Wall Street Cosmos Industry Report:
Newspaper Publishing
Newspaper Publishing
The Newspaper Sector Faces A Dangerous Decline of
Advertiser Demand
by James A. Maccaro
It is by now a familiar story, repeated many times over the
past couple of years --- daily newspapers are doomed to fade
away, vanquished by the internet and by a loss of interest in
“hard news” by celebrity-obsessed younger people. There is
more than a grain of truth in this assertion, yet it is only part of
the picture.
Most examinations of the problems of the industry focus on
the supply side of the issue, that is, on newspapers’ declining
power to supply advertisers with an efficient avenue for reaching
readers.
Every six months, the Audit Bureau of Circulation, the
agency that monitors newspaper circulation, releases the latest
results. For a generation, these reports have consistently shown
steady declines in readership, a decline that has accelerated over
the last few years. As a newspaper’s stock in trade is providing
advertisers with access to consumers, this trend is a dire warning
for the long-term health of the industry. Without a critical mass
of readers, newspapers will no longer be attractive to advertisers.
This “supply problem” has been analyzed in depth by many
sources and is therefore not the subject of this article. Instead,
the focus here is on the “demand side” of the equation.
Newspapers depend not only on their ability to supply
advertisers with readers, but also on the level of demand by
advertisers for access. A number of factors, which have nothing
to do with the internet or with declining readership trends, have
caused a marked decline in demand for newspaper advertising.
Here are four factors that have caused newspapers to be
less valuable
1. The demise of the department store as the dominant
mass-market retailer --- For generations, middle class
Americans primarily shopped at traditional downtown and
suburban department stores. It was at such places that we bought
clothing, furniture, linens, china, toys and many other household
items. When I was growing-up in the 1970’s and 80’s in Queens,
New York, the list of department stores that served the New
York City and nearby Long Island markets was long: Macy’s,
Gimbels (also a separate Gimbels Discount chain), Sterns,
Alexander’s, Abraham & Straus, Korvettes, Gertz, May’s (not to
be confused with the May department store group), Ohrbach’s,
Sloane’s and a few others come to mind. Each was an active
newspaper advertiser, buying by the page as a matter of routine.
Today, only Macy’s lives on.
In 2005, Federated Department Stores, owner of the Macy’s
and Bloomingdale chains, took over May Department Stores, its
only remaining major national rival. Within a year, all of the May
chains, including such renowned stores such as Marshall Fields,
Filene’s, Kaufmann’s, Hecht’s and Foley’s, were converted to
Macy’s stores or, in a few cases, into higher-end Bloomingdale
stores.
Today, the only other major traditional department store
chain is Dillards, a company that serves the South and Midwest.
It has been losing market share for years.
The connection this all has with newspaper publishing is
that traditional department stores were hooked on newspaper
ads, running page after page of them to promote seasonal sales.
By combining its chains into the Macy’s group, Federated
now only has to promote one brand, thereby greatly reducing the
potential ad revenue for the newspapers that serve its markets.
They have reduced the competition for newspaper space and
increased their bargaining power with publishers.
As for the chains that simply closed, they have been
replaced with new mass-market retailers, such as Wal-mart,
Target, warehouse clubs, specialty stores, and internet-based
firms, which are much less dependent on newspaper ads and, in
many cases, do entirely without them. Even when they utilize
newspapers, the ads are likely to be much smaller. This is also
true of high-end department stores, such as Nordstrom and
Bloomingdale’s, which are more likely to run discreet quarter-
page ads, rather than several full pages of ads.
2. The supermarket squeeze --- When I was growing-up,
there were three supermarkets in my neighborhood. Now there is
only one, which is typical of today’s supermarket industry.
Articles in the mass media about the supermarket industry
have focused on increased competition from Wal-mart, Target
and many other outlets, but there are also other factors. For
instance, labor costs have increased (due primarily to successful
unionization drives that began in earnest in the 1980’s), as have
real estate costs, taxes and insurance costs.
Supermarkets have adopted by focusing on maximizing
volume. This means that in most areas only one supermarket can
prosper, resulting in a “natural monopoly,” that is, a situation
were as a matter of course only one competitor can serve a
particular market. Consequently, supermarkets do not need to
advertise aggressively in newspapers as they once did (due to
the lack of local competition) and lack the means to do so even
if so inclined (because of their diminished margins).
3. The blight of the airline industry --- Yet another
industry that traditionally was a major newspaper advertiser has
been transformed. Long gone are such blue chips as Pan
American, Eastern and TWA, which were major newspaper
advertisers. They have been replaced by low-cost carriers, with
business models based on the correct assumption that customers
do not need to be persuaded through expensive advertising to
use the airline if the airline is dependable, safe and cheap.
