Newspapers Worry About Holiday Season

By: Lucia Moses Happy days may not be here again but, at long last, it's starting to look like a modest recovery.

Analysts revised upward second-quarter Gross Domestic Product growth, following strong defense and household spending. Healthy back-to-school sales suggested the return of the consumer and indicated a good holiday season for retailers. But job growth remains stagnant, and most tax refunds have probably already been spent -- partly on those back-to-school items -- while not significantly reviving the economy.

Sears, Roebuck & Co. CEO Alan Lacy hedged his recent remarks about the holiday shopping season, saying he expects it to be better than last year but not stellar. With the weak job market and a slowdown in home-buying and refinancing promising an uneven recovery, this holiday will be "far from a slam dunk for retailers," Frank Badillo, senior economist for Retail Forward, wrote recently.

Tepid shopper interest last year forced retailers to cut their year-end forecasts and resort to heavy promotions to move merchandise. This helped newspapers eke out a 3.8% gain in Q4 retail advertising, on a par with the industry's 1999 spending level. Is another promotion-heavy season newspapers' best hope? "I think we'll see promotions again this year," says Kathleen Brookbanks, managing director of media planning and buying firm OMD Midwest in Chicago, which places ads for retailers like Dell Inc. and J.C. Penney Co. Inc. "When they're depending on taking business from others, they go back to what works for them, and newspapers will do well."

Or will they? Bob Shamberg, president and COO of Newspaper Services of America in Downers Grove, Ill., sees less of the last-minute ROP push of the sort Kmart did a few years ago. "Because retailers get much better information, they have somewhat less interest in throwing a lot of advertising at what might be profitless revenue," he says.

Retail ads pull the sled

Retailer woes are no small matter for newspapers. Retail advertising accounted for 47.4% of total newspaper ad revenue in 2002, and 29.2% of those retail ad dollars came in the fourth quarter, according to the Newspaper Association of America (NAA). And even the more optimistic forecasts warn of risks to the coming shopping season.

The National Retail Federation believes that after two years of worrying about terror attacks, war, and job losses, people are ready to buy again. The NRF predicts 5.7% growth to $217.4 billion in holiday retail sales, which it defines as November and December sales in stores in key categories. That's more than double the 2.2% growth the NRF recorded for 2002. The association points out that spending by businesses should account for a large part of the holiday spending, though, and cautions that job and international political tensions could weigh on results.

Retail Forward forecasts holiday sales to grow a more mediocre 4%, up just slightly from its last-year figure of 3.7% growth. The Columbus, Ohio-based consultancy predicts continued declining sales at mall-based department stores and steep price cutting by apparel stores, with the strongest growth coming from supercenters, warehouse clubs, and dollar stores -- outlets that traditionally spend the least on newspaper advertising as a percentage of sales.

Consumer polls raise additional concerns. A September poll by Leo J. Shapiro and Associates LLC in Chicago shows spending intentions are about the same as this time last year, which, remember, finished with a meager holiday sales haul. The firm's research shows that data generally show spending intentions are a leading indicator of retail sales. "At this point, we're really not expecting as strong a Christmas as what others think," says Owen Shapiro, a vice president at the research company. BIGresearch LLC in Worthington, Ohio, a market intelligence firm that takes the pulse of 8,000 consumers every month, also contends consumers aren't convinced the economy's getting better. "They're still going to be looking for bargains," says Phil Rist, vice president of strategy at BIGresearch. "... Many retailers have been stuck with merchandise in previous years, and they're going to be competing early for consumers' dollars."

Pollsters say consumers will be out searching for low-priced practical items, as they have in recent years. Home furnishing goods and clothing, the categories that together contribute some 15% of fourth-quarter retail advertising dollars, are likely to do well in this pragmatic environment.

Great expectations

When the economy is booming, retailers and newspapers generally have a good holiday season. Short of that, publishers can hope retailers need to use promotional-style advertising that tends to benefit newspapers. Already Nintendo Co. Ltd. has cut the price of its GameCube, the third-place game console in the market, from $149 to $99, which could be accompanied by some newspaper promotions.

"[Retailers'] expectations are higher than they've been in a couple years," Shapiro says. "So there's a likelihood they've bulked up on merchandise more than in the past couple years, expecting a rebound in sales. If it doesn't happen, it could trigger some advertising events."

Paul Ginocchio, newspaper analyst with Deutsche Bank in New York, says that after cutting back on ad spending earlier in the year, department stores will look to the fourth quarter to make up for weak sales. "I think they probably saved a little bit in July and August, and whatever money they saved, they're going to use in October, November and December, so I think we're going to see a rebound," he says.

Ginocchio revised his stance a few days after making these comments, however. In a research note dated Oct. 6, he downgraded his outlook for fourth-quarter and 2004 retail advertising in newspapers, citing weak department store sales this year and concerns about consumer and radio ad spending.

