Profit improvement opportunities for newspapers
Michael Caruso

Newspapers have historically been among the most profitable segments of the media industry with strong cash flows and little leverage. However, fundamental changes are now occurring that may motivate newspapers to reduce costs and improve profits.

In spite of generally strong overall economic growth in the last decade, profits in the newspaper industry have decreased. Publicly traded newspaper earnings declined 10% in 2007 due to several long-term trends, such as the displacement of local retailers by national chains. In these cases, advertising revenue usually decreases because regional shops are more likely to purchase local newspaper advertising. In addition, newspapers now face greater competition from niche and direct mail publishers as well as an increase in “image” advertising. This type of advertising focuses more on a company’s brand than on price and is less likely to rely on advertising in newspapers for exposure.

The rise of the Internet has been a significant blow to an already struggling industry, as it directly competes for classified advertising and subscribers. As a result, newspaper advertising declined by 11% since 2000 and 7% in 2007 alone. Publishers have attempted to compete with Internet companies by offering their own online products, but they have not sufficiently replaced the cash flow lost. Online revenue represents less than 5% of total newspaper revenue and growth is slowing -- down to 20% in 2007 from over 30% in prior years.

In spite of the newspaper industries’ economic decline, acquisition activity has increased. Newspapers have traditionally been family controlled, but in recent years some of the largest papers in the industry have changed hands, including The Wall Street Journal, Minneapolis Star-Tribune, Chicago Tribune and the Philadelphia Inquirer. The increased capital costs associated with these acquisitions may weaken their financial situations.

Due to these factors, more and more newspapers are entering a crisis situation. Advertising revenue and profits have always closely followed the economic cycle, so the current downturn will have devastating effect on an already beleaguered industry. However, there are numerous cost reduction and profit improvement opportunities available, many of which can be applied in any industry.

As with any comprehensive restructuring plan, there are immediate actions that can be taken within a few weeks, followed by more comprehensive initiatives and finally, strategic projects that may take months or years to be developed and implemented.

Advertising: For many companies, product pricing can help improve profits and the newspaper industry is no different. Overall advertising rates, as well as discount policies, can be examined by segments -- e.g. National, Regional, Retail, Automotive and Real Estate -- to determine the least profitable categories.

Efficiency in servicing ads can be achieved through high commission-based sales plans, close monitoring of revenue per sales representative, outsourcing incoming classified calls and increased electronic processing.

Circulation: Opportunities in circulation strategy represent the fastest and easiest way to increase cash flow. Many newspapers have gone to great lengths to keep overall circulation volumes as high as possible, in spite of the lack of a quantifiable link between circulation volume and advertising rates. Selling newspapers is break-even at best so the most expensive delivery channels, such as discounted or free subscriptions to hotels and schools, can be a heavy drain on cash flow. Vanity circulation like the above may help in the boardroom but is damaging to the bottom line. Increases in circulation rates will yield increased revenue and profits while decreasing volumes and costs. As such, an aggressive approach in circulation can be extremely cost effective.

Editorial Process: Newsrooms are usually isolated from business operations in order to avoid conflicts of interest. As a byproduct, they generally do not benefit from business process improvement techniques such as Lean and Six Sigma. They have numerous layers of support staff that do not directly originate content, often over 50% of the entire staff. Applying such process improvement techniques should yield significant cost savings while improving the editorial product.

Production & Distribution: This is the largest expense in any newspaper but has decreased with innovations in desktop publishing, printing press, collation and truck-routing technology. However, process improvement methodologies such as Lean and Six Sigma have not been applied to the newspaper industry and are an excellent way to increase value. One initial step is to ensure the best and most current technology and methodologies are in place.

Back Office: Newspapers have the same opportunities in G&A as most other companies. Improving collections, outsourcing and purchasing can all reap benefits.

Consolidation: The newspaper industry has been moving toward consolidation. The strategy behind many recent acquisitions has been clustering neighboring newspapers and consolidating production, distribution and administrative operations. In a turnaround situation, significant value may be gained by pursuing a sale to a neighboring newspaper or in strategic alliances.

Its pre-eminent market and journalistic position has allowed the newspaper industry to avoid the extreme competitive pressures that have impacted many other industries. As a result, newspapers have tended to act like universities: insular, conservative and self-important.

However, they are now facing a perfect storm of long-term structural decline, a fast-growing substitute product and a cyclical economic downturn. The party is over; it’s time to run newspapers like businesses.

Michael Caruso is a managing director of CRG Partners, a Certified Public Accountant and a Certified Six Sigma Black Belt. Prior to joining CRG Partners, Mr. Caruso held several leadership positions with Affiliated Publications and The New York Times Company, the publishers of The Boston Globe. More about Mike Caruso.

Note: All data per the State of the News Media 2008 by the Project for Journalism Excellence

Commodity prices surge in a struggling economy

It was not long ago that businesses in North America were immersed in a relatively robust economy. While oil and other commodity prices seemed high, much of this was attributed to the geo-political instabilities in major oil-producing regions and the high production demands in China. Despite complex analyses and contingency scenarios for escalating commodity prices, very few companies expected, or actually planned for, the current situation. Most evidence now projects that the cost of basic commodities will remain elevated or continue to increase for some time. The impact of surging commodity prices on the U.S. economy is profound and will quickly cause companies and consumers alike to modify their spending habits.

The total effect of crude oil price goes well beyond the basics of fuel for transportation or for home heating. For some capital-intensive industries, energy expenses (which are primarily driven by oil prices) can account for over 60% of the total cost of goods. Raw material costs for common commercial and household goods, such as plastic and packaging, have escalated since many are produced from petrochemical derivatives. The prices of simple agricultural products, such as grains, are increasing as we look for bio-fuels to replace oil for heating or transportation needs.

In global markets, major commodities are priced in U.S. dollars, and the current economic down-cycle has caused a significant global devaluation of the dollar. Although this has benefited U.S. manufacturers who have substantial exports, it has adversely affected U.S. consumers and investment markets. A recent study indicated that if the dollar had stayed even with the Euro over the past few years, the cost of oil would be $66 a barrel today instead of $125.

Thus, the vast majority of U.S. based companies are witnessing shrinking profit margins as they struggle to control the expense of purchased goods or services, manage market price points, and determine which costs to pass along to consumers. The consumer feels the burden when the items they purchase regularly keep increasing in price.

In the last 25 years, the U.S. has experienced only two official, rather short-lived economic downturns (1990 and 2001). Unlike these previous economic downturns, the U.S. consumer is now simultaneously facing a housing bust, a severe credit crunch, a devalued dollar, a weakening labor market and rising commodity prices.

Although we may be seeing early financial indications of stabilization, these factors are compounding to result in an extremely uncertain economic climate and most likely, a very prolonged recovery. A recent report presented at the Institute for Supply Management Global Conference, suggests that the pressures contributing to elevated commodity price points will continue for the foreseeable future. As a result, we must begin to adjust to the reality of our current economic situation.