Tough love you can't paper over

With merchants increasingly conscious of how well their ads pull, the newspaper industry's relationship with retailers is "at risk," says an analyst who witnessed a tough-love encounter last week between news execs and some of the largest advertisers still patronizing them.

The occasion was the INMA summit in Miami, where vice presidents from Home Depot and Walgreen's expressed significant concerns about the effectiveness, efficiency and credibility of newspaper advertising. These are not exactly novel concerns, though they will be duly reported in a moment.

But newspaper execs will be startled by what Deutsche Bank analyst Paul Ginocchio learned when he got back to his office in New York and started crunching some numbers.

Down in Miami, Paul and fellow conferees were told that Walgreen's and Home Depot respectively spent 75% and 50% of their ad budgets on newspaper advertising. In checking the independent TNS Media Intelligence/CMR industry database, Paul found that Walgreen's reportedly puts 52% of its $159 million ad budget into newspapers and that Home Depot puts only 15% of its $636 million ad budget into newspapers. The difference between stated market share and CMR's numbers is a quarter-billion dollars.

No one at Home Depot or Walgreen's has responded to requests for clarification.

The good news for newspapers is that Home Depot still likes them so much that they run inserts 52 weeks a year, according to comments Paul attributed to John Ross, the vice president of advertising for Home Depot.

The bad news from Home Depot, according to Paul, is that newspapers deliver one the lowest returns on investment of all the media in Home Depot's toolbox. Home Depot's best media deliver $18 in sales for every dollar of advertising, while the the worst fetch only $5 in sales per dollar spent. Newspapers are "at the bottom of the range," reports Paul.

Given this relatively limp ROI, Home Depot feels "the retail industry's historical relationship with the newspaper industry [is] about to change," says Paul, adding:

Due to retailers capturing more customer data via in-house credit cards, loyalty programs and online sales, retailers now have much more information about their customers. As direct mail and online ad results are much more auditable and tangible, they are going to capture ever-larger allocations of ad budgets.

If newspapers are not able to segment more precisely, make themselves more measurable and help retailers reach their overlapping customers (via comparing databases and by household-by-household targeting), then newspapers will continue to lose retailers' ad dollars.

Walgreen's ad VP Craig Sinclair expressed concerns over the practice of increasing newspaper circulation by giving non-subscribers copies of newspapers purchased by a third-party such as a merchant or hotel. "Does the reader really want the [newspaper] or not?" he is quoted as asking.

Paul says advertisers are "confounded" as to why the newspaper industry is more focused on starting free newspapers and cutting expenses than on shoring up their flagship titles and investing in such strategic initiatives as new media and direct-marketing capabilities. "These speakers delivered a fairly harsh message to the industry," says Paul. "But, of course, it's in their best interests to do so."

It also would be in the best interests of the industry to listen.