Furthermore, virtually all airline industry analysts predict further
consolidation, resulting in fewer potential advertisers and less of
a need for the remaining players to advertise.
4. The car dealer’s dilemma --- There are simply too many
car dealerships in the United States, especially among General
Motors, Ford and Chrysler. The “Big Three” have responded by
shutting down Oldsmobile (GM) and Plymouth (Chrysler), as
well as by reducing the number of cars that they offer and by
encouraging the stronger dealerships in many markets to buy-out
the weaker players. The New York Times reported 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 less models and
less dealerships, comes less need for newspaper advertisements.
Furthermore, profit margins for most dealerships are
extremely tight, particularly since most buyers are much more
knowledgeable about car pricing. It is no wonder that Business
Week recently declared that “car salespeople never had it so
bad.” The result, once again, is less demand for newspaper
advertising.
These trends are not likely to be reversed. While new
advertisers have arisen, they are much more likely to use
alternative methods of advertising. The Internet is the most
obvious example, but there are others, such as circulars that are
delivered to consumers’ homes. This method has proved to be
effective and can be much cheaper than traditional newspaper
advertising.
This does not mean that daily newspapers are now
economically not viable, although this day might come in time.
Many currently have profit margins of in excess of 20 percent.
Although lower than traditional newspaper margins, and almost
certain to further compress, such margins would be considered
enviable in most other industries. It does mean, however, that
daily newspapers are less valuable today than in the past, and
their value will almost certainly continue to erode, as reflected
by the fact that The McClatchy Co. recently sold the
Minneapolis Star Tribune for half of what it paid for it just eight
years ago.
Warren Buffett addressed this issue in the 2007 Berkshire
Hathaway annual report, noting that many wealthy people have
made known their interest in buying newspaper properties. "For a
local resident, ownership of a city's paper, like ownership of a
sports team, still produces instant prominence." Buffett noted.
However, he warned that “aspiring press lords should be careful,
however: There's no rule that says a newspaper's revenues can't
fall below its expenses, and that losses can't mushroom…. Fixed
costs are high in the newspaper business, and that's bad news
when unit volume heads south."
The questions to be asked when analyzing a particular
newspaper property are how much cash is it likely to produce,
how long will this “cash cow” last, and is management using the
money for the benefit of shareholders?
Advertiser Demand
by James A. Maccaro
It is by now a familiar story, repeated many times over the
past couple of years --- daily newspapers are doomed to fade
away, vanquished by the internet and by a loss of interest in
“hard news” by celebrity-obsessed younger people. There is
more than a grain of truth in this assertion, yet it is only part of
the picture.
Most examinations of the problems of the industry focus on
the supply side of the issue, that is, on newspapers’ declining
power to supply advertisers with an efficient avenue for reaching
readers.
Every six months, the Audit Bureau of Circulation, the
agency that monitors newspaper circulation, releases the latest
results. For a generation, these reports have consistently shown
steady declines in readership, a decline that has accelerated over
the last few years. As a newspaper’s stock in trade is providing
advertisers with access to consumers, this trend is a dire warning
for the long-term health of the industry. Without a critical mass
of readers, newspapers will no longer be attractive to advertisers.
This “supply problem” has been analyzed in depth by many
sources and is therefore not the subject of this article. Instead,
the focus here is on the “demand side” of the equation.
Newspapers depend not only on their ability to supply
advertisers with readers, but also on the level of demand by
advertisers for access. A number of factors, which have nothing
to do with the internet or with declining readership trends, have
caused a marked decline in demand for newspaper advertising.
Here are four factors that have caused newspapers to be
less valuable
1. The demise of the department store as the dominant
mass-market retailer --- For generations, middle class
Americans primarily shopped at traditional downtown and
suburban department stores. It was at such places that we bought
clothing, furniture, linens, china, toys and many other household
items. When I was growing-up in the 1970’s and 80’s in Queens,
New York, the list of department stores that served the New
York City and nearby Long Island markets was long: Macy’s,
Gimbels (also a separate Gimbels Discount chain), Sterns,
Alexander’s, Abraham & Straus, Korvettes, Gertz, May’s (not to
be confused with the May department store group), Ohrbach’s,
Sloane’s and a few others come to mind. Each was an active
newspaper advertiser, buying by the page as a matter of routine.
Today, only Macy’s lives on.
