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Turning the page on the Mag Nation doubters

Monday, 31 January 2011 | By Oliver Milman

Sahil Merchant isn’t afraid of a challenge. According to friends, potential investors and even the magazine industry itself, his start-up Mag Nation didn’t have a chance of succeeding. Five years and more than four million customers later, Merchant didn’t just beat the odds. He smashed them.


Merchant is no longer involved in Mag Nation, having sold out in July 2010. He says that he doesn’t want to step on the toes of the current owners, but it’s clear that he handed them a legacy of one of the most dynamic start-ups in Australia.


There are now six Mag Nation outlets across Australia and New Zealand. The stores stock more than 4,000 magazine titles from across the world, with customers encouraged to drape themselves on plush seats to access wireless internet and peruse titles ranging from craft publication Bead & Button to UK indie music magazine Big Cheese, and everything in-between.


The hard sell


Mag Nation isn’t quite a newsagent, but it’s not really a library either. It’s a concept that Merchant had to sell hard in Australia after he decided to spin out the success of Auckland-based Mega Mags with co-founder Ravi Pathare, who happens to be his uncle, in 2005.


“A lot of people said ‘Shit Sahil, why run a magazine business?’,” he recalls. “They thought that because they shop, they were an expert in retail. There was a lot of scepticism (from potential investors) but they were willing to introduce me to other people.


“Before we had a store in Australia, we saw the major magazine distributors and pitched the idea to them. They said ‘Good on you, but it won’t work.’


“They pointed out that the magazine industry hasn’t changed in 100 years and that newsagents are not libraries – once you allow people to touch and feel the magazines, conversion rates go down.


“But they were thinking all about Women’s Day, not the collectors’ items. People have such passion for these magazines. Why are they treated differently from a watch or piece of clothing? You wouldn’t buy a pair of jeans unless you tried them on first.”


Tapping into that consumer passion for niche magazines was what convinced Merchant that the idea was viable, despite the misgivings of others. His own passion, for entrepreneurship, compelled him to give it a go.


“I was at (consultancy firm) McKinsey and I loved what I did, but I got to the point where I was itching thinking about Mag Nation in the morning,” he says. “I couldn’t wait to start it up.”


“Here you had a major category that was stuck in the middle – it wasn’t value driven but it had the carpets and fluoro lights. The experience of buying magazines wasn’t great.”


Sizing up the mag world


Merchant may have been determined to forge ahead with the idea, but he wasn’t starry-eyed about the industry at large. He admits: “I’m passionate about information, but I’m not a big magazine reader. In many ways, I was the sceptic as I’m not the usual customer for this, but I had a feel for the customers and their passion for magazines.”


“Also, it’s a dumb industry, so to speak. You don’t have lots of smart people say ‘I really want to work in the magazine industry.’ Those that do work there do it for a lifestyle choice, but they aren’t going to change the industry around them.”


In order to bend the magazine retail industry to his will, Merchant needed cash. Using “contacts of contacts” at McKinsey, Merchant managed to get $5 million worth of private equity commitments, but eventually only raised $1.8 million. Merchant admits there was a lot of “blood, sweat and tears” to get convince investors that he wasn’t opening a glorified newsagency.


An initial injection of $500,000 enabled Mag Nation to get started, opening its first store on the corner of Elizabeth and Collins Streets in Melbourne’s CBD. The cash soon disappeared as the venue had to be completely revamped, including the installation of a new floor, in order to house the business.


“I’m from Melbourne, thought that the urban savvy community was here and wanted to keep a close eye on the business,” says Merchant. “We wanted to secure somewhere high profile but the hard thing is that we didn’t get a look-in at Chadstone, for example, because we weren’t a national brand.”


“We were used (by property landlords) to drive up the price for existing business tenants. To get the funds for the premises, we need the location. It was a catch 22 situation.”


“We managed to get both through dumb luck. Through an intermediary, we managed to get hold of the Melbourne CBD location before it went to market. There were plenty of sleepless nights though.”


Once he got the business up and running, Merchant began taking on the very model of magazine distribution in Australia in an attempt to form a more profitable supply chain.


