McClatchy’s online sales swoon

Online advertising sales have fizzled completely this year at McClatchy, the nation’s second-largest newspaper publisher. The question is: Why?

Although online sales at newspapers grew far more vigorously in the last three years than they have in first half of 2007, interactive revenues remain the single positive note for an industry heading to a likely 10-year low in print sales. But McClatchy, whose print sales are wilting along with those of most of its peers, isn’t even sharing in the online upside.

With industry-wide online sales up 20.8% in the first half of this year, McClatchy's interactive revenues gained a meager 1.4% through June, according to the company. McClatchy's online sales actually fell 3.1% in August to a bit less than $13.4 million, while other publishers like Lee gained 48%, Journal Communications rose 35%, Media General climbed 29.3% and Journal Register increased 19.6%

It’s true that Lee’s August sales of $5.3 million grew from a much smaller base than McClatchy’s, making a jumbo percentage advance easier to achieve. But Gannett, the biggest publisher in the land, achieved 12% online sales gains at its U.S. papers in the first two quarters of the year, according to spokeswoman Tara Connell. (Correction: In the initial version of this post, I erroneously reported that Gannett's online sales climbed 48% in August. In fact, this related only to its broadcast division and not its newspapers.)

So, why is McClatchy’s online sales performance drastically lower than that of the rest of the industry?

“There’s never a quick and easy answer to this sort of stuff,” says Elaine Lintecum, the company’s treasurer. Agreed. But McClatchy’s answers are neither quick, nor easy, nor convincing.

Now that I hereby have reminded you that I own a paltry number of shares of the company’s stock, here’s a point-by-point summary of what McClatchy has to say about its fizzling online sales – plus my take on why it doesn’t quite compute.

McClatchy Explanation No. 1

“Our online sales continue growing, even though our accounting numbers appear to be less favorable,” says Elaine, arguing that it is difficult for McClatchy to make year-to-year sales comparisons for the 20 newspapers acquired from Knight Ridder in mid-2006 because McClatchy’s accountants can’t reconcile KRI's bookkeeping to their system.

My take: McClatchy has owned the former KRI papers for a full year as of June 27, 2007, so the company, at the very least, ought to have accurate year-to-year comparisons for the months of July and August. Those numbers show online sales rose 8.4% in July (vs. +62.5% for Lee) and dropped 3.1% in August (vs. +48% for Lee). With McClatchy now counting all the beans, there can be no doubt that its online sales are far worse than those of any of the publicly held publishers.

McClatchy Explanation No. 2

When McClatchy bought KRI a year ago, Tribune Co. and Gannett gained the right to buy back the one-third share of the three-way partnership they had forged with KRI to create Career Builder, the online job site. After prolonged negotiations, McClatchy cut a deal with the other two publishers to sell 18.3% of Career Builder to TRB and GCI and to retain the rest for itself.

A less-celebrated provision of the deal took certain lucrative Career Builder products away from the former KRI papers in the McClatchy fold. The absence of those advertising products is another reason for McClatchy’s online sales slump, says Elaine. But it gets worse: Not only did Career Builder take away the valuable products that are costing McClatchy revenues, but Career Builder now is also selling some of them directly against the former KRI papers.

My take: Why did McClatchy go along with a deal that turned its partner, Career Builder, into a direct competitor? Chris Hendricks, the vice president of interactive media for McClatchy, told investors over the summer that he was trying to persuade Career Builder to give him a better deal. When asked if he made any progress, Elaine said via email: "We do have some additional products we can now sell. That is all we can say." You can bet Career Builder will be selling the same stuff, too, diluting McClatchy's share of a recruitment market likely to shrink in the expected economic slowdown.

McClatchy Explanation No. 3

Elaine says it will take 12 more months before the above issues are wrung out of the financial statements, thus producing accurate year-to-year comparisons that will prove, retrospectively, that McClatchy’s online sales are growing faster today than the financials would appear to suggest.

My take: Unless the company is fudging its numbers – which I don’t for a second think is the case – how can sales be growing faster than the company’s financials say they are? The numbers are weak, because the numbers are weak – not because they are being counted wrong.

So, what's happening here? Why are McClatchy's online sales the lowest, by far, in the business? If McClatchy knows, no one is telling. If McClatchy doesn't know, that's telling, too.