In 2005, Federated Department Stores, owner of the Macy’s
and Bloomingdale chains, took over May Department Stores, its
only remaining major national rival. Within a year, all of the May
chains, including such renowned stores such as Marshall Fields,
Filene’s, Kaufmann’s, Hecht’s and Foley’s, were converted to
Macy’s stores or, in a few cases, into higher-end Bloomingdale
stores.
Today, the only other major traditional department store
chain is Dillards, a company that serves the South and Midwest.
It has been losing market share for years.
The connection this all has with newspaper publishing is
that traditional department stores were hooked on newspaper
ads, running page after page of them to promote seasonal sales.
By combining its chains into the Macy’s group, Federated
now only has to promote one brand, thereby greatly reducing the
potential ad revenue for the newspapers that serve its markets.
They have reduced the competition for newspaper space and
increased their bargaining power with publishers.
As for the chains that simply closed, they have been
replaced with new mass-market retailers, such as Wal-mart,
Target, warehouse clubs, specialty stores, and internet-based
firms, which are much less dependent on newspaper ads and, in
many cases, do entirely without them. Even when they utilize
newspapers, the ads are likely to be much smaller. This is also
true of high-end department stores, such as Nordstrom and
Bloomingdale’s, which are more likely to run discreet quarter-
page ads, rather than several full pages of ads.
2. The supermarket squeeze --- When I was growing-up,
there were three supermarkets in my neighborhood. Now there is
only one, which is typical of today’s supermarket industry.
Articles in the mass media about the supermarket industry
have focused on increased competition from Wal-mart, Target
and many other outlets, but there are also other factors. For
instance, labor costs have increased (due primarily to successful
unionization drives that began in earnest in the 1980’s), as have
real estate costs, taxes and insurance costs.
Supermarkets have adopted by focusing on maximizing
volume. This means that in most areas only one supermarket can
prosper, resulting in a “natural monopoly,” that is, a situation
were as a matter of course only one competitor can serve a
particular market. Consequently, supermarkets do not need to
advertise aggressively in newspapers as they once did (due to
the lack of local competition) and lack the means to do so even
if so inclined (because of their diminished margins).
3. The blight of the airline industry --- Yet another
industry that traditionally was a major newspaper advertiser has
been transformed. Long gone are such blue chips as Pan
American, Eastern and TWA, which were major newspaper
advertisers. They have been replaced by low-cost carriers, with
business models based on the correct assumption that customers
do not need to be persuaded through expensive advertising to
use the airline if the airline is dependable, safe and cheap.
Furthermore, virtually all airline industry analysts predict further
consolidation, resulting in fewer potential advertisers and less of
a need for the remaining players to advertise.
4. The car dealer’s dilemma --- There are simply too many
car dealerships in the United States, especially among General
Motors, Ford and Chrysler. The “Big Three” have responded by
shutting down Oldsmobile (GM) and Plymouth (Chrysler), as
well as by reducing the number of cars that they offer and by
encouraging the stronger dealerships in many markets to buy-out
the weaker players. The New York Times reported 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 less models and
less dealerships, comes less need for newspaper advertisements.
Furthermore, profit margins for most dealerships are
extremely tight, particularly since most buyers are much more
knowledgeable about car pricing. It is no wonder that Business
Week recently declared that “car salespeople never had it so
bad.” The result, once again, is less demand for newspaper
advertising.
These trends are not likely to be reversed. While new
advertisers have arisen, they are much more likely to use
alternative methods of advertising. The Internet is the most
obvious example, but there are others, such as circulars that are
delivered to consumers’ homes. This method has proved to be
effective and can be much cheaper than traditional newspaper
advertising.
This does not mean that daily newspapers are now
economically not viable, although this day might come in time.
Many currently have profit margins of in excess of 20 percent.
Although lower than traditional newspaper margins, and almost
certain to further compress, such margins would be considered
enviable in most other industries. It does mean, however, that
daily newspapers are less valuable today than in the past, and
their value will almost certainly continue to erode, as reflected
by the fact that The McClatchy Co. recently sold the
Minneapolis Star Tribune for half of what it paid for it just eight
years ago.
Warren Buffett addressed this issue in the 2007 Berkshire
Hathaway annual report, noting that many wealthy people have
made known their interest in buying newspaper properties. "For a
local resident, ownership of a city's paper, like ownership of a
sports team, still produces instant prominence." Buffett noted.
However, he warned that “aspiring press lords should be careful,
however: There's no rule that says a newspaper's revenues can't
fall below its expenses, and that losses can't mushroom…. Fixed
costs are high in the newspaper business, and that's bad news
when unit volume heads south."
The questions to be asked when analyzing a particular
newspaper property are how much cash is it likely to produce,
how long will this “cash cow” last, and is management using the
money for the benefit of shareholders?
