Racks to Riches

Can Houston-based SuperStand do for magazines what Barnes & Noble did for books?

January 2000By Comments

When some think of a newsstand, they envision a dimly lit store in a low-rent shopping center with dirty floors. SuperStand, a Houston-based chain of newsstands, wants to change that. By catering to upscale shoppers, it hopes to do for magazines what Barnes & Noble did for books, Starbucks did for coffee, and Einstein’s did for bagels. Indeed, SuperStand calls itself America’s Magazine Superstore.

The first SuperStand opened in August 1997 in the shadow of the Galleria. The company has since opened six more stores in the Houston area, in and around neighborhoods such as Montrose, Meyerland, outer Westheimer, and Memorial and in the outlying suburbs of Katy and Sugar Land. Last spring, it opened two stores in the Dallas area, one in Arlington, and one in Fort Worth. Ultimately, SuperStand plans to expand nationwide, building one thousand stores within the next five years. Its next stop: Chicago.

Forget what you know about traditional newsstands; the typical SuperStand is clean, well marked, and packed with four thousand titles, with familiar names like Time, BusinessWeek, and Cosmopolitan as well as quirky special-interest magazines like Modern Ferret, Alien, and Aroma Therapy Quarterly. It even carries international newspapers and regional magazines. And, yes, Playboy and other adult titles are stocked too; they are shrink-wrapped and kept in a special section. Though the stores don’t feature a fancy coffee shop or cafe, they do sell impulse items like Beanie Babies, candy, and soft drinks. SuperStand attracts a diverse clientele, drawing in business people on their lunch hour, women with small children in the afternoon, and singles out looking for something to do on a Saturday night.

SuperStand’s backers—most notably Mexico-born, Houston-based investor Alfredo Brener—picked up on a little-noticed fact: Newsstands are an incredibly fragmented business. Currently more than 65,000 retail outlets across the U.S. sell magazines, including supermarkets, discount chains, pharmacies, bookstores, and mom-and-pop shops. That makes it an industry ripe for consolidation. Grocery stores and pharmacies have already begun to cut back on the number of magazines they carry, and most book superstores, like Barnes & Noble, have room for only seven hundred to one thousand titles. If SuperStand is successful, it could be the next great “category killer” in retailing, what some in the industry are already calling “micro-killers.” In the same way that Barnes & Noble has squeezed out smaller independent bookstores, the SuperStand stores in Houston have already helped kill off Guy’s News, a newsstand institution near downtown that closed last spring. “We’re taking a sideline category to the forefront,” says Chris Peluso, who was SuperStand’s acting chief executive from January 1998 to September 1999 and now works as a consultant for the company.

Though it remains to be seen whether magazines alone will be a big enough draw to keep the SuperStand stores going, one key to their success is that the magazine industry is booming. With the rise of so-called specialty titles, the number of magazines has grown steadily, from 2,500 in 1985 to 5,500 today, according to Samir Husni, who heads the magazine program at the University of Mississippi in Oxford. Husni expects the growth to continue and predicts that by the end of 2000 there will be more than 5,900 titles. “There doesn’t seem to be any letdown,” he says.

And that’s exactly the kind of news SuperStand wants to hear. Though the 47-year-old Brener wouldn’t talk with Texas Monthly about his venture (strangely no one at SuperStand would even confirm that he is an investor, despite the fact that he is identified as its chairman in an unrelated Securities and Exchange Commission filing), it’s clear he has a golden touch when it comes to investing, as well as a keen eye for spotting hot trends in retailing. He made a bundle off Los Angeles- based Boys Market, an ethnic supermarket chain he bought for $180 million in 1988 and turned around and sold for $235 million in 1989. He then moved to Houston and purchased the Blockbuster franchise for Mexico, which he sold to the parent company in June 1995 for $35 million. He was also part of the investment group led by Fort Worth’s David Bonderman that bought control of Continental Airlines in 1992. In November 1998 the group completed a deal to sell its 14 percent stake of the airline’s equity and 51 percent of its voting shares to Northwest Airlines for $370 million in cash and 2.6 million shares of Northwest common stock. Besides SuperStand, Brener’s latest investments include SpinCycle, a laundromat chain based in Scottsdale, Arizona, and E-Stamp Corp., a company based in San Mateo, California, that was awarded a license from the U.S. Postal Service to sell postage stamps over the Internet.

