On the Cutting Edge

By: Jennifer Saba

For more than a year now, it seems like hardly a week goes by without one or several newspapers announcing major job cuts. Continued bloodshed on the labor side, where more than 2,000 jobs were eliminated in 2005, has warranted a great deal of attention. Often overlooked, however, are the less dramatic, but equally significant ways publishers have found to balance the books beyond getting rid of bodies. No function has escaped the axe; the spending

reductions have hit everything from big-ticket newsprint to nickel-and-dime plant maintenance ? the green kind.

Consider this memo sent to the employees of Philadelphia Newspapers Inc., owner of the Inquirer and Daily News, in late January. Management notified staffers the papers would no longer employ Philadelphia Plant Service, an outfit that watered the office greenery, in an “effort to reduce costs.” Now everyone is responsible for tending to their own shrubbery and those in the common areas. PNI Chairman and Publisher Joe Natoli says the step saved the company about $23,000 a year. “We made that change,” he tells E&P via e-mail, because “it didn’t seem like the best use of finite resources.”

A few days prior, The New York Times issued a memo posted on the media gossip blog Gawker.com about changes to its company cafeteria and executive dining room. The Times outsourced its food service to Restaurant Associates, as opposed to employing its own cooks and servers. The memo read, “This change helps our company to continue to maintain a cafeteria for our staff, while managing increasing costs at a time when we are confronting a particularly challenging business environment.”

From the office decor to the lunch lady, companies are making a variety of moves to save money. Bear Stearns analyst Alexia Quadrani notes that papers are cutting editions and reducing size to save on newsprint, closing foreign bureaus, and sharing content. “I think they are under more and more pressure as costs rise higher than revenues,” she says. “The ad environment is still a challenge this year and some [newspaper executives] maybe think, unofficially, it’s challenged permanently,” she says.

The Courier-Journal in Louisville, Ky., shuttered three of its state bureaus, spinning the closing as “an effective way to use limited resources,” rather than a “cost-cutting move,” then-publisher Edward Manassah told his employees.

The Chicago Tribune dropped its stock listings (as many papers have done recently), turned its broadsheet book section into a tabloid, and discontinued its women’s section that now runs in Tempo. New Jersey sister papers The Star-Ledger in Newark and The Times in Trenton combined printing efforts and other back-office jobs like accounting and technical support. S.W. Papert III, CEO of Belden Associates, notes that one major metro saved $1 million just by eliminating the staples in its weekend TV book.

“I don’t think I have ever seen a period quite like this,” says Lauren Rich Fine, an analyst with Merrill Lynch. When asked if the cuts are hitting one specific area, like say, newsprint, she responds, “I’m not seeing any one thing. Nothing is sacred anymore.”

Going … south?

Last year’s ad-revenue performance was on a downward trajectory, but it certainly didn’t help that fourth-quarter results were deeply disappointing. Goldman Sachs estimates that Q4 2005 was the industry’s weakest performance in several years, with December showing a decline of 0.6%.

In a note issued in the beginning of February, analyst Peter Appert didn’t sugarcoat the forecast for 2006. While he gave credit to companies for keeping costs “under tight control” he acknowledges that publishers are boxed in. Revenues for the industry need to grow 2% to 3% to sustain margins, especially when newsprint costs are climbing around 10%. “The good news: if revenue growth accelerates, there is significant operating leverage given the reduction in fixed costs,” the note read. “The bad news: we do not see any evidence of improved revenue dynamics.”

Particularly troubling is the automotive category, which according to Goldman Sachs fell about 15% in the fourth quarter. During earnings calls in January, many newspaper executives appeared stumped as to when auto would get back on track.

“I think the downturn in the automotive classified business is secular and not cyclical,” says Belden’s Papert. “It’s in very serious jeopardy.” Papert also asserts that the auto category could infect other healthy classified categories like help wanted and real estate.

It would seem that belt-tightening is here to stay. But where to find more fat? Does it even exist?

