wealth of resources for every skill level and budget.”

This brilliantly simple site includes free online step-by-step tutorials and users can compare notes and tips on their latest projects by creating a personal profile, complete with a photograph on the website. Like many good niche business ideas, it is almost under the radar in a market where the likes of Hearst, Time and Conde Nast are trying to find ways of competing with the world’s smartest retailers.

Those “church and state” journalistic issues also seem (slightly) less likely to trouble specialists like Rodale and Future. Then, publishers “only” have to contend with the problem of whether people are likely to click-through from an article they are reading to buy something. “Is that the mode they are in when they read about a product?” as one researcher asked. Which goes to the basic point: how well-suited really are magazine publishers for ecommerce? Does the editorial actually stand in the way?

Hearst asserts the continuing independence of editorial : “We’re not saying to the editor, ‘you should be reviewing pots and pans’. We’re taking their editorial perspective and applying it to what we feature.” Well, yes, but you can tell where this is all going, and how conflicts of interest simply must arise.

Magazine publishers are naturally being drawn to online retailing – apart from anything else – by its fantastic growth prospects. Currently, it accounts for some 9% of all retailing in the US (up from 5% in five years), 10% in the UK, 3% in the AsiaPacific – and 2% in South America but growing at 40% pa, predominantly in Brazil. Most observers online sales to account for 15-20% of all retailing globally, so there’s a lot to play for – even though the fusion of online and offline retailing will intensify the competition.

These are tough times for magazines, some of which had so recently been accustomed to 20% profit margins and solid market positions. Now, they are wrestling with competition from online-only magazines, from retailers (new and old),  and even from YouTube. And they are trying to get to grips with video, mobile and interactivity, not just in ecommerce. It is the combination of declining revenues and the available technologies that has emboldened publishers to think they can become retailers. And some will make it. Even if they find themselves competing in a cut-throat world where their market positions are less secure and not as profitable.

But there is ecommerce and ecommerce.

At one end of the spectrum is the process of getting readers to click-through to purchases from retailer sites – and there is no doubt that this will be a hugely important area for publishers of magazines on the web. At the other extreme is the apparent opportunity for publishers to use their brands, content and relationships to become fully-fledged retailers.

It is tempting to conclude that many major publishers (in large, highly-competitive retail markets) will find this as risky a business as, in earlier generations, some of them found the business actually of opening shops or operating TV channels. It is easy to feel that the Total Retail approach of web ‘channels’ which combine ecommerce with editorial content is more sustainable for publishers in specialist markets. In larger markets, many retailers will be formidable competitors – and will be increasingly well-armed with the editorial content, design and community that publishers once thought was their own special act.

Nobody doubts that some of these publisher-led ecommerce initiatives can become very attractive businesses.  And some of the companies talk loudly about how they are already experienced ecommerce operators because they sell online subscriptions to readers. But the ecommerce we are discussing does, in fact, pose significant challenges to publishing businesses with no guarantees that the switch to retailing will be worthwhile. This is why:

• Ecommerce may change the long-standing economic model of magazine-centric businesses, especially in the general interest and mass market. As publishers seek to compete with ecommerce specialists, they may find it impossible to sustain advertising revenue other than as linked to online sales. This would fundamentally change the publisher’s approach to editorial content.  The magazine journalists who are troubled by the current blurring between editorial priorities and product sales may, of course, have seen nothing yet. The success of a magazine’s ecommerce operations will depend on competing effectively with existing operators and that means an emphasis on sales, albeit with an editorial flavour. Quite a change of emphasis for magazines most of whose staff are journalists. For specialist magazines, the changed business model may be much less problematic.
• The transition to ecommerce will spur the continuing rise of free magazines, able to under-cut traditional advertising rates – and further depress paid-for circulations.
• However apparently profitable, current  magazine relationships with ecommerce specialists like Amazon, Net-a-Porter and ASOS can be dangerous. These companies are becoming mainstream competitors.

These challenges provide some answers to my three questions, as follows:

1. Some magazine publishers will become successful online retailers. But, for many, it will dictate fundamental changes in costs, strategy, and relationships with readers/ users and advertisers/ suppliers. While the 18-year-old Amazon has had a five-year average return on capital of 17%, US department stores and discount retailers have averaged 6.5%. You can guess in which direction increased competition will push ecommerce margins in the medium-term. New opportunities.
2. In order to compete with major online/offline retailers, magazine-led ecommerce will need eventually to supersede existing reader-advertiser relationships. Trying to ride both horses will be difficult for any company and might succeed only in eroding higher-margin media revenues. Publisher-led ecommerce will anyway hasten the move towards advertisers ‘paying-by-results’, which may fundamentally change the economics of many companies. New business models.
3. The growth of publishing ecommerce will further encourage the expansion of new, low-cost media operators. No bad thing, of course, unless you happen to be a traditional media company. New faces for old.

So, the holy grail of ecommerce promises some exciting – and profitable – times for magazine companies, big and small. But, for some, it may prove to be a painful move away from the world they know best, albeit one that is losing its distinctiveness and dominance. And that, of course, is the problem.