Newspapers May Benefit From Holiday Advertising

By: Lucia Moses As if publishers don't already have enough worries -- with newsprint prices on the rise and help-wanted classified advertising in the tank -- retail sales may be slipping now, even as the holiday season rapidly approaches.

Business conditions don't look great for the nation's retailers. Consumers finally seem to be pulling back, depressing hopes for a recovery and a robust fourth quarter. But all the anxiety could work to newspapers' advantage. For one thing, retailers may be feeling a little desperate after two disappointing fourth quarters in a row, suggests James Conaghan, economist for the Newspaper Association of America.

Stores have been madly promoting discounts: Just look at preprints, which have gained nicely this year at such newspaper giants as Gannett Co. Inc., Knight Ridder, and the Tribune Co.

"Retailers know that newspaper advertising [does] the heavy lifting in their advertising, and I think they're going to be doing more in that area over last year," says Tom Holliday, president of the Retail Advertising & Marketing Association (RAMA), a National Retail Federation unit.

Of course, it will be hard for newspapers not to beat last year's horrendous fourth quarter. Marketers, expecting the worst after Sept. 11, pulled back, and newspaper retail-ad revenue suffered its worst quarter since 1991. Even so, fourth-quarter retail sales proved Sept. 11 wasn't the holiday-downer retailers feared it would be.

"I think advertisers chickened out, and the public surprised them," says Edward J. Atorino, who follows publishing for Blaylock & Partners. He predicted last month that newspaper retail-ad revenue will be up 5% in the fourth quarter, compared with a decline of 6.4% a year ago.

The nightmare before Christmas?

Still, it's a scary time, and not just with Halloween -- and a possible war against Iraq -- in the air. Enriched by a fall in fuel prices and a rise in mortgage refinancing, Americans had been on a seemingly endless spending spree, but as the economic malaise drags on with no sure signs of recovery, consumers are now showing signs of caution.

Chain stores had disappointing sales in September, when year-over-year comparisons should have been favorable, as consumer confidence declined for the fourth straight month. Even auto sales, which had been spurred by zero-percent- financing offers and helped to prop up retail advertising this year, have slowed.

True, the mortgage-refinancing boom has freed up money for additional purchases. But zero-percent-financing offers on big-ticket items other than cars have soaked up a lot of it so far this year. Such spending reflects consumers' desires to take advantage of low prices rather than an improved outlook on their personal financial situations or the economy -- and therefore isn't likely to benefit holiday sales, according to a September poll by Leo J. Shapiro & Associates LLC in Chicago, a tracker of consumer spending. Job losses over the past year are starting to take their toll, and anxieties about future layoffs are running high. And the bears in the stock market have laid waste to the "wealth effect," as many scramble to repair cracks in their nest eggs.

The spectre of war with Iraq and rising oil prices, along with the continued slump, also threaten future spending. In surveys of consumers' buying intentions, most people said they plan to spend the same or less this holiday season than last, as they hunt for bargains and practical purchases.

Analysts project year-over-year, fourth-quarter retail sales to increase 2.5% to 4%, a smaller gain than last year's 4.4%. "I don't think we're going to match the spending levels of last year, so it's a fight for market share," says Owen Shapiro, analyst with Leo J. Shapiro. Since people are spending less at the store, retailers have to increase transactions. Stores would like to discount less, but with consumers conditioned to expect bargains, he says, "It's going to be very hard to wean themselves from that at this point."

The National Retail Federation is in the optimistic camp, predicting a 4% bump in holiday sales. Still, the NRF contends heavy promotions will be key to that outcome as consumers make finding deals a top priority. That means stores will be getting their message out early and often. It's happening in mid-October at department stores that are already turning to markdowns and at electronics stores that are trying to best each other on price.

For retailers, it's not a question of whether they'll hit their goals this year, but how. And newspapers remain important tools.

At the Bon March?, a big user of run-of-press advertising based in Seattle, "Our goal is to finish the year strong, so we are pulling out all the stops to do that," says Kimberly Reason, director of corporate communications and media relations for the Federated Department Stores Inc. chain. J.C. Penney Co. Inc., headquartered in Plano, Texas, has been sprucing up its stores and sharpening its edge in price and fashion, among other areas, to drive sales. "Until the economy changes, you just have to work twice as hard," CEO Allen Questrom said at a Sept. 26 analysts meeting.

