By: Lucia Moses
Detroit Newspapers was getting crushed in the direct-mail arena when it sat down in the late 1990s with a longtime competitor, Advo Inc. It had to be a humbling moment for senior business executives at the joint-operating-agreement (JOA) agency and their bosses at Gannett Co. Inc., which oversees its advertising. Advo has long been one of the newspaper industry’s biggest rivals, with 500 million pieces delivered each week. The Motor City is highly competitive for direct mail, but efforts by The Detroit News and the Detroit Free Press to start a total-market-coverage product (TMC) had stalled twice, leaving them with no car in the race.
In the fall of 1999, Detroit Newspapers and Advo agreed to merge their offerings into a single, cobranded, direct-mail packet, combined with in-paper distribution of inserts. The business launched the following January and turned profitable four months later. Since then, the newspapers’ agency says it’s attracted more run-of-press (ROP) advertising because it can now offer greater reach.
“Advertising is more competitive these days,” says Jim Kleinklaus, senior vice president of advertising for Detroit Newspapers. “I think you might see more surprising partnerships.”
Today, seven newspapers have combined some aspects of their mail programs with Advo’s. Encouraged by their success, Advo is looking for other deals, with the hope of doing four or so each year.
Shared economic misery is bringing these two foes together on common ground. Total newspaper advertising revenue sank 8.97% last year and isn’t soaring yet. While direct mail eked out a 0.3% gain last year, its growth rate has slowed. Many newspapers’ TMCs are successful; others are only breaking even.
But is working with the competition — even in a limited fashion — the best way for newspapers to improve their bottom lines?
“It’s a little bit like sleeping with the enemy,” says Gene Grant, former advertising director at The Sacramento (Calif.) Bee and creator of its successful TMC. “If I can have 100% of the business, why would I want to share the business with a company that is my biggest competitor?”
A dynamic duo
By reducing delivery costs, which can account for as much as 70% of TMC expenses, newspapers can immediately improve their profitability via an Advo deal. The Saint Paul (Minn.) Pioneer Press cut its mail-delivery costs in half when it contracted with Advo in the late 1990s to deliver its inserts in the direct mailer’s packet. “We realized that by paying per piece to Advo, delivery would be much cheaper,” recalls Bill Wilson, who helped set up the deal when he was Knight Ridder’s head of telemarketing.
The details vary by market, but Advo’s main model basically works like this: Both sides keep their sales staffs separate but combine their inserts into a cobranded Advo ShopWise shared-mail package, a jacket stuffed with inserts — and topped with the now-familiar “Missing Child Card” — which is then mailed to those who don’t subscribe to the paper. Subscribers get the ads delivered with their newspapers on the same day for total household coverage.
Those who have shared-delivery pacts with Advo claim they have not only cut costs but boosted the top line as well. Through its shared-mail venture, Detroit Newspapers brought in new advertisers such as Meijer Stores, Kleinklaus says.
And the Denver Newspaper Agency, the JOA arm of The Denver Post and the Rocky Mountain News, has cranked up its weekly inserts to 60 from 10 over the past year because of its ability to reach more households in the market. “Our volumes have skyrocketed this year,” says William Dean Singleton, publisher of the Post as well as vice chairman and CEO of its parent MediaNews Group Inc.
The potential for incremental growth is one of Advo’s big selling points to newspapers. Myron Lubin, the Advo executive charged with seeking more newspaper deals, says the more-varied advertising content of the packets makes the products more enticing to readers and thus more likely to get a response for advertisers.
The parties to these deals say that while they now sell into the same concept, they remain as competitive as ever for ad dollars. Advo’s Lubin offers its newest partner, the Connecticut Post in Bridgeport, as an example. No sooner had Advo launched a direct-mail product with the Post than it lost a client to the paper, he says.
The devil, you say?
Given their history of mutual hatred, the idea of these archenemies sharing anything is nothing short of eye-popping.
Advo is a big part of the reason many newspapers got into direct mail over the past decade. During that period, newspapers’ share of total advertising spending shrank to 19.2% last year from 23.4% in 1992. Some of that money went to direct mail, especially Advo, as retailers, particularly grocers, demanded more targeted advertising as well as the ability to blanket an area. Shared mail also offered small businesses a cheaper way of reaching audiences than ROP, and Advo rose to meet that need. A newspaper executive who once referred to his Advo counterparts as having horns likely spoke for many of his peers.
