Ad, Circ Execs 'Terrified' by Valassis Moves

By: Lucia Moses Valassis' recent decision to pull its free-standing inserts (FSIs) out of all Freedom Communications Inc.'s 25 community dailies in one fell swoop seemed like an extreme move for the couponing giant. But tougher negotiations with the industry's 10th biggest spender are becoming an industry norm. "Valassis is a big stick," said one chain newspaper executive, who like most interviewed for this article spoke on condition of anonymity. "Circulation directors are terrified of losing coupons, and advertising directors are scared of losing advertising."

Valassis traditionally paid lower rates for its FSIs, a trade-off papers accepted for the benefit of getting the consumer packaged goods advertising they otherwise wouldn't have gotten. But as the Livonia, Mich.-based company fights for market share of its FSI business (which accounts for more than half its total revenue), it is trying to use those lower rates to reach new categories of advertisers that traditionally pay higher ad rates.

Whether it will be able to pursue these new categories unfettered is the big question facing papers as they meet Valassis at the negotiating table.

Valassis spent $259.8 million in newspapers in 2002, making it the industry's 10th biggest customer among parent companies. More than just ad dollars are at stake, though, as many people buy the Sunday paper just for the coupons.

Valassis isn't trying to cannibalize newspapers' business, insisted Sherry Lauderback, company director of investor and public relations. She pointed out that most of the new business sought is incremental to the newspaper. "There are obviously times when there are disagreements whether it's incremental or not, but our intent is not to hurt that relationship," Lauderback said. She would not comment on individual company negotiations, but said Valassis just wants competitive rates.

While Valassis dropped the Freedom papers rather than continuing to pay surcharges for placing non-traditional advertising, according to Freedom executives, other papers have made concessions. The Pittsburgh Post-Gazette, for example, gave Valassis "a little more flexibility" in their current contract to go beyond the traditional manufacturer's coupons and direct-response companies. But Valassis didn't get all it wanted, according to Doug Olsson, the paper's sales and marketing director. "We recognize that their business is changing, and we responded to their requests in a creative way," he said.

Once an ROP buy, coupons shifted dramatically during the 1980s and '90s to FSIs, which now distribute an estimated 86% of all manufacturers' coupons. Because of their trackability, coupons are growing ever more appealing to makers of packaged goods. But a rate hike cost Valassis customers and share to News America, a unit of News Corp., which spent $234.8 million in newspapers last year via its FSIs. In the second quarter, Valassis' FSI revenue declined 7.5% to $129.3 million.

Valassis has increased efforts to attract new customers to FSIs and new and existing customers to ROP, a small category that Valassis expects to grow 10% to 15% this year. Ads from bottled water companies, chain restaurants, and the like are popping up in its FSIs. News America also is getting in on the game, newspaper execs say, but to a lesser extent. (News America declined to be interviewed for this story.)

Newspapers' resentment is reminiscent of the industry reaction 12 years ago when ad placement giant Newspaper Services of America (NSA) formed to place newspaper ads for major retailers. But some newspaper executives said NSA has been more collaborative on rates than Valassis; the Newspaper Association of America chose NSA as its first Advertising Agency of the Year award recipient this year.

Not everyone is complaining about Valassis. The St. Petersburg (Fla.) Times considers the company "more cooperative than ever," a spokeswoman said. Horvitz Newspapers, publisher of the King County Journal in suburban Seattle, has had a sound relationship with Valassis, President and CEO Peter Horvitz said.

How can papers avoid Freedom's fate? Valassis considers such factors as market size, household size, coupon redemption rate, product usage, and coupon delivery options in determining its market list. Papers in competitive markets should be concerned that Valassis might take its coupon business to a competing daily or other distribution vehicles, such as direct mail, Pittsburgh's Olsson said.

"What you have to bargain with is the strength and power of the audience you're delivering, and that varies from market to market," Olsson said. "We have to understand what our unique strengths are in that marketplace."