Newspapers Cut Back as Advertising Slips and Paper Cost Rises

Frankly, part of the problem is hemlines.

They’re too high.

And, for that and other reasons, the American newspaper industry is suffering through an economic slump--one that has left some wondering whether the broader economy is headed toward another recession.

Newspapers, which derive much of their revenue from advertising, are typically considered a sensitive barometer of the economy’s direction.

This summer, while many signs point to a robust economy, the country’s major and usually profitable communications giants are suddenly finding themselves cutting costs, imposing hiring freezes and reducing the physical size of their newspapers to save newsprint--just the sort of steps the rest of corporate America takes during recessions.

“It’s not quite a disaster. It’s sort of blah, but nobody has any quick answers of what it means and where it’s going,” said John Reidy, an analyst with the brokerage firm of Drexel Burnham Lambert.

While many of the basic predictors of economic activity--such as employment, industrial production levels and factory use--are up, so, too, are women’s hemlines, and that has turned out to be a problem for newspapers.

This year’s fashion trend--the miniskirt--will be remembered best as a mini-seller. Women, most of whom are over thirty something, apparently thought it was too young, didn’t like it and didn’t buy it.

Even before the mini, clothing prices were rising faster than those of most other products. The combination has meant that for nearly two years the fashion industry, one of the forces that drives advertising, has been slumping.

Another problem is consumer electronics.

“In the first half of the decade you had microwaves, then VCRs,” which spawned whole industries unto themselves and caused a boom in consumer sales, said Carl Steidtmann, vice president and chief economist for Management Horizons, a research and consulting arm of Price Waterhouse.

Those products also started coming down in price, and nothing spurs newspaper advertising like a good price war.

“If you’re selling the cheapest, you have to advertise your price in the newspaper, where people can see it,” said Al McCready, national retail industry director for the Big Eight accounting firm of Deloitte Haskins & Sells.

Some retailers and economists also think retail sales are slumping because consumers simply have gotten cautious. “The Reagan years had a lot of pluses and minuses, but it was a time when people splurged,” said Reidy of Drexel Burnham. “Now I think they may be nervous. They think . . . ‘It’s been fun, but it’s time to start saving for a rainy day.’ ”

A storm that already has battered many retailers may now be dampening newspaper profits as well: Supermarkets, department stores and clothing chains have undergone an extraordinary wave of mergers and acquisitions in the past two years.

Since 1986, for example, May Department Stores--owner of May Co. California--has acquired Robinson’s, Lord & Taylor, Foley’s and Filene’s; Campeau Corp.--a Canadian developer--has bought Bloomingdale’s, Abraham & Straus, Rich’s, Lazarus, Jordan Marsh and Maas Bros., and Macy’s has acquired Bullock’s, Bullocks Wilshire and I. Magnin.

In Boston, said Boston Globe advertising manager Jack Reid, 18 of the paper’s 25 biggest advertisers have changed owners in the past 18 months.

Among Southern California supermarkets, Vons bought Safeway’s stores in the region this year, and Lucky is merging with Alpha Beta.

In many of these cases, the acquiring company had to go deeply into debt to make the purchase; now they are trying to reduce that debt by cutting costs. Campeau, for instance, has told its stores to cut costs.

And while the impact of the stock market crash last October may still mystify some economists, its effect is unambiguous to the advertising sales people at Dow Jones & Co., publisher of the Wall Street Journal.

Financial advertising, which includes those gray, number-filled ads for companies that are selling new stocks or bonds, is off drastically.

Ad linage at the Wall Street Journal, for instance, is down roughly 10% this year, 12% in the past three months.

The numbers are better at newspapers with a broader advertising base, but the picture still is not pretty.

Because of the slump in advertising from retailers and a continuing slump in national advertising of such products as liquor and tobacco, total advertising linage is down slightly this year at the New York Times, the Tribune Co., Knight-Ridder and elsewhere.

It is up slightly at Gannett Co., the country’s largest newspaper chain, though only slightly.