“The incentive given by distributors to magazine sellers wasn’t to sell everything they got,” he explains. “You pay for everything up front and then get your money back two or three months later.”


“Distributors are like large financial institutions. Close to the end of the financial year you get lots of magazines dumped on you. For every 10 magazines printed, five are sold and five are dumped and pulped.”


“This has a lot of hidden costs and makes the magazine industry very inefficient. We thought if we could get rid of that, the money would come through to us.”


Merciless tracking


Rather than be at the mercy of distributors that sent large volumes of magazines that may or may not sell, Mag Nation began to record its sales in a way that a standard newsagent would never be able to do.


Merchant says that the business “bastardised” a standard system used by retailers to chart the sales of titles. By identifying the most popular titles, Mag Nation could cherry pick them and avoid accumulating large batches of stock that wouldn’t sell.


“We mercilessly tracked sales,” says Merchant. “We had a better feel for what consumers wanted than the distributors, who were just pushing stuff to us.”


This change involved the construction of a supply chain that, on the face of it, was far more complex than dealing with a handful of major distributors.


“We rethought the entire supply chain and dealt directly with the UK, US and Europe,” Merchant explains. “We had lots of cups of coffee with lots of niche, independent publishers who didn’t have a distribution channel or did have one but knew that we would give them a good show in-store.”


“We aligned risk and return rather than buying stock and being stuck with it if it didn’t sell. Magazines are one of the last ‘push’ industries left in retail, rather than ‘pull.’ Why should we accept a 25% margin when we can choose the publishers ourselves?


“We made the margin structure better, made more per sale and the customers engaged with us. We went where the love was.


“We managed 1,000 different supply chains into us and the margin was 50 to 75%. We did it through personal relationships. We were left with some stock, of course, but we built trust so that publishers knew that if they were selling 50 copies somewhere, we would sell 800.”


Fine-tuning the model


The change to the supply chain boosted Mag Nation’s margins, but it wasn’t until two years after the business launched that Merchant finally fine-tuned the business model by shifting the focus from product to consumers.


“We started out without a target audience,” he says. “Everyone said that we needed a target audience and I said that the product was king. I thought the product was the point of difference from newsagents.”


“We had a light bulb moment and dumped the product focus and switched to customers. The term was ‘urban savvy’ – not Gen Y or based on demographics, but it was about being design and fashion conscious. It was about caring about the visual and material world.”


“We were selling more design, architectural and fashion magazines, proportionally, than other topics.”


Merchant may have belatedly honed in on Mag Nation’s target customer, but he says he was always clear about separating good magazines from the rest, especially in an era when the internet is viewed as a major threat to circulations.


“A lot of magazine are crap and have no business existing,” he states, bluntly. “Why buy a magazine on cameras when you can see it online? What magazines can do is complement online.”


“Online is the enabler. If there was no internet, Mag Nation wouldn’t exist. The barriers around aggregating communities are now much lower.”


Giving the brand a voice


Mag Nation’s marketing started to reflect its core customer base, with Merchant giving the brand a cheeky, irreverent edge. Merchant began blogging for the company website and a motto of "Everything at Mag Nation can be touched, felt and browsed... except for our staff" was adopted.


“The voice of brand was my voice, it was very personal,” he says. “A lot of large brands don’t have that authenticity. It was a real strength of ours. We used blogs and Twitter and we were playful and fun.”


“We weren’t reticent to talk about errors and when people criticised us, we didn’t hide it. We changed the focus of the blog from magazines to things I was thinking about.”


The exit


In July last year, Merchant started getting “itchy” about his working life again and decided to sell his share in the business.


“It was an emotional time as Mag Nation was my baby, but it was the right time to do something else,” he says. “I have three kids and it was taking over my life. I loved the business but I was working like a dog.”


“I gradually made myself redundant. I’m a big believer in stirring the pot before it gets stale.”


That “next challenge” is in fact a dual task, with Merchant working on two different businesses. Previously a highly visible character in the entrepreneurial world, Merchant says he hopes to be a “bit more under the radar” this time around.


Despite his desire for a slightly quieter life, there will be plenty of people keen to see if Merchant is again set to defy the odds and conjure up another start-up that captures the public’s imagination.