Newspapers that had spent decades trying to sell the virtues of the paid paper against direct mail eventually decided to go where the money was, buying or starting their own nonsubscriber advertising products. The attitude that direct mail was “bad and dumb and didn’t work” suddenly became “it’s a viable option,” says Scott Stines, a former newspaper TMC maven who is now president of mass2one, an e-mail marketing consultancy based in Cedar Rapids, Iowa.
Today, most newspapers have some sort of direct-marketing product, but Advo remains their biggest rival in the field.
Direct mail, too, has its problems. The industry charged ahead in recent years, growing at a compound annual rate of 6% from 1996 to 2001. But U.S. Postal Service rate hikes, the recession, and competition from online marketers have hurt. The industry’s annual growth rate is expected to slow to 1.8% between 2001 and 2006, according to media merchant bank Veronis Suhler Stevenson projections.
Those pressures led Advo three years ago to set up a diversified business group to look for new revenue opportunities, including working with newspapers. Lubin, a 19-year Advo veteran appointed to run the new unit, thought Advo and newspapers could help each other in the same way the Postal Service and the FedEx Corp. share delivery costs. As he sees it, “We need a national program. We need to be able to reach that marketplace. We’re both going to be here. Is there a way … we can do it together?”
Still, he wondered if any publisher would want to work out a deal — or even take his phone call. He knew many of them continued to pooh-pooh nonpaid products as having little value. Meanwhile, Advo viewed its competition as lazy from years of market domination and as people who cared more about collecting Pulitzer Prizes than accounts receivable. “We saw them as the devil incarnate, and they probably saw us as the same,” Lubin says.
Sales staffers at the St. Petersburg (Fla.) Times initially “raised their eyebrows” when told about a deal to jointly distribute inserts in part of the market, says Lyn Sargent, the ad manager responsible for the region where the joint distribution is being carried out. Those who are working with Advo now praise the company for its sales know-how, postal expertise, and helpfulness. “They’re a very good competitor,” says Bob Berry, president of the Florida Newspaper Advertising Network. He should know: Florida is one of the top states in spending by direct marketers. “They’re a lot more sophisticated than I think people give them credit for.”
For its part, Advo had its own share of surprises. “We found the newspaper folks to be a lot more intelligent about how they ran their business than we thought in the past,” says the direct-mail company’s Lubin.
Denver: The urge to merge
Looking for its first partner, Advo figured it would be well-received at The Denver Post, since Singleton already had approached the company in the early 1990s. It was in the pre-JOA days, and the Post‘s TMC was losing several million dollars a year because competition with the E.W. Scripps Co.’s Rocky Mountain News had forced ad rates way down. “We had our own TMCs going to the same households they were, and there was a lot of wasted delivery,” Singleton says.
The Post merged its TMC with Advo’s ShopWise packet in 1999; now, both sell into a single product that Advo delivers to nonsubscribers, while the newspaper delivers the packet to subscribers. The newspaper now boasts a 15%-to-20% profit margin on the product, making Stines wonder, “Just think how much money The Denver Post could have made if it got on board with Advo 10 years ago.”
Singleton is probably the biggest fan of the Advo model, as shown by the recent deal struck by his company’s Connecticut Post. Other MediaNews papers also are discussing it. “I think it would make sense in almost every market because you’re saving millions in efficiencies,” he says.
Advo would certainly agree. And any market may make sense, Lubin says, because a strong Advo market today can be weak tomorrow.
The impact of the delivery-sharing deals is still small on Advo, which has $1.1 billion in annual revenue. But, in a few years, Lubin sees them being an “important part of what we do.”
The newspaper industry’s anti-Advo sentiment aside, it takes time and effort to put together a deal. In Santa Ana, Calif., The Orange County Register spent a year putting together its deal to create a cobranded weekend-mail package with Advo. Both sides have to coordinate everything from printing and production of the packet to setting deadlines to sharing revenue. Seemingly small decisions, such as whose name will appear first on the cobranded packet, can hold up negotiations.
In Detroit, where the two set up a separate company to run the program, with the profits evenly split, it took the newspapers months to reconfigure their thousands of carrier routes to conform with Advo’s sub-ZIP-code zones.
Even when the program is finally running, the parties may find themselves working at cross-purposes. Take Detroit. When Advo at first pushed for full-market coverage there, the newspapers insisted on limiting initial distribution to a section of its market where newspaper penetration was low. But when the newspapers wanted to go full-market to meet advertiser demand, Advo wasn’t ready. “When you’re in a partnership, it’s like a marriage,” Lubin admits.