Leaner, but not meaner

Labor and newsprint are a newspaper’s two largest costs. While publishers can control the former, their influence over the latter has been waning in the past several years.

Newsprint consumption is down 2.6 million tons since 2000, according to Kevin Conley, an economist with Resource Information Systems Inc. (RISI). Slowing ad lineage, declining circulation, conservation measures that shave inches off the paper, the elimination of stock tables, and the gradual shift of classifieds to the Internet are some moves that account for the drop in the use of paper.

One might think that as consumption goes down, prices would stabilize ? but that hasn’t been the case. Canadian paper mills, which supply the majority of newsprint in North America, are shutting down about as fast as consumption is falling. Producers are also hurt by a strong Canadian dollar.

As a result, newsprint prices have been steadily rising ? up 45% since 2002, says Conley. Producers are pushing for a price increase of $40 per ton in March. “We think they will get half of that over the next several months,” he says. Some are even predicting another jump in the fall, but Conley thinks this is unlikely as the Canadian exchange rate is expected to weaken.

All the while stuck between a stagnant ad environment and rising newsprint costs, publishers are looking to satiate shareholders’ continued demand for returns. Goldman Sachs reported that for the newspaper stocks it tracks, 2005 was the third consecutive year of newspaper-sector underperformance versus the S&P 500, and the second year of absolute decline. As of February, the sector eked out a 0.8% year-to-date gain versus the S&P 500’s 1.8% climb.

“There’s not a newspaper out there that is not doing a lot of efficiency-based cost-cutting measures,” says Scott Stawski, vice president of media practice at customer intelligence consultant firm Inforte. “The reason is pure profit margin.”

Most publishers have enjoyed profit margins somewhere between 20% and 30% for several years. But rising costs and slowing ad growth have chipped away at those gains ? and now cash-rich companies are scrambling to find change under the cushions. They are cutting to “protect shareholder value and free up cash flow to use for other acquisitions,” Stawski says.

The shareholder-based call for Knight Ridder’s sale only puts this issue front and center, and may even bring the sector to a boil. “The Knight Ridder situation has taken something that has been relegated to back-office discussions to the forefront ? that the industry is facing a big transition,” says Merrill Lynch’s Fine.

But Robert G. Picard, a media economist and fellow at the Shorenstein Center on the Press, Politics, and Public Policy at Harvard University, believes that deep cuts signal a retreat. “At the corporate level they are already planning the demise of the newspaper,” he says of large public companies. “They are looking down the line for some years, and if [newspapers] are in bad shape they are not going to support them.” In such circumstances, a company has two choices: “When your bottom line is not what you want, you either cut costs or find new income,” Picard explains. “All the emphasis on the newspaper side is on cutting costs.”

Mapping out the changes

In late 2004, top executives with the New York Times Co. made the decision to step up cost-saving measures ? something it had done every few years in the past? and make it part of its DNA. In June 2005, the company appointed Stuart Stoller, vice president of process engineering/corporate controller, to head the effort.

“We need to rethink each and every thing we do, because it’s a new world,” says Stoller. “You can get at the fringes of things to get at general cost savings, but unless you look at the process you can’t see the inefficiencies.”

The New York Times Co. stock has taken a beating lately; last year it was down 35.2%, according to Bear Stearns. Year- to-date as of February, shares are trading up 5.2%. During earnings calls, executives have been stressing that cost-saving methods are being implemented. Says Bear Stearns’ Quadrani, “The New York Times Co. is saying they can return to a historical peak performance because of their cost-cutting.”

That’s where Stoller comes in as the man responsible for something called “process mapping.” Though it sounds like one of those terms touted in business school seminars, process mapping involves looking at every aspect of the company ?from story generation, to circulation, to technical help, to, presumably, the cafeteria.

Stoller explains the process works by getting “subject matter experts,” handing staffers an armful of sticky notes, and getting them to explain each step of their jobs. “Then we start talking and asking questions,” he says.