Forecasting the retail category has grown trickier. Once, retail sales were a pretty good predictor of retail ad spending in newspapers. By 1983, retail advertising in newspapers as a percentage of retail sales had peaked at 0.93%. With the rise of discounters and warehouses that spend less on advertising as a portion of sales grabbing market share from department stores and old discounters, that ratio had declined to 0.58% in 2002, its lowest level in at least 36 years, according to Deutsche Bank research.

As that relationship has weakened, predicting the fourth quarter has become little more than a guessing game, with ad executives waiting longer and longer to gauge the season. "I've never been able to figure out whether a good season for them means a good season for us," sighs Mort Goldstrom, advertising vice president of the NAA.

NSA's Shamberg, however, believes that in the long run, retailers' stricter ad spending discipline will benefit newspapers because of their trackability. "If you run an ad on Sunday," he says, "sales show up on Sunday."

Competition also has tightened the supply of remaining ad dollars. Just as consolidation in the retail sector has reduced the number of stores needing to advertise, so has it shrunk the number of manufacturers. And fewer vendors means stores are getting fewer co-op advertising dollars to spend in newspapers, which shifts the costly advertising burden to stores.

In recent years, economic volatility has been the bane of forecasters, and retailers' fourth-quarter ad plans haven't stuck. Stores kept inventory low in an effort to inflate demand, but had to switch gears when it didn't work. They're also better equipped now to get an early read on how consumers are responding to their wares and react accordingly. "There's a plan in place, and newspapers know what it is, and no sooner than it starts, the plan changes," Goldstrom says.

This year, he speculates that after two moderate Christmases, "people may need replacement stuff." But that doesn't mean unrestrained shopping sprees. "The customer is not stupid," he says. "Retailers have trained the customer that the longer you wait, not only will there be stuff, it'll be cheaper."

Up against the Wal-Mart

Department stores' loss of share to old-line discounters like Sears and new ones like Wal-Mart is a well-known story and may be irreversible. To be sure, the category has baffled newspapers and their observers. "Every analyst in New York wants to know what we think about department stores," says Polk Laffoon IV, spokesman for Knight Ridder, which is working on new ways to encourage retail advertising. "There are a whole lot of reasons why department stores have pulled back. There's no clear view what they'll do in the near future."

But there's a chance their struggle to win back customers by revitalizing their physical stores and inventory could benefit newspapers.

Target Corp. has been trying to glitz up its tired Marshall Field's chain by remodeling stores and adding new designer clothing lines. Federated Department Stores Inc. this year launched a national strategy by attaching its Macy's name to its regional chains and centralizing its marketing. Chains also are looking closely at the brands they sell and promoting their private labels as a point of differentiation.

Tom Holliday, president of the National Retail Federation's Retail Advertising and Marketing Association, sees in such initiatives an attempt to restore department stores to their former luster by building the store brands. "They'll try and get off the promotional needle," he says.

What's in it for newspapers? Federated's national marketing strategy, which is scheduled to roll out through February, suggests to some it would shift its ad budget from print, which now garners 85% of its media budget, to TV, more commonly associated with brand-building. (A Federated spokeswoman says that the company planned additional advertising this year to support the Macy's rollout, but wouldn't be more specific.) But some see potential gains for print, too. "I think clearly they will use newspaper, television, and direct mail campaigns, so all three will benefit from increased spending," Holliday says.

Several stores in Federated's Rich's/ Lazarus/Goldsmith's/Macy's division have been running splashy image-style ads in newspapers this year. The ads emphasize the stores' fashion and quality, says Ellen Fruchtman, vice president/public relations for the division. "If you think about how we've used newspaper ROP advertising in the past, it's really been to tell a promotional message," she says. "This is to tell a fashion story." Similar ads have come out of Bloomingdale's, another Federated unit.

Those who know their history realize the use of image-style ads in newspapers isn't totally new for the category. Until department stores discovered the power of price promotions to move merchandise, image ads were their stock-in-trade.

Even if the image ads in vogue among department stores (and specialty and discount retailers) represent a shift in, rather than an addition to, their budgets allocated to newspapers, Goldstrom sees them as a positive sign. "They're recognizing newspaper advertising can do a bunch of things, and it's not just driving traffic," he says.

While retail executives may hope that shoppers turn out early and like what they see on the racks this holiday season, it's nearly impossible to say if that will translate into strong fourth-quarter numbers for newspapers. Too many variables go into determining a store's advertising decisions to generalize about the ideal circumstances for newspapers, says Don Stinson, vice president of marketing for Gannett Co. Inc. A store with limited inventory of a hot item wouldn't seem to need to advertise, but that changes if the competition has an equally popular offer, for example.

"I hope everybody who's optimistic is right on target and there'll be plenty of goods and plenty of people to buy them," Stinson says. "What's clearly good for everybody is a strong economy." A holiday wish universally shared, to be sure.
---
E&P welcomes letters to the editor: letters@editorandpublisher.com.