Cutbacks in editorial departments, lowered expectations for earnings growth, and continued rises in newsprint prices would be the developments to watch out for in the newspaper industry worldwide during the coming year, a new report has indicated.
Till revenues remain flat – advertising growth below inflation and slight declines in circulation – newspapers must lower profit expectations, cut expenses to achieve profit goals and keep stock prices high, or, cut expenses to reinvest in added sales and marketing pressure on the market to grow business fundamentals, says Newspaper Outlook 2006.
The "Newspaper Outlook 2006: Managing Perceptions" report is the fifth annual strategic examination of the newspaper industry by the International Newspaper Marketing Association (INMA). INMA is a non-profit association dedicated to promoting advanced marketing principles within the newspaper industry, and is based in Dallas, Texas, US.
Some of the predictions made by the INMA report, authored by its executive director Earl J Wilkinson, have already started bothering the newspaper industry. Newsprint price in the United States (US) has already matched its historical high of $625 per metric tonne. Newsroom cuts at the New York Times and the Philadelphia Inquirer among others already has editors worried about rough times ahead.
INMA's analysis shows that the 13 publicly-traded newspaper companies – counting operations both related and unrelated to the newspaper business – grew revenues 7.3 per cent in 2004 to $31.8 billion, the highest year-on-year revenue growth since 1997. Operating profits increased 6.5 per cent last year to US$7 billion. The operating profit margin for the 13-company sector was 22 per cent in 2004, down slightly from the 22.2 per cent in 2003 and the 22.3 per cent in 2002.
The picture is less positive looking at newspaper operations within these companies. About three-quarters of these companies’ business is strictly print newspapers. Revenues grew 5.5 per cent to US$23.8 billion in 2004, the best year-on-year results since 1999. However, operating profits last year slid less than 1 per cent to US$5 billion representing only the third year that has happened since 1993. Operating profit margins of the newspaper operations of the 13 companies was 21.2 per cent last year, down for a consecutive year. In the first half of 2005, operating profit margins have been down 1.9 per cent to 20.9 per cent versus 21.3 per cent in 2004, 21.6 per cent in 2003, and 21.3 per cent in 2002.
Says Wilkinson, "What the data tell us is that the United States’ most efficient newspaper companies have hit a profit margin ceiling. The inability to grow revenue at an appreciable level will cost jobs, as was evidenced in September 2005 as several US newspaper companies announced layoffs – notably to cutback-immune editorial departments which have been spared scrutiny since the structural market shifts began in 1990."
Though the revenue growth rate in the 2003-2005 period represents the best financial performance for newspaper companies since 1996-1998, "store-on-store" revenue growth has languished since the 1980s and came on the backs of newspaper acquisitions and advertising rate increases. Improved profit performance throughout the 1990s was due to aggressive cost management, points out Wilkinson.
Why this has happened, says the INMA executive director, is a story unto itself. Until 1997, newspapers consistently recorded profit margins of 11-16 per cent. As capital flew from safe havens like newspapers to the stylish new dotcom stocks in the late 1990s, newspaper companies responded by aggressively trimming costs even as revenue growth remained mediocre. Between 1998 and 2000, profit margins were ratcheted upward to the 19-22 per cent range. After the recession year of 2001 saw operating profit margins fall to 16 per cent, margins returned to a consistent 22 per cent every year since then. Yet newspapers are operating in an environment in 2005 which is different than 1995.
INMA estimates that without significant costcutting, the US publicly traded newspaper sector would need to grow revenue 8-10 per cent annually to see miniscule profit margin improvements. The newspaper sector has passed firmly into that revenue growth range only once in the past 12 years. Newspapers operating in different ownership structures have varying needs for revenue and profit growth. Yet it is the financial performance of these companies that represents the most transparent and most closely followed benchmarks for most newspapers.
Newspaper managements, says Wilkinson, historically see marketing as a cost often disconnected from a return on investment. Other industries confront this misperception, though not to the degree of the product-led newspaper industry. A big part of that thought process comes from the executives populating boardrooms without marketing backgrounds. This thought process is slowly fading away at newspapers, yet it still exists. Short-term financial needs and short-term personnel disputes are usually at the heart of such steps. As predictably as marketing departments are decentralised
or eliminated, they are always re-introduced at a later date.
The reasons for these, according to the report, are simple: at minimum, managements cannot get their arms around what is happening in the market and cannot muster the focus to engage the market without at least an under-funded marketing department.
Newspapers historically spend less than 2 per cent of revenues marketing themselves – split between motivating circulation and advertising performance. Yet, newspaper managements urge advertisers to spend 5 per cent of revenues on marketing with the lion’s share going to newspapers. Despite the intense market forces outlined in the INMA report, newspaper executives say their paltry marketing expenditures will be maintained in 2006.
While the budget increases from a low base are small, there is some semblance of hope. Some 56 per cent of INMA members said they planned on increasing their marketing budgets next year. This is down slightly from last year’s 60 per cent. Only 8 per cent of members said they planned to decrease marketing expenditures – the lowest percentage since the first Newspaper Outlook survey was carried out in 2001.
The present INMA survey showed that most regions remained consistent between expectations for 2005 and 2006. Fiftyfive per cent of North American newspaper executives expect marketing budgets to rise next year versus 57 per cent a year ago. There has been a sharp downward shift in marketing outlook among European newspaper executives: 46 per cent expect increased budgets compared to 61 per cent a year ago. Fifteen per cent of European newspaper executives expect marketing budgets to be cut in 2006 compared to 6 per cent last year.
[To purchase the report, please visit the INMA website.]