Subject matter experts are people who are most knowledgeable about a given process. For example, if the company put the accounts payable department at The Ledger in Lakeland, Fla., through the exercise, the subject matter expert would be the person (or persons) who knows the most about invoices.

The Times has an initiative called the Third Way, a process involving steps to find cost savings and new growth. The Boston Globe has launched a similar strategy, Streamline to Grow. The Globe team found it had a redundant IT support department. The company has an IT help center in shared services located in Norfolk, Va., which fields questions from all its properties, so it eliminated the Boston group.

On the benefits front, the Times Co. has made vast savings by shifting medical costs onto employees by increasing deductibles and co-pays. “When you do that you add a sense of consumerism into the mix,” Stoller says. By keeping co-pays low, employees are more likely to go to the doctor. Increasing that cost, employees “feel it a little bit more,” he says. “Hopefully they secure the medical coverage they need. They go to doctors when necessary.”

Stoller declined to talk about the amount of money saved by making such a move, but did say that the company decreased cost per eligible employee by 1% to 2%. (On average, the cost of medical coverage has risen 9% to 10%.)

On the print side the company has saved $3.5 to $4 million in 2005 by converting to a lighter grade paper, which is purchased centrally by the company.

Indeed, like the Times Co., many companies are switching to lighter-grade newsprint. The standard weight is 48.8 grams per square meter (gsm), but many publishers are now shifting to 45 gsm. By doing so, they can shake about 1.5% in cost, says RISI’s Conley. They can save even more when distribution is figured in, since it costs less to move lighter paper around (although these savings vary from newspaper to newspaper).

But process mapping involves not only looking for cost efficiencies, but also how to maximize a department’s productivity. Stoller says it is so all-encompassing that it’s hard to determine what areas ? like circulation or advertising or editorial ? in which the company can save the most. But he does say that this year, the company expects to shave its costs by $50 million ? and that number is increasing.

Belo Corp. is another company that has looked hard and fast at expenses for several years now, says chairman, president, and CEO Robert Decherd. “I think we made the shift in the mid-’90s,” he says. “Prior to that, we and most of our peer companies did this from time to time when market pressure compelled us to do it.”

Now the company is starting to explore new areas for managing costs. “We are getting into that in some earnest, having done some centralization of administration,” Decherd says.

Belo is taking administrative back-end functions such as accounting and purchasing and consolidating them under one roof; it’s considering outsourcing some of those functions by the end of this year. Decherd declines to say how much it will save Belo, stating only that it will be “significant.”

Shiny new coat of paint

The relentless hunt for savings at the corporate level also impacts the face of the newspaper. Along with waves of staff cuts, there has been a steady stream of editors’ notes and releases heralding the redesign of several papers. In some instances, the paper is due for an overhaul. But more often than not, budget-tweaking played a key role.

In late January, the Orlando Sentinel introduced a new look. Changes included taking the Florida daily’s arts and entertainment section and turning it into “a broadsheet lifestyle magazine”; swallowing the once standalone travel and food sections; shuttering weekly sections in four counties; reducing stock and market listings, and eliminating its opinion section while moving the editorial and opinion pages to the A section.

Research revealed that readers wanted to see some change but the timing was right on a cost side, too. “At the same time we were dealing with expense challenges,” says Avido Khahaifa, the Sentinel’s senior vice president and general manager. “We looked very closely at scheduling and the production facility to see where we had capacity and where we had opportunities.”

Newsprint played a big part in the decision-making process. “How you use newsprint is always going to be a real factor,” he says. The Sentinel closely compared the costs of starting a new section versus combining two existing sections to serve readers just as well, he contends. The Sentinel also switched to a lighter grade of newsprint.

Khahaifa maintains that the industry at large has already harvested the “low hanging fruit” ? such as using independent carriers ? to save on costs, and that now newspapers have resorted to other measures. “You reach this point and you have to say, ‘OK, we are going into 2006 and we want to make sure we are streamlining our expenses as much as possible,'” he says, declining to reveal how much money the redesign saved the paper.

