Wheeling and Dealing for Classified Ads

By: Jennifer Saba

In mid-July, when major newspaper companies hosted Q2 earnings calls, few surprises jumped from the phone lines. However, analysts needed to lock in on something, and this time around they often fired questions at executives over the state of auto advertising. One analyst, looking for direction during the McClatchy call, defined the sector as the “achilles heel of the industry.”

The category has indeed been on a backward march. The Newspaper Association of America (NAA) reported that in Q4 of 2004, auto classifieds for the industry slipped 6.2% to $1.6 billion. In Q1 of this year, it dropped 4.8%.

Second quarter results don’t show a reversal. Knight Ridder said classified auto advertising is down 7.1% in its larger markets and off 6.6% in its other papers. McClatchy reported similar declines, with auto advertising slipping 7% (including online) and 9.3% (print alone). Tribune decreased 7%, with Los Angeles down 9%, Chicago down 1%, and New York down 6%. Gannett dropped 5%.

No executive offered any relief when pressed by analysts. Gary Pruitt, McClatchy’s chairman, president, and CEO, said, “We’re not seeing any changes in the environment. We don’t expect positive numbers until Q4 and that’s because of easy comps. Honestly, we don’t see improvements right now.”

His peers reported much the same. Douglas McCorkindale, chairman, president, and CEO of Gannett (at the time; Craig Dubow has since taken over) said, “We continue to struggle across all platforms, the outlook is uncertain.”

Beyond classified, auto advertising may actually be growing.

Tribune executives explained that national auto was up 9% due mostly to aggressive campaigns from the auto manufacturers, including General Motor’s recent blitz offering employee discounts. When the manufacturers turn on the spigot on branding advertising, local dealers tend to pull back, letting the mothership do the spending.

One mitigating factor: Although auto classified (which includes local dealers) has dropped, publishers are relying on the other two classified sectors, help-wanted and real estate, to keep the category afloat. Recruitment accounts for roughly 35% to 40% of classified, while real estate and auto split the rest. “For a while automotive was up and employment was down,” says James Goss, a media and entertainment analyst at Barrington Research in Chicago. “The fact that employment and real estate are doing pretty well does help offset the issues facing automotive.”

But like recruitment advertising, which has migrated online, auto is going the way of the Web as well. Gordon Borrell, president and CEO of Borrell Associates, says, “The [classified] model that newspapers employ is doomed. The advertiser has to pay to get that listing in the paper and the cost is high. On the Internet, that listing is free. The business model changes and the traditional company, in this case newspapers, is caught with its pants down.”

Borrell reports that of all three segments in the auto category (dealers, dealer associations, and manufacturers) dealers made the largest spending changes in 2004. They nearly doubled their spending on online while slowing their spending on newspapers, broadcast TV, and radio. Dealer associations increased online spending 20.2% while manufacturers grew their online spending by 38.8%. “It’s just too simplistic to say that newspaper advertising doesn’t work and online works,” Borrell says. “In reality, newspaper advertising works, but the dealers may have over-spent on it.”

Newspapers aren’t sitting idle. Cars.com, a joint venture owned by six newspaper companies ? Belo, Gannett, Knight Ridder, McClatchy, Tribune, and The Washington Post Co. ? is taking a chunk of the online spending. “When we ask [auto] advertisers what’s working, it’s autotrader.com, autobytel.com, and cars. com,” Borrell says.

The print side is still very important to the industry, says Jake Kelderman, director of auto industry and ad agency relations at the NAA. And what’s occurring is most likely cyclical, he explains, noting auto classifieds did pull in $5 billion last year. The industry netted around $800 million from national auto in 2004.

Kelderman acknowledges the auto industry is undergoing changes even as auto salesmen continue to rely on incentives and new models to boost sales.

“Because the business is driven by these factors,” Kelderman says, “all the companies are creating more models every year [more efficiently]. You can almost make the argument that the savings manufacturers have found in producing vehicles they have reinvested in marketing dollars.”

There is a fierce battle among the auto companies ? domestic and foreign ? to sell more. Prudential Equity Research expects a surge in new car launches in 2006 and 2007. The six major manufacturers (DaimlerChrysler, Ford, General Motors, Honda, Nissan, and Toyota) are expected to unveil 56 models in 2007, up from 34 in 2006.

“A robust schedule of new car launches … should be a positive trend,” Prudential notes. The firm is even considering raising its total U.S. advertising forecast in 2005. Ideally, newspapers will benefit from the marketing efforts of auto makers and dealers trying to unload those wheels.

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