Shopping for Solutions

By: Mark Fitzgerald & Jennifer Saba Fundamental changes in the ways Americans shop and stores sell threaten the very foundations of the newspaper industry's retail-advertising franchise. Though newspapers have been forced to adjust to new market conditions in literally every area of their business in recent years, this shift may prove the most difficult to accept. That's because of all the marvels wrought by the Daily Miracle, none was more important economically than the retail advertising engine that built the neighborhood haberdasher and hardware store into gigantic department stores and big box category killers, and transformed American newspapers into the thickest packages of newsprint and preprinted free-standing inserts (FSIs) in the world.

Yet even as newspaper retail advertising dips and rebounds with the short-term rhythms of the marketplace, this important category is in the throes of a long-term decline that, oddly, has failed to galvanize the newspaper industry in the way that similar crises in readership or diversity in newsroom employment have.

Robert Broadwater, managing director of the New York City merger and acquisition firm Veronis Suhler Stevenson, says for the better part of eight years, "I've gotten question after question from publishers taking a lot of time thinking about classified advertising." But now that classified is recovering, there isn't the same focus on the "troublesome" state of newspaper's retail franchise, he says.

Some newspapers have made retaining retail a priority, and the initial results of their campaigns, at least, indicate that papers can select among several strategies to keep ? and even grow ? the franchise.

Papers such as The Arizona Republic and the jointly produced Detroit newspapers, for instance, are publishing magazine-like products to attract nontraditional retailers. In Oklahoma City, which suffered the sudden and dramatic loss of several big retail advertisers, The Oklahoman has turned the corner by paying greater attention to smaller retailers. The San Diego Union- Tribune is attracting local accounts that once turned to direct mail and shoppers. And Tribune Co. is reacting to the increased consolidation and centralized decision-making of major retailers by taking a national and multimedia approach with its Tribune Media Net sales organization.

But observers both in and outside newspapers complain that the industry as a whole fails to understand the magnitude of what it faces.

The dynamics of the problem would seem to be pretty simple to understand: Retailers who mostly do not advertise in newspapers, such as Wal-Mart, Costco Wholesale, and other so-called EDLP (every day low price) discounters are taking market share from the retailers who have been the best newspaper customers, such as department stores and supermarkets. Some of those general merchandisers, household names for generations, disappeared forever in this new retail era.

At the same time, high-end specialty stores like Neiman Marcus and national retailers like The Gap are cutting into the department stores while, for the most part, eschewing newspaper buys.

Miles Groves, the Washington D.C., media economist, has for years sounded the alarm about the effect that retail's radical restructuring is having on newspapers' retail linage. "The issue now is not so much newspaper versus any other medium ? it's whether [retailers] are investing in advertising at all," he warns.

Groves offers some sobering statistics taken from a recent study by Deutsche Bank Securities. In 1992, the discounters and warehouse clubs accounted for 16% of the retail market. By last year, their share had grown to 40%. That shift cost newspapers about $60 million annually in lost advertising between 1992 and 2001, he calculates.



Snubbed by the ruling stores

A lot is at stake for newspapers individually. At Tribune Co. newspapers, retail is the largest single category, accounting for 40% of ad revenue, Tribune Publishing Co. President Jack Fuller told analysts this summer. Retail is even more important at The San Diego Union-Tribune, where it accounts for 43% of total ad revenue. At The Dallas Morning News, retail is fully 50% of revenue.

Newspaper's retail advertising crisis is no longer just a Wal-Mart problem. Newspapers have convinced Target they are an important medium for communicating its hip brand, but others are not so sure. Mort Goldstrom, vice president of advertising for the Newspaper Association of America (NAA), notes that some of these retailers are simply "dabbling" with newspapers ? among them, Banana Republic, which now runs in roughly 10 newspapers in only seven markets.

And some national retailers who have been traditional newspaper advertisers are reconsidering whether they should keep putting their money in the medium ? and are concluding they would rather spend on public relations, promotion, and branding advertising in broadcast or magazines.

Starbucks, for example, leaves it up to regional marketing managers to decide whether to advertise in newspapers. Spokesperson Lara Wyss says that many regions do use newspaper advertising to generate awareness usually around a specific promotion. Yet the company relies heavily on what Wyss calls "store advertising" concentrating on posters, signs, and window clings. "Our overall advertising budget is relatively small," she says.

Neiman Marcus is one example that still pains Harold Gaar, vice president of retail display advertising for The Dallas Morning News, the hometown paper for the high-end retailer. "Unfortunately, at many newspapers, including ours, Neiman's has moved on to alternatives," Gaar says. "We paid less and less attention to them. It's our fault, and we have to rethink how we go to market so that these advertisers understand they are important to us."



Slowfoot no racehorse

Kurt Barnard, the dean of retailing experts, says customers are being virtually chased away by newspapers. Barnard is credited with being the first to point out the shift in retailing from traditional stores to EDLP discounters. He says retailers have made the transition to a more efficient business model, while newspapers have not.

