Newspaper Industry Report

It’s a familiar story, told countless times over the last few years—-daily newspapers are destined to slip away, vanquished by the internet and lost interest in the “hard news” of celebrities-obsessed younger people. There is more than a grain of truth in this statement, but it is just part of the scene. Most of the examinations of the issues of the sector rely on the supply side of the matter, that is, on the decreasing power of newspapers to provide advertisers with an effective means of reaching out to subscribers.

Every six months, the Circulation Audit Office, the department that controls the circulation of newspapers, publishes the latest findings. For a decade, these studies have steadily shown gradual decreases in readership, a trend that has intensified in recent years. As a newspaper’s stock of trade offers advertisers access to customers, this development is a significant warning to the long-term stability of the business. After a critical mass of subscribers, the publication would no longer be appealing to marketers. This ‘supply crisis’ has been analyzed in detail by several publications and is thus not the subject of this report. Instead the emphasis is on the “demand side of the equation.

Newspapers rely not only on their ability to provide readers with advertisers but also on the amount of demand for access from advertisers. A variety of causes, which have little to do with the internet or falling rates in readership, have contributed to a marked decrease in demand for newspaper advertisements.

Here are four reasons that have made newspapers less valuable.

  1. Death of the department store as the dominant mass-market retailer—-For decades, middle-class Americans have mainly shopped in conventional downtown and suburban department stores. It was in those places that we purchased clothes, chairs, linen, china, toys, and many other household things. As I was growing up in the 1970s and 1980s in Queens, New York, there was a long list of department stores serving New York City and surrounding Long Island markets: Macy’s, Gimbels (also a separate Gimbels Discount chain), Sterns, Alexander’s, Abraham & Straus, Korvettes, Gertz, May’s (not to be mistaken with the May department store group), Ohrbach’s, Sloane’s and a few others. Both of them was an active newspaper advertiser, buying a page as a matter of practice. Just Macy lives on now.

In 2005, Federated Department Stores, owner of the Macy’s and Bloomingdale chains, took over May Department Stores, the last remaining major national competitor. Within a year, all of the May brands, including well-known stores such as Marshall Fields, Filene’s, Kaufmann’s, Hecht’s and Foley’s, were changed to Macy’s stores or in a few cases, to higher-end Bloomingdale stores.

The only other major traditional chain of department stores today is Dillards, a corporation that serves the South and the Midwest. It’s been losing market share for years. All this has to do with newspaper printing is that conventional department stores have been hooked on newspaper advertising, running page after page to promote holiday sales. Through merging the chains into Macy’s company, Federated now has only one brand to advertise, drastically decreasing the possible advertisement income for newspapers that serve its markets. They decreased competition for newspaper space and strengthened their negotiating power with publishers.

As for the chains that actually closed down, they were replaced by modern mass-market outlets, such as Wal-mart, Target, discount clubs, specialty stores and internet-based businesses, which are much less focused on newspaper advertising and in many cases, totally empty of them. And where newspapers are used the advertisements are expected to be much smaller. This is also true of high-end department stores, such as Nordstrom and Bloomingdale, which are more likely to run subtle quarter-page advertisements than a few full-page ads.

  1. Supermarket squeeze—-When I was growing up, there were three supermarkets in my neighborhood. Now there is only one that is representative of today’s retail industry. Mass media reporting on the retail industry focused on increased competition from Wal-mart, Target, and several other outlets, but there are other reasons as well. For example, labor rates have risen (primarily due to active unionization campaigns that started in the 1980s) as well as real estate costs, taxation, and insurance costs.
    Supermarkets have been adopted with an emphasis on optimizing space. This means that in most areas, only one supermarket can survive, resulting in a “natural monopoly,” that is, a situation where of course, only one rival can serve a given market. As a result, supermarkets do not need to advertise heavily in newspapers as they once did (because of lack of local competition) and lack the resources to do so, even though they are so inclined to do so (because of their diminished margins).
  2. The blight of the aviation sector—-Another industry that has historically become a big newspaper advertiser has become changed. Long gone are blue chips like Pan American, Eastern, and TWA, big newspaper marketers. They have been replaced by low-cost airlines, with marketing strategies focused on the right premise that passengers do not need to be convinced by lavish ads to use the airline if the airline is efficient, safe, and inexpensive. In addition, nearly all airline observers expect more fragmentation, resulting in fewer prospective sponsors and less need for the remaining players to advertise.
  3. The car dealer’s dilemma—-There are clearly so many car dealerships in the United States, particularly between General Motors, Ford, and Chrysler. The Big Three replied by closing down Oldsmobile (GM) and Plymouth (Chrysler) as well as by reducing the number of cars they sell and encouraging stronger dealerships in certain markets to buy-out poorer competitors. The New York Times announced on February 15, 2007, that “Chrysler… said it planned to eliminate 10 to 20 percent of the 32 models it makes and reduce the number of dealerships it has by 10 to 15 percent.” With fewer models and fewer dealers, there is less demand for newspaper advertising. In addition, profit margins for most dealerships are extremely tight, particularly when most customers are far more educated about car pricing. It’s no surprise that Business Week recently announced that it’s never been so bad for car salesmen.” The result again is less demand for newspaper ads.

These patterns are unlikely to be reversed. Although new marketers have appeared, they are far more likely to use alternative promotional strategies. The Internet is the most apparent example, but there are others, such as circulars, which are distributed to customers’ homes. This approach has proven to be successful and can be much cheaper than conventional newspaper ads. This does not mean that daily newspapers are not commercially sustainable today, but this day will come in time. Many already have gross margins of more than 20%. Although these margins are smaller than the conventional newspaper margins and almost likely to be more squeezed, they will be considered enviable in most other sectors. It does mean, though that daily newspapers are less valuable now than in the past, and their popularity will almost inevitably begin to evaporate, as evidenced in the fact that McClatchy Co. recently sold the Minneapolis Star Tribune for half of what it paid for eight years ago.

Warren Buffett discussed this topic in the 2007 Berkshire Hathaway Annual Report, noting that many rich people have made public their interest in purchasing newspaper properties. “For a local resident, ownership of a city’s paper, like ownership of a sports team, still produces instant prominence.” Buffett said. However, he cautioned that “aspiring press lords should be cautious, however there is no law that states that newspaper profits can’t plunge below their expenses, and that losses can’t mushroom…. Fixed costs are high in the newspaper industry, and it’s poor news because the unit volume is going south.”

The questions to be answered when assessing a particular newspaper’s property are how much cash it is going to make, how long will this “cash cow” last, and how much money does management use for the benefit of shareholders?

The first is the current management. Most of those running the show have been around in the 70’s & 80’s, when newspapers dominated their businesses (50+ percent market penetration in several cases) and telling marketers what they will pay for. With many alternatives open today and pointed out your point on industry restructuring, there is little strategy in place to draw new advertisers…

The fat and cheerful days of the newspaper have gone a long way, most of the able sales staff have moved on. The consequence is the emergence of incompetent sales people to occupy roles they have never been trained or able to play. It’s a catastrophe formula, and we’re watching it unfold in front of our eyes. With management’s failure or reluctance to identifying these real problems, the Internet is a simple solution to a very difficult problem. Not to say that the Internet is not collecting huge dollars, it is and should be) but the fragmentation of the world is dwarfing the face of cable/broadcast and radio.

If you don’t have a team who knows how to sell your commodity spectrum quickly and successfully, well you’re watching the outcomes right now.