Department store consolidations seen cutting newspaper revenue

Federated-May merger means fewer dollars spent on advertising

September 23, 2005|By Stacey Hirsh and Jamie Smith Hopkins | Stacey Hirsh and Jamie Smith Hopkins,SUN REPORTERS

When Philadelphia Newspapers Inc., owner of The Philadelphia Inquirer and Philadelphia Daily News, announced plans this week to cut 100 jobs, the publisher noted struggles that resonate for the newspaper industry far beyond the City of Brotherly Love.

"We face new challenges as we head into 2006, particularly the loss of one of our largest advertisers, Strawbridge's, due to its purchase by Federated Department Stores, and significant cost increases for newsprint and fuel," Joe Natoli wrote in a memo to his staff.

The acquisition by Federated Department Stores Inc. of May Department Stores Co. announced this year is putting regional department stores, including Hecht's, under the Macy's nameplate - and putting newspapers under increased pressure.

The department store consolidation is expected to cause significant reductions in newspaper advertising dollars in some markets, especially where Federated and May previously competed for shoppers.

The New York Times Co. also announced this week job cuts in New York and at its Boston Globe property, among others, and named the Federated-May merger among the challenges it faces - though not a primary one.

"It'll be a fairly widespread phenomenon," said John Morton, an industry analyst and president of Morton Research Inc. of Silver Spring. "But it's just one thing that's contributing to fairly weak retail advertising."

The shakeout among department stores has been closely watched by newspapers, because the two industries traditionally relied on each other for decades. Department stores are historically the largest newspaper advertisers, said Andrew Malis, president of MGH, an advertising and public relations firm in Owings Mills.

In most newspapers, retail ads represent nearly half of all advertising, while national ads make up about 10 percent and classified ads about 40 percent, said John Kimball, senior vice president and chief marketing officer for the Newspaper Association of America in Vienna, Va.

Department stores once represented 20 percent of all retail advertising in newspapers, but that share has shrunk to 10 percent to 15 percent in recent years, he said. The numbers vary by market and newspaper.

Still, a major department store spends $8 million to $10 million a year in advertising, the analyst Morton said. Consolidation in department stores comes at a time when consolidation in telecommunications and a movement toward online shopping are also affecting the retail advertising market, he said.

Newspaper advertising revenue for publicly traded companies was up 2.8 percent through the first seven months of the year, Morton said. At the same time, newsprint costs are increasing 10 percent to 15 percent a year, he said.

Bob Liodice, president of the New York-based Association of National Advertisers, said the Baltimore area could see a decline in advertising because Federated plans next year to close Macy's stores at three local malls - White Marsh and Owings Mills in Baltimore County and Marley Station in Anne Arundel County. Those malls all have Hecht's stores, which will be renamed Macy's.

Hecht's is The Sun's largest advertiser. Mireille Grangenois, vice president of advertising for The Sun, said that it is too early to say how the paper will be affected by the department store consolidation, but that the paper would likely lose some business because of it.

Sun Editor Timothy A. Franklin said the weak advertising market would mean a smaller newsroom budget next year. "I think we've come up with a plan so that any positions we lose would come through attrition and not more drastic steps," he said.

Some media experts fear that reacting to the weak advertising climate with newsroom cuts could have an adverse affect on newspapers, particularly as the industry faces competition from cable television and the Internet.

"With cuts as drastic as there were in Philadelphia ... I'm not sure it's a great strategy to try and strengthen your position in the market by putting out an inferior product," said Rem Rieder, editor and senior vice president of the American Journalism Review, a trade publication.

Thomas Kunkel, dean of the University of Maryland's Philip Merrill College of Journalism, said newsroom cutbacks can lead to missed local stories, the closing of small suburban news bureaus and staff exhaustion. The latest round of cuts comes at a time when newspapers are calculating their budgets for next year and many have been pouring money into coverage of the Gulf Coast hurricanes.

Cognizant that they must fortify their advertising base, some newspapers have begun reaching out to smaller, mall-based retail chains, such as Old Navy and Williams-Sonoma, and to the business base in their communities, such as lawyers, electricians and fence-builders, said Kimball of the Newspaper Association of America.

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