"Newspapers don't know what they are doing," Barnard says from his Montclair, N.J., office. "They are out of touch with the industry on which their living depends. They are out of touch technologically, and out of touch managerially."

Retailers have run out of patience, Barnard says, declaring that, "the time for a showdown is here." Newspaper advertisers, he says, are fed up with lip service from the industry, and will demand new ways of delivering audiences much more efficiently and economically. And for the first time since newspapers and retailers began their mutually profitable partnership, Barnard says, papers must take advertisers seriously when they threaten to walk out the door. "That is one of the major conundrums that your industry is facing. Retailers have learned that media are not necessarily indispensable to their businesses," Barnard says.

Barnard is famed for his big-picture analysis of retailing. Ed Nakfoor sees the local perspective. As a consultant in the Detroit suburb of Birmingham, Mich., he works with retailers typical of businesses that now mostly shun newspapers. Among his clients are a high-end shopping mall that publishes its own magazine instead of advertising in newspapers, and upscale shops that, he says, "don't want to be in the front section with all these other crappy-looking ads."

On the other hand, these stores are sold on using PR and promotional efforts, he says ? even as Nakfoor himself advises them that advertising must be part of their marketing mix. Newspapers, he says, don't provide a place for these retailers: "Even if they have a 'fashion page,' it's really just a half-page, or if there's something about fashion in the features section, there's no place to advertise unless you want to get stuck next to the movie listings."



Smartening up

But if Nakfoor's clients represent the new-style retailers newspapers are losing, they also represent stores that could become customers, and in very simple ways.

Those client stores, for instance, are enthusiastic about two print products that will soon be published by the very newspapers they avoid. The magazines, Strut and Signature, will be launched this September by Third Street Publications, a division of Detroit Newspapers?the joint operating agency for Knight Ridder's Detroit Free Press and Gannett Co.'s The Detroit News. The glossy, perfect-bound publications will mimic a city magazine, but deliver better results for retailers, says Third Street's general manager, Alan Lenhoff.

"There are a lot of retailers who are extremely image-conscious," Lenhoff says, and Third Street is determined that everything about the monthly Strut reflects a class environment. Lenhoff describes the newsrack used to distribute copies in high-end beauty salons, gyms, and restaurants as "the little black cocktail dress of racks, sort of curvy, definitely made to look different." The rack is designed, he adds, to be part of the upscale environment of its target audience of women.

The Arizona Republic has started up a similar niche-publishing venture, now known as Republic Magazines and Custom Products. Like Third Street, it publishes a selection of glossy magazines, each distributed on a saturation basis to the 15,000 to 20,000 households in the particular upscale community. The magazines are so filled with photos of local people that editors expect someone in every household will recognize at least one person pictured in each issue.

Republic Advertising Director Margie Cochrane says the new-products unit is one response to the shifting advertising strategies of department stores. Traditional retailers such as Macy's or Robinson's department stores are changing their mix of ad spending, she says. Dollars that were going to newspapers are now spent to increase television advertising. The Republic continues to fight for its share of department store ads, and has had some success in assembling packages that combine multimedia advertising with assiduous service in helping attract customers through the Web.

But much of the Republic's focus rests on what it calls the "locally controlled advertising dollars" that can come from smaller and medium-sized retailers. These aren't necessarily mom-and-pop stores. The paper has increased its share of jewelry advertising, and has opened up a whole new category for the company in very high-end furnishings. These local retailers for the quiche-and-truffles set are increasingly going to be part of newspapers' bread-and-butter advertisers. "We understand that this is not a short-term situation, but probably a long-term scenario," Cochrane says, "and we know more dollars are going to have to come from the nontraditional retailer."

It's a scenario that The New York Times has down pat. The glossy magazine project has been so successful, that the paper is relaunching its styles publication under the new heading T, focusing on fashion, home design, and style and entertainment. T is distributed through the paper eight times a year, though eventually it will be published monthly.

Jyll Holzman, senior vice president of advertising at the Times, says that already the women's fashion ads are up 50% from last year. Holzman attributes the success to investment in the editorial product in the paper and the magazine. "Advertisers look to us for branding," she says.



Wal-Mart: We're not to blame

Like the changes in retailing itself, the forces reshaping newspaper's retail advertising category began with the marketing phenomenon Sam Walton started building in 1962 with a single store in the town of Rogers, Ark. By July of this year in the United States alone, there were 1,409 Wal-Mart stores, another 1,562 Wal-Mart Supercenters ? which include huge supermarkets ? and 539 warehouse club-style Sam's Clubs.

Along the way, other general merchandisers and even some big box retailers that once towered over Wal-Mart have fallen victim to the relentless cost-cutting efficiencies of the Bentonville, Ark., company. For newspapers in many markets, the combination of burgeoning Wal-Marts and shrinking traditional retailers has played havoc with ad revenues.

Wal-Mart says it gets a bad rap as a shunner of newspapers. Wal-Mart spokesperson Sarah Clark tells E&P, "'The non-use of newspapers' is not a strategy at Wal-Mart at all." The retailers, she says, runs FSIs in "more than 800 newspapers across the nation every month." What it doesn't do much, she acknowledges, is ROP (run of press) advertising: "ROP advertising doesn't fit well with our overall company philosophy [of] Every Day Low Prices."