Higher Ad Costs

Times Mirror Co., publisher of the Los Angeles Times, reports that ad linage is up just slightly at the Los Angeles Times, the Baltimore Sun and the Morning Call in Allentown, Pa. Linage is down at the Hartford Courant in Connecticut and Newsday on Long Island.

In most cases across the industry, however, companies have been able to show increases in advertising revenue thanks to increased prices charged advertisers.

“We continue to expect 1988 to be a record year for the company,” New York Times Chairman Arthur Ochs Sulzberger told shareholders in releasing second-quarter results last week. But “this, of course, assumes no downturn in the economy.”

One indicator that newspaper executives monitor when watching for a recession is classified advertising--the ads for real estate, cars and help wanted.

When people stop buying houses and companies stop looking for new employees, goes the thinking, the economy usually is headed for trouble.

Classified advertising revenue is still growing--up 4.6% for the first three months this year over last--but not nearly as fast as in past years. In 1987, for instance, classified advertising grew by 15% over the year before.

“We have considered a recession, we’ve discussed it a couple of times,” said Reid of the Boston Globe, “but we haven’t come down on the side yet that there definitely will be.”

Newspapers’ Costs Higher

“I know that common sense says somewhere you have to have a dip” in the economy, said Jerome Tillis, vice president of marketing for Knight-Ridder Newspapers. “But the more time goes on without a significant dip, the more people almost want to get it out of their system, as if to say, ‘let’s get it over with.’ ”

Even without recession, the newspaper industry has found itself in a bind.

While advertising, in the irrepressible vernacular of business, is “soft,” costs are hard--or at least hard to swallow.

Translation: They are going up.

The price of newsprint has risen twice in the past year, a total increase of 12% to 18% depending on the price negotiated.

The result is a squeeze--rising costs and declining revenue.

At Knight-Ridder, pretax operating profits have dropped roughly 6% this year, 10% in the past three months.

At the New York Times Co., newspaper operating profits are down 11% for the year, 17% in the past three months, though the company will profit from the increased revenue of its forest products holdings.

At Times Mirror, operating profits from newspapers are down nearly 15% for the year so far, more than 19% in the past three months.

And at Dow Jones, operating profits for business publications--which includes the Wall Street Journal, Barron’s and the Far Eastern Economic Review--sank 31% in the second quarter, 27.5% for the year to date.

Operating profits for newspapers are up slightly at Gannett and the Tribune Co., among others.

Expense Cuts Under Way

Newspaper industry analysts are predicting roughly more of the same this year:

“We think retail is going to continue soft, and we think classified will continue soft compared with other years,” said John Morton, an analyst with the Lynch, Jones & Ryan investment firm.

“I expect moderate improvement,” said J. Kendrick Noble, the newspaper industry specialist for the brokerage firm Paine Webber.

Regardless, companies are cutting costs and trimming operations, the same behavior they would take in case of a recession.

The Wall Street Journal is letting its staff shrink through attrition, instituting cost hold-downs, a hiring freeze and, in some cases, taking aggressive steps to encourage some staff members to leave.

The Tribune Co., publisher of the Chicago Tribune, the New York Daily News, the Orlando (Fla.) Sentinel and others, is using lighter-weight newsprint in some of its papers.

The Los Angeles Times has asked departments to cut travel and entertainment costs by 20%, increase the ratio of advertising to news space and has implemented a selected hiring freeze.

Hiring freezes have become “the norm” throughout the industry, said Morton.

“In general, throughout the company, we are looking very closely at the cost base because of what has been a slowing revenue stream,” said David Laventhol, president of Times Mirror.

Increased Vulnerability

While newspapers tend to reflect recessions, not create them--as housing, oil or retail might--if a recession does come, some analysts believe the industry is more vulnerable than in the past.

The reason is that newspapers are now more dependent than ever on those forms of revenue that are hit worst when times get tough--namely, real estate and help-wanted classified ads.

Once only about a third of newspaper income, they now account for more than 42% of revenue.

“So if we have the kind of recession in which help-wanted, real estate and autos really plunge, which is characteristic of every recession we have ever had,” said analyst Morton, “newspapers are more vulnerable now than they have ever been.”