The 50-50 profit split in Detroit works now because both sides contribute more or less equal revenue, but what happens when the balance shifts to one side?
Share and share alike?
Certainly, an Advo deal probably makes sense for some newspapers. Freedom Communications Inc.’s Orange County Register may be a case in point. It tried to offer total market coverage through its network of 25 free weekly newspapers, but “there’s always been the attitude with advertisers — they believe direct mail has a stronger effect than the newspaper,” says Douglas Hanes, vice president of major account sales for Freedom Media Enterprises. Meanwhile, the Register had powerful competition from Advo and other direct mailers such as the PennySaver, as well as the Los Angeles Times. Advo already had economies of scale in printing and a relationship with the post office, benefits the Register couldn’t compete with but now benefits from, Hanes says.
Today, he says, “The horsepower of two brands of that magnitude … gets everyone’s attention.” Had the Register not acted, he contends, “The L.A. Times would probably have loved to have Advo.”
But some newspaper direct-marketing veterans bristle at the idea of sharing anything with Advo. They warn that the deals Advo proposes are a short-term fix that could limit a newspaper’s flexibility to serve its customers. While Wilson says Advo was good to work with in St. Paul, he feels that newspapers should try to run their own TMCs. “It gives us more control over the advertiser relationship.” Besides, the skeptics ask, what good is reducing your costs if you’re helping your rival to do the same?
The typical paper, says Grant, the former Sacramento Bee ad director, “can develop and operate a much superior product to what Advo delivers and grow as a complement to the daily newspaper, and they can also use it to build paid circulation.” Certainly, an up-to-date database of nonsubscribers, commitment by management, enough big advertisers to cover delivery costs, and a strong sales culture are key to a good TMC. But papers can save millions by outsourcing most of the operation.
And despite Advo’s claims of targeting superiority, most advertisers are served just fine at the ZIP-code level. “Getting down to finer zoning than that — it’s nice to have, but I haven’t found there’s a huge demand for that,” Grant says.
Building the perfect beast
Indeed, some newspapers have taken failing TMCs and turned them around on their own.
Take The San Diego Union-Tribune. Its shared-mail product went from losing money to the break-even point over the past two years, poaching a few Advo clients in the process. Ad Director Scott T. Whitley credits the change to a stepped-up effort to sell the single sheets that are popular with small advertisers, the switch to weight-based from page-based rates, and a move to weekend from midweek delivery, which attracted drugstore and other advertisers.
Having sales reps who are eager to sell the single sheets made a difference, says Lori Moreno, preprint advertising manager: “They’ll sell anything, anywhere, anytime.” In the end, Whitley looked at Advo and was able to conclude, “We had the better mousetrap.”
But Advo may still have something to teach newspapers. The increasing desire to target audiences will keep direct mail going strong. Advo is vying to add second programs on the weekend throughout its markets. And those papers that don’t keep their household data current and their sales staffs motivated may one day find themselves knocking on Advo’s door.
How the Advo deal goes down in Denver
In the Denver market, 1.1 million households get a newspaper/Advo cobranded packet with their newspapers or in their mailboxes each week. Here’s how it’s done.
The Denver Newspaper Agency, the business arm of The Denver Post and the Rocky Mountain News, delivers its self-printed advertising inserts to Advo by Wednesday for nonsubscriber delivery. (Clients that do their own printing send their preprints to Advo themselves.) Advo assembles the packets Thursday and brings them to the U.S. Postal Service Friday. On the following Monday, Advo hauls its newspaper-bound inserts to the Denver papers’ docks. The packets are delivered on top of that Wednesday’s papers, to coincide, more or less, with the delivery of Advo packets via U.S. mail.
Advertisers that want to run inserts inside the paper can still do so. Safeway Inc., for one, chose to distribute its inserts this way as well as by mail. However, it probably will pay a higher rate. Liz English, who manages printing and distribution for major accounts for Denver’s joint operating agency, explains that Advo charges the agency a lower rate for advertising that’s delivered entirely through the cobranded Denver-ShopWise package. That’s why the agency can pass on a lower rate to the advertiser, she says.
To prevent duplicate delivery, the Denver agency each month sends Advo its subscriber list, which Advo then merges with its household file. While the sales staffs at Advo and the newspapers remain competitive, English says, they have agreed informally not to go after each other’s existing business.