Despite the industry’s potential and Brener’s backing, SuperStand hasn’t been an easy ride. Brener apparently got the idea from an associate of his. He liked it so much he reportedly rounded up $6 million in capital from a group of Houston investors and recruited Mike Welch, a veteran of the Best Buy chain, to make it happen. Flush with cash, Welch hired an army of people at the corporate and store levels, constructed huge buildings—the 6,100-square-foot store near the Galleria and another Houston store on Shepherd with 4,700 square feet—and bought state-of-the-art point-of-sale computer systems. He also planned a rapid roll-out schedule: thirty stores in the Southwest by the end of 1998.

It didn’t happen. Though the first two stores were impressive in appearance and inventory, they lost gobs of money. So in January 1998 Brener fired Welch and brought in 38-year-old Peluso, a former senior vice president of marketing at Borders Group, which owns the well-known bookstore chain, and the president of Philadelphia-based music retailer the Wall. Peluso went right to work, cutting the size of new stores to two thousand square feet while maintaining the same number of titles and, to further cut costs, letting go of almost everyone at the corporate level and reducing staff at the stores to one or two people. He thinks Welch simply got ahead of himself. “Overcapitalization can be as dangerous as undercapitalization,” Peluso says. “It can lead to inefficiency and excess.”

After that, business started buzzing. At the end of 1998 the average purchase at a SuperStand was up 30 percent from the previous year. At least four of the chain’s eleven stores are now profitable, and Peluso believes the entire company will be in the black in a couple of years. To further the message, SuperStand began advertising on radio, in newspapers, and through direct mail. It also holds promotional events in its stores in conjunction with publishers. Now that the company has the right model, it is prepared to go nationwide.

SuperStand is also trying to set up its own distribution business. Whenever possible, the company avoids distributors and buys directly from the publishers, which bumps up its gross margins by 30 percent. It is currently doing that with at least fifty magazine companies, storing and then shipping the titles to stores from a warehouse it opened in Houston at the end of 1998. “If we’re going to become a national chain, we need to do our own distribution,” Peluso says.

Another aspect of the SuperStand’s aggressiveness is its plan for using the Internet. Last year, Peluso hired a developer in Houston to create a Web site that not only provides information about SuperStand but also serves as a gateway for people seeking information on magazines in general. The site should be up within a few months, and he’d eventually like to offer reprints of articles as well. “Our goal is to develop a comprehensive search engine for magazines, with SuperStand as the portal,” he says. “When people think of magazines, we want them to think of SuperStand.”

While SuperStand has regrouped and expanded, potential competitors have emerged. In August 1998 Barnes & Noble opened its first stand-alone magazine store, called Ink Newsstand, in a mall in Meriden, Connecticut. Since then three more stores have opened in shopping malls, with one in Austin (at Barton Creek Mall); one in Cary, North Carolina; and one in San Diego, California. Books-A-Million, a bookstore chain based in Birmingham, Alabama, has also jumped into the newsstand business by opening five Joe Muggs newsstands over the past few years across the Southern states, from Mississippi to Georgia. But even with new ventures hitting the market, some signs indicate that the newsstand retailing trend may already be waning. When the first Ink stores were opened, Frank O’Neill, then the president of Barnes & Noble’s mall division, boasted, “Ink does for the printed word what CNN has done for television news.” Now there’s a change in tune. Debra Williams, a spokesperson at Barnes & Noble, says the Ink stores were just a test. “We didn’t think it did well,” she says, “so we’re not planning to build any more.” And magazine expert Husni from the University of Mississippi is skeptical about SuperStand’s plans. “It is a good concept,” he says, “but I don’t think they can handle as many stores as they envision.”

Still, SuperStand has attracted attention from potential investors over the years, according to Peluso, from venture capital firms such as Dallas-based Phillips-Smith to individual investors such as Austin retailing entrepreneur Gary Hoover. It has also caused analysts at Montgomery Securities and Merrill Lynch to take notice. And Peluso says its investor group would like to take SuperStand public some day. Indeed, the plan is to pay back investors within three years. “We’ve proven that this is a growing business,” he says. SuperStand is in this for the long haul. He just hopes that people will want to read all about it.

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