Advantages of Scale

Sometimes life can take some pretty cruel twists. Thanks to inspiration from Maggie Thompson, I composed my letter of tribute to Julie Schwartz last week, only to then read the dreadful news that he had passed away over this past weekend. While writing that letter was certainly an act of catharsis and closure for myself, I also genuinely wanted Julie to know how much I loved and respected him. While I am presuming that Julie never got a chance to read my letter, I take some comfort in knowing that I am just one small part of a huge multitude of people that sent their love to Julie in his final days. We should all be so blessed as to be missed by so many when we pass over...

Returning to my history of the evolution of the Direct Market, I want to go a little further in depth in discussing the issue of advantages of scale amongst the 19 Direct Market distributors who were able to buy from Marvel in 1979. Two weeks ago, I told you about how freight rebates were instituted by Marvel in 1982. Those rebates allowed the larger distributors (such as Diamond and Capital City) to set up trucking arrangements under which which they not only were able to minimize their costs to the point that they were able to make a profit on the rebates, but also allowed them to shave precious hours off of normal truck freight delivery times. This gave the larger distributors some very distinct advantages over their brethren who were servicing smaller markets.

The evolution of the freight rebates also had in great measure to do with the very ugly practice of airfreighting comics. In those early, highly competitive days in the formation of the Direct Market, new distributors fought savagely over customers. When Phil Seuling saw his virtual monopoly on distribution of comics to comics shops ended by the Irjax anti-trust lawsuit, he came up with the very clever idea of setting up a warehouse of his own in Sparta, Illinois, just down the road from the printer that produced all the comics in America. By having his own facility available to immediately break down bulk shipments from the printer, Phil gained a significant timing advantage in the pursuit of many potential customers. He had UPS shipments zooming out to customers in outlying regions before the trucks of most other distributors had even reached their warehouses.

Another clever distributor, Russ Ernst of Glenwood Distributing, took this concept a step further. Russ pioneered the concept of airfreighting comics from the St. Louis airport to subsidiary warehouses he had set up around the country. He would pick up his weekly shipments from the printing plant, and then send them by truck to his main warehouse in Collinsville, Illinois (halfway between the printing plant and the St. Louis airport). He then sent shipments to his own warehouses by airfreight, and they were delivered that same day. While this cut into his operating margins significantly, it did allow him to capture quite a bit of market share in the areas directly surrounding each one of his subsidiary warehouses.

If this practice had been Russ's only innovation, it would not have been so pernicious. What naturally followed, however, was a quickly escalating airfreight war in which certain comics retailers personally absorbed huge airfreight costs in order to have their individual weekly new comics shipment delivered into their given market a day, or two, before any other comics shop. Sadly, this advantage never lasted, as whenever one comics retailer began airfreighting, all the other retailers in that market who wanted to survive were forced to follow suit. This was a wonderful development for Russ Ernst, and the airfreight concerns, but acted as a drag on desperately needed comics shop earnings for many years to come.

As regards economies of scale, airfreight was even more sensitive during the 1980's to the size of shipments than truck freight. Because planes fly on their schedules regardless of whether they are full or not, the airlines were very aggressive in bidding for predictable weekly shipments. As certain Direct Market distributors were able to deliver more and more volume, their costs per pound dropped radically. My wife, Nanette, felt the disastrous impact of differentials in air freight cost most specifically in 1986. Through her Alternate Realities Distributing, Inc. company she was servicing the comics shops of the Colorado region, and also had a substantial business in shipping comics to accounts overseas by airfreight. In fact, aside from Mile High Comics, her largest accounts were in Singapore, Great Britain, and Germany. Because there are only about 5 million people who live within 500 miles of Denver, these International accounts provided Nanette with the critical additional sales volume she needed to keep her operations cash-flow positive. Because she didn't ship that much volume by air, however, she had to pass on substantial airfreight costs to all of her International accounts.

Then came that dreadful month in 1986 when not a single one of her eight Singapore accounts turned in their order forms. Despite their previously effuse praise of her wonderful service, they all switched in the same month to Capital City Distributing. The reason was simple: free airfreight. John and Milton at Capital had managed to work out a master airfreight agreement which allowed them to ship Internationally at the same rate as what they were paying for domestic shipments. Since their cost per pound to airfreight was not that much greater than the freight rebates that they were receiving from the publishers, they made the strategic decision to provide free International airfreight. While this new airfreight policy worked wonderfully for them, it spelled the beginning of the end for Alternate Realities.

To be continued...

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Mile High Comics, Inc.
Attn: Chuck Rozanski
2151 W. 56th Ave.
Denver, CO 80221

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