Different strokes for different folks

If all this anxiety confers a short-term benefit on newspapers in the form of glossy preprints and extra display-ad pages, the long-term outlook for their biggest advertising category is still troublesome.

It's an old story for newspapers, but one worth repeating. Retail's consolidation pace may have slowed since the early 1990s, but analysts believe that recessionarylike pressure will force more stores to buckle.

Department and discount stores are betting on new looks and private labeling to differentiate themselves. Federated Department Stores (also parent of Macy's, Burdines, and others) is adding features such as Internet kiosks and fitting lounges with flat-screen TVs as part of an effort to appeal to younger shoppers. Other retailers such as the Target Corp. and Sears, Roebuck and Co. also are getting into the game, Target selling an exclusive line of Woolrich home products this fall and Sears buying the Land's End catalog business.

Those efforts notwithstanding, "I think the pressure on those department stores is going to increase over time," says Frank Badillo, senior economist at Retail Forward Inc., a consultancy. "In the short run, the weak environment and stiff comparisons may continue to generate some good advertising, but as the shakeout unfolds, I think a more negative impact is going to unfold for newspapers."

This time, the focus is on Kmart, one of newspapers' top customers. The discounter hasn't given papers much reason for hope as it tries to dig itself out after filing for bankruptcy protection under Chapter 11. Sales have grown slower than expected this year, and executives have said they expect fourth-quarter, same-store receipts to come in under last year's already low levels.

History has shown that even today's hot stores could be in the obituaries tomorrow. "It's a very volatile industry," Shapiro says. "The ability of stores to go from very, very strong growth to very weak growth is incredible."

Expanding national chains will likely leave more small to midsize stores in their dust, while the growth of supercenters of the Wal-Mart ilk threaten local and regional grocers. Stores are already on alert on the West Coast, where discount retailer Kohl's Department Stores is expanding next year.

Unlike their predecessors, these growth companies spend less on advertising as a percentage of sales, and they put most of their ad dollars to work not in print but on TV. While department stores such as Dillard's and Macy's put 96% and 87% of their 2001 ad budgets, respectively, in newspapers, J.C. Penney and Sears allocated just 40% and 31%, respectively. Even Kohl's spent less than half of its ad budget on newspapers last year.

Shrinking ad budgets, growth in preprint usage, consolidation in favor of discounters, and competition with other media are among the reasons behind the stumbling growth of general-merchandise advertising, which accounted for more than a third of newspapers' retail-ad dollars last year.

For all of last year, newspaper retail-ad revenue decreased 3.4% even as total retail sales increased 3.5%, the first time in a decade that newspapers didn't show a corresponding gain. John Mennenga, a Santa Rosa, Calif.-based consultant who measures market share for newspapers, found continued share loss at about 30 papers last year. In the small to midsize markets he studied, "it was as much retail as classified." Mennenga believes part of the share loss stems from the cutbacks in sales efforts by newspapers last year. "The more money you spend trying to sell advertising, the more you sell," he says. "You have cutbacks, you sell less."

Newspapers have wisely tried to compensate for shrinking retail-ad dollars by offering direct-mail solutions, and some have been successful in pursuing mom-and-pop advertisers. But there's no easy way to make up for the loss of a major retailer. It takes a lot of little ads -- and more human resources -- to replace a big retail ad.

"Generally speaking, it's obviously more sales-force-intensive, so it's going to be a negative for the profit margin, and you may have to [create] introductory ad rates for smaller advertisers," says Kevin Gruneich, a newspaper analyst at Bear Stearns & Co. "Having said that," he adds, "it's not a choice."

It wouldn't hurt for newspapers to toot their own horns more, either, RAMA's Holliday says. While stores should take advantage of newspapers' local-market knowledge to help develop their media plans, "Newspapers don't do enough in explaining who they are and their effectiveness," he says. "Electronic media are always beating their own chests about that."