But even in a year like 2003 that was not particularly good, traditional retailers were bigger newspaper advertisers by far than Wal-Mart or Costco. According to TNS Media Intelligence/CMR, Sears last year spent $127.3 million on newspapers; Target and its subsidiary department stores, $235.6 million; and Kmart, $90.9 million. Wal-Mart, the nation's biggest retailer by far, spent just $14.9 million. Fast-growing Costco Wholesale stores spent a total of less than $400,000.

As Wal-Mart opens more Supercenters, newspapers are likely to see revenues slip in that category as well, because unlike traditional supermarkets, Supercenters do not need thick FSIs to list the price of dozens of food items. "We do not advertise price for Supercenters in any market currently," spokesperson Clark says. "Specific pricing goes against the EDLP philosophy."



Embracing the 'big shift'

At individual papers, the cumulative effects of these retailing shifts can be dramatic.

Consider The Oklahoman. In the past three years, Oklahoma City lost all of its Montgomery Ward stores when the chain shut down; Kmart closed all its big boxes in the market; and a prominent local electronics chain went belly-up. Along the way, Wal-Mart not only gobbled up all of that market share of general merchandising, but it also knocked out all but two supermarket chains and now claims 41% of Oklahoma City's grocery sales.

While laying waste to all those long-time newspaper advertisers, Wal-Mart buys preprints just 13 times a year in The Oklahoman, although Display Advertising Manager John White notes with a dry laugh that "they do give us a lot of 'grand-opening' business."

What does a paper do in this situation? "First, you have to admit to yourself that [the old retailers] are gone, and they aren't coming back. It definitely makes you more resourceful," White says. His paper has created niche products from local golf course guides to quarterly "Fashion OKC." It put Post-It Notes sticky ads on its front page. It tried, he says, "to create more opportunities for advertisers, and more excitement for the paper."

But its most important strategy, White says, was a return to the basics of newspaper sales. The paper added more people to its local territories ? and concentrated on working much closer with customers old and new. "We still have a strong retail base here, but we realized we needed to put more time back into rebuilding those relationships and keeping our local retailer alive," White says. Rejuvenated older accounts, and a spate of new and nontraditional customers from the restaurants and clubs in a newly popular downtown zone, are growing at "double-digit rates," White says, and have put The Oklahoman back in positive territory. "Overall, we lost a major item or two off the menus, and we're replacing them with a bunch of appetizers," White says. "Because the fact is, local is where the growth is."

That's also what The San Diego Union-Tribune is discovering, says Advertising Director Scott Whitley. And to go after that, Whitley is implementing a strategy that is basic Sales 101. Sales force incentive plans and performance standards that emphasize skills beyond simply taking more ad orders are now the standard. Last month it began conducting a "territory audit" that gives managers information about the number of retailers in territory, along with their gross revenue.



Go big, or go home

Research, in fact, is a key in confronting this retail advertising crisis, but one the industry has largely ignored in recent years, says media economist Miles Groves. "What newspapers and associations and rep firms need to offer is critical core research focused on local advertising ? and we're not doing it," he says.

That is changing, declares Dave Murphy, president of Tribune Media Net (TMN). "We've go to have greater transparency toward advertisers," he says. "We need to tell them who reads the business section, and how they think and behave. We also need to tell them that if 100% of readers read the news, maybe only 40% read business. We've been somewhat reluctant to do that."

TMN considers itself the kind of big-scale, nationally oriented unit that newspapers need in an era of consolidation. "It's the kind of environment that rewards scale," Murphy says. It isn't just the reach of Tribune's major-market dailies, television and new media that's important, he argues, but the ability of TMN to strategize with national retailers.

Ironically, as consumer businesses consolidate the audience for media is fragmenting, giving newspapers a big advantage, argues TMN Managing Director Barry Haselden. "The good news in this story is that as advertising clutter becomes greater, we think the environment favors newspapers, because we have a strong connection with readers. Consumers actually rely on newspapers for advertising, they want to see our ads ? where in other media, they want to block advertising." With its acquisition (along with Gannett and Knight Ridder) of CrossMedia, TMN now has the ability to sell national and local retailers on the concept of ShopLocal.com. The site, which sits on Tribune's online editions, allows readers to search advertisements.

Newspapers are only now beginning to catch on to the significance of the shifts in retailing. But the task ahead, experts say, may not be so much to catch up ? but to anticipate the further changes ahead.

"I'm not convinced Wal-Mart is the end of the story in terms of retail evolution," Miles Groves argues. He points to the growing consumer preference for the local, the unique brand, the product that has not yet been commodified by a relentless push on price. "Research shows the two strengths newspapers can take to retailers is that they can target, and they can build brand," he says. "We've just got to bring them that research."

Retailers are ready for a print product from the local newspaper that reflects consumer interest in exciting specialty products, says retail consultant Nakfoor: "Just look at the success of InStyle or Lucky. People crave all this information