ROP ads poised for a comeback?

In a potential bit of good news for newspapers, run-of-paper advertising may be making a comeback after a sustained period of decline.

Large national retailers like Macy’s and Best Buy, which had shifted much of their budgets to free-standing color inserts over the years, are taking a fresh look at in-paper advertising as a way of eliminating the growing cost of producing the ad inserts they pay newspapers to deliver for them.

If the shift catches on, it would bring some additional heft to America’s incredible shrinking news pages and possibly deliver higher advertising rates to newspapers, which have been repeatedly downsizing as the result of double-digit increases in the cost of newsprint and double-digit declines in ad sales.

In just the last four months, the price of 30-pound newsprint has climbed nearly 14% to $701 per metric ton, according to PaperAge.Com. Meantime, as reported here, industry ad sales for the year are projected by to fall by $4.7 billion, or a record 11%, to $37.5 billion.

An uptick in ROP advertising could help restore some of the physical presence that newspapers have been losing each year since 2003.

Owing in part to reduced advertising volume and in part to the increasingly stringent economies undertaken by publishers to shore up their sagging margins, the size of American newspapers has been wasting steadily since 2003, according to statistics kept by the Newspaper Association of America.

As you can see from the graph below, newsprint consumption tumbled by more than 27% to some 1.5 million metric tons in the fourth quarter of 2007 from where it stood in 2003. In April, 2007, newsprint consumption fell 13.7% from the prior year to 483,000 metric tons.

Inserts gained popularity among merchants not only because of the perceived high impact of the colorful, magazine-like circulars but also because inserts could be targeted to selected Zip Codes in a newspaper’s circulation footprint. By carefully selecting which copies carried their inserts, advertisers maximized the efficiency of their expenditures.

But the rapidly escalating cost of producing and distributing free-standing inserts is giving some advertisers second thoughts, according to newspaper executives. “We can print more efficiently than retailers,” said one publishing executive. “They are starting to talk to us about buying more ROP.”

Where advertisers are continuing to publish standalone inserts, they are getting stricter about the places publishers can distribute them, banning them in some cases from copies distributed in schools or sold at newsstands.

Even though the cost of newsprint may rise as much as 25% this year because mills have throttled capacity in the face of declining demand, major newspaper publishers consume paper in such large quantities as to command better discounts than most retailers. At a time of soaring fuel costs, it is vastly cheaper to email a digital image of an ad to a newspaper than to have paper reels shipped from a mill to a commercial printer and then have the finished product loaded on a second truck to be hauled to their final destination.

While many retailers charge the makers of electronics, housewares or power tools a co-op advertising fee to appear in their circulars, an executive at one major chain told me a few years ago that the company lost $70 million a year on its insert operation. That was well before the current bout of inflation kicked in.

Newspapers like ROP advertising because it fetches a higher rate and eliminates the need to hire extra help in the mailroom to sort and stuff the circulars. The distribution of multiple sets of inserts to multiple locations is also a logistical nightmare.

Historically, insert advertising has represented about a quarter of a newspaper’s retail advertising business, though the number may have risen in recent years as other types of advertising declined. Nationally, the insert business probably generated about $5 billion to $5.5 billion in 2007.

A typical metro charges $25 per thousand copies to stuff inserts in its papers, as compared with $60 per thousand for an ROP ad. The difference is far from being all profit, because ROP rates have to cover the cost of the paper, ink and certain other costs.

Merchants who forsake freestanding inserts for in-paper advertising will lose the ability to zone the distribution of their circulars. But they may gain new customers among readers who previously didn’t fit their distribution criteria or among readers who ignore circulars but serendipitously discovers an appealing ad while perusing the paper.

Even if marketers begin to shift their dollars away from inserts and into ROP, the industry still faces the quickening flow of ad dollars away from newspapers to such targeted media as the Internet, magazines and cable TV.

In one chilling example, Macy’s reduced its ad spending in newspapers by nearly a quarter of a billion dollars between 2004 and 2007, according to TNS Media Services, an independent market research company. In the four-year period, Macy’s newspaper expenditures fell 23% to $609.7 million at the same time Internet outlays rocketed 840%, magazine buys climbed 34% and television schedules rose 27%. Significantly, however, Macy’s total ad expenditures fell 8% in the period to a bit over $1 billion.

The other worry for newspapers, quite bluntly, is whether some of their most faithful advertisers will stay alive.

CompUSA, a regular circular advertiser, absorbed the Good Guys, another major insert advertiser, before both companies succumbed as national advertisers at the end of last year. (The CompUSA brand was acquired by the parent of Tiger Direct and operates a website and a few stores in Florida, Texas and Puerto Rico.)

Circuit City, another insert regular, has been struggling against what one analyst called a “death spiral” of challenges to its business model.

If Circuit City were to join CompUSA and Good Guys in big-box heaven, would Best Buy think about trimming its long-time comitment to newspaper advertising?

Talk about potential death spirals.