$7.5B sales plunge forecast for newspapers
Should this forecast prove to be correct, sales would tumble by 16.5% to $37.9 billion from last year’ s depressed level and the industry will have lost a staggering 23.4% of its revenues since producing a record $49.4 billion in sales in 2005.
Prior to the historic collapse of the worldwide financial markets, I projected on Sept. 5 that print and online sales would drop about $5.4 billion to $40 billion from the 2007 level, barring “unforeseen events.” Given the ferocity of the ensuing unforeseen events, my revised forecast now shows the industry this year could shed an additional $2.1 billion in sales, bringing the total estimated decline to $7.5 billion.
The true number could come out higher or lower, depending on further developments. But it will be difficult to undo much of the damage the credit crisis already has done.
Even if all the leaders of the all the world’s governments uncharacteristically adopted a well conceived and well orchestrated rescue plan to jump-start the credit markets, it would take a substantial amount of time and effort to mend the mangled finances and rattled psyches of millions of households and businesses.
The credit crunch will hit newspapers hard, because nearly three-quarters of their ad sales come from such vulnerable accounts as:
:: Retailers who are seeing consumer demand dry up at the same time they are struggling to borrow the money they need to make payroll and stock their shelves.
:: Auto dealers who can’t sell cars because many potential buyers are postponing purchases and the customers who try to buy cars often can’t get loans. Meanwhile, dealers are scrambling to finance the fleets of unsold vehicles clogging their lots.
:: Real estate agents who can’t find buyers because no one knows what anything is worth and, owing to a paucity of transactions, can’t afford to buy ads to sell homes that no one wants to buy. The few brave souls stepping forward to buy homes generally have found mortgages difficult or impossible to obtain.
:: Employers who aren’t buying help-wanted ads because their businesses are shrinking, not expanding. Many report difficulty borrowing the working capital they need to buy raw materials or make payroll while they await payments for goods and services they already have provided.
In an effort to translate the effects of these grim circumstances into a revised sales forecast, I assumed that third-quarter sales performance would be only slightly worse than it was in the in the first half of the year, because the credit markets didn't seize up until mid-September. But then it gets ugly.
As detailed in the table below, I trimmed classified revenues in the fourth quarter to half of the prior year’s level in the auto, realty and recruitment categories, because each would be affected most directly by the credit collapse.
I was more conservative in cutting the expectation for retail advertising for the fourth quarter, because I believe merchants will do everything possible to sustain their ad schedules during the holiday period that determines the profitability of their businesses for the year. If there is not a sharp turnaround in the economy after the first of the year, the sales in this category could collapse in 2009 in a tide of bankruptcies and desperate cost cutting as the surving merchants strive to remain viable.
In light of the 2.3% drop in online ad sales in the second quarter, I projected a modestly accelerating decline in that category for the balance of the year. Although most newspapers generate two-thirds or more of their online sales from the three major classified verticals, I am assuming publishers will push as much of the remaining classified revenue as possible to the online side of the ledger to preserve the impression – but not necessarily the reality – that the web remains a growth area.
While the publishing business (though not all individual newspapers) has survived every economic calamity in the nation’s history, this downturn could be uniquely catastrophic for an industry that has been struggling for the last three years to retain its relevance among readers and advertisers.
Even during the economically robust years of 2006 and 2007, newspaper advertising fell a total of $4 billion, or 8.2%, from the all-time peak of $49.4 billion achieved in 2005. A drop to $40 billion in sales this year would be equal to an 19.1% slide from the 2005 level. But the newly projected drop to $37.9 billion in sales this year would amount to a 23.4% decline from 2005.
Bleak as this immediate prospect is, the long-term outlook is not much better. It is not clear how the industry will recapture its former vigor when the economy rebounds, given that its revenue base was disintegrating well before the economy fell apart.
Macy’s has gobbled up many of the Main Street department stores that traditionally were among the best newspaper advertisers, substituting instead a national brand strategy relying more on television and magazines than newspapers. Between the economically expansive years of 2004 and 2007, Macy’s reduced its advertising spending at newspapers by $249.1 million, or 29%, according TNS Media Intelligence.
CompUSA, a major newspaper advertiser, absorbed the Good Guys, another major advertiser, and then went out of business at the beginning of this year. Circuit City is hanging on by a thread and manufacturers are being warned not to ship it merchandise because they might not get paid. If Circuit City, the penultimate national electronics retailer, goes away, will Best Buy keep buying Sunday inserts every week?
If General Motors merges with Ford or Chrysler, how many car dealers will shut their doors forever? Well before ordinary mortals ever heard of credit-default swaps and other financial weapons of mass destruction, auto classified advertising at newspapers fell by $1.8 billion, or 35%, between 2000 and 2007.
If the self-employed real estate agents and mortgage brokers who buy newspaper ads can’t make a living during the extended housing downturn, they will exit the business, as many already have. Real estate advertising at newspapers in 2007 fell by $1.2 billion, or 22.6%. In the first six months of 2008, the category slid another $681.9 million, or 35%. If consumers in the future can buy and sell homes on their own at Zillow – or use a cheaper fixed-price agent like Redfin – will real estate advertising as we knew it come back?
Craig’s List, Monster, Simply Hired and many others have eviscerated the one-time newspaper monopoly in recruitment advertising since the tech bubble burst, resulting in a loss of $4.9 billion, or 56.3%, of classified revenues between 2000 and 2007. Will the employers who were buying newspaper ads before the economy cratered still use them when the economy recovers? Will they be around to consider it?
The newspaper industry’s unwillingness or inability to diversify its revenue base since the start of this century has hitched it to the fates of the retailers, car dealers, real estate brokers and employers who are struggling to keep their heads above water in the worst business conditions since the Depression.
If those accounts succumb, who will replace them?