Monday, can’t trust that day

Charlotte Observer Editor Rick Thames had to give his paper a redesign to save money. Thames recalls that in early fall of 2005 when executives were putting together their budgets, they realized they were going to fall short of revenue projections. Also, it was anticipated that newsprint costs would increase $2 million. “It made more sense to balance the costs,” he says. “If I was going to have to reduce expenses, I would much rather do it by shrinking through newsprint than the loss of positions.”

Management studied the Observer’s Sunday and Monday editions and found that those two days could withstand the most change. The Sunday paper went down one section to eight, and the Monday paper was shrunk one section to four.

“We did a lot of moving around,” Thames says about trying to make the best use of space. For example, editors were often relying on wire copy when they had to fill last-minute newsholes in the A section. Thames says now that the perspective section is gone, many stories that previously would have run in that section now get better play.

Weddings and engagement announcements moved from the back of the arts and living section to a new standalone section called Celebrations. The popular personal finance and consumer section that was carried in the Monday paper replaced Sunday’s traditional business section.

All told, the Observer reduced the number of pages running per week by 20 to an average 480, saving the paper $1 million.

At The News Journal in Wilmington, Del., David Ledford faced a similar challenge. As the newspaper’s vice president of news and executive editor, it was his job to look for savings. He made cuts in several sections including the paper’s TV book ? a standalone, unstapled tabloid that was reduced from 32 pages to 24.

Ledford says scrutinizing the bottom line, while painful, does have its benefits: “I tell you, one of the things going on with people looking hard at their budgets is that you find stuff that you are paying for that you haven’t been using.” For example, the News Journal was subscribing to wire services for illustrations that they hadn’t been running.

Ellen Foley, editor of the Wisconsin State Journal in Madison, pared down her paper’s stock tables on Jan. 1. Previously, the listings ran on Tuesday, Wednesday, Thursday, Friday, and Sunday, but the paper decided to run stock tables only in the Saturday edition. The step saved 15 pages a week and roughly $100,000 a year.

Foley took additional steps that she says amounted to “drops in the bucket,” including reducing staff travel and entertainment budgets. The paper also axed the New York Times News Service (though it still subscribes to Knight Ridder and the AP).

Though the paper received about 100 reader complaints about the stock tables, Foley says her primary goal is to keep her paper in business. “My focus is to protect the local franchise,” she says. “I can’t tell you how important it is to me to protect the folks who are working for me. It’s pretty scary out there.”

Cutting it too close?

Cost-saving measures are always considered a good thing among the business set, and it’s hard to fault the newspaper industry for doing what other industries have been doing for years: outsourcing back office functions, passing along the cost of health insurance to employees, and cutting back on extraneous services ? especially if it will save jobs (though they cut those too).

This time however, there’s been some concern that publishers are cutting, to use the phrase that has become clich?d over the past year, too close to the bone.

Bear Stearns’ Quadrani thinks it’s too early to tell if publishers are in fact cutting off their noses to spite their faces. In many cases it’s a good thing, but she concedes “it’s a little bit scary,” especially when newspapers are eliminating editorial positions. She adds that if companies continue to deliver papers with less content, they’re running the risk that readers will soon find less value in the paper.

Belo’s Decherd weighs cost-saving moves against hurting the product: “I think it’s a matter of being disciplined and very focused about it when opportunities present themselves. Obviously, it would be a mistake to eliminate so much cost as to impair your ability to produce outstanding journalism.”

Shorenstein’s Picard counters that the advertising environment is in decent shape, and the problem is that the newspaper industry is considered mature. “We have crossed a threshold of awareness in newspaper companies that the future does not hold the promise” that past years did.

The core product may be on the decline, but newspapers still dominate local content. Decherd believes the industry still has lots of kick. “I am confident that what we have experienced in the last year is some overreaction to some fairly predictable changes about how our newspapers operate and compete,” he says. “To me, we are in the early innings here. This is not the eighth inning and we’re behind. I think we are going to surprise people with the upside.”

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