Growth of Wal-Mart bad news for papers

Study shows drag on ad spending

By Leon Lazaroff
Tribune national correspondent

September 22, 2004

Newspaper advertising this year has been a major disappointment to both the papers and their investors.

But while everything has been blamed, from the war in Iraq to a struggling economy, a study Tuesday said the problem is deeper and will continue.

Call it the "Wal-Mart effect."

"Wal-Mart and stores like them don't simply advertise in newspapers the way traditional department stores do," said Paul Ginocchio, a Deutsche Bank Securities media analyst and the report's chief author. "Most troubling for newspapers is that this isn't going away. It's actually accelerating."

Since the early 1990s, as big-box stores expanded from small and midsize towns into the suburbs of major U.S. cities, they have changed the face of retailing. By extension, their success cut away at the advertising revenues of newspaper companies.

Coming out of the 1991 recession, big-box retailers such as Wal-Mart Stores Inc. and Costco Wholesale Corp. accounted for about 16 percent of general merchandise sales nationwide; today the figure is nearly 50 percent. That jump in market share, Ginocchio said, is the main reason retail advertising growth at the nation's newspapers is expected to be less than half the 4 percent that the industry forecast at the beginning of 2004.

Newspaper executives have known that some big-box retailers prefer television and radio advertising over print publications. But the Deutsche Bank study quantifies the trend, demonstrating that as those retailers have expanded, their spending preferences have had a big drag on retail advertising.

Between 1993 and 1997, the study said, big-box retailers slowed retail advertising growth by one-half to 1 percentage point. Between 1998 and 2000, the figure reached 1.5 percent. Today, the drag is 2-2.5 percent.

Ginocchio estimates that as big-box retailers continue to take 3-5 percent of market share away from traditional and discount department stores, they will drag down newspaper retail advertising by about 2 percent. Retail advertising accounted for 47 percent, or about $21 billion, of total advertising in 2003.

"The correlation between Wal-Mart exposure and local advertising revenue growth over the last two to three years has been extraordinary," he added.

Wal-Mart, said Deutsche Bank, spends 0.3 percent of its sales--$259 billion worldwide in 2003--on advertising and allocates 3 percent of that budget to newspapers. By comparison, traditional department stores spend 4.6 percent of their sales on advertising, and most significant, appropriate 85 percent of that to newspapers.

Wal-Mart marketing director Troy Steiner said the retailer spends about $100 million a year on newspaper advertising, the bulk of which are inserts.

"Wal-Mart is not reliant on advertising to drive its sales," he said. "We certainly see the value in all advertising media, but we do things based on what's effective."

The chief executive of one of the country's largest media buyers said most advertisers would love not to have to spend money on advertising. "But their reality is much different than Wal-Mart's," said Scott Harding of Downers Grove-based Newspaper Services of America.

Unlike the country's department stores, which largely began in big cities, Wal-Mart grew in rural areas far from metropolitan centers. As the company expanded, it discovered it could drive sales through television advertising and monthly inserts in local newspapers.

"Wal-Mart created a brand and reputation that became larger than life," Harding said. "As they grew, advertising was judged to be an expense that didn't have to be as large as their competitors'."

For newspaper companies with large numbers of Wal-Mart stores in their markets, the drag on retail advertising has been greatest. Media General Inc., a newspaper chain based in Richmond, Va., and E.W. Scripps Co., based in Cincinnati, have been most affected, said the report.

Conversely, newspaper companies that predominantly operate in large cities, such as Tribune Co., owner of the Chicago Tribune, and The New York Times Co., have experienced less of a jolt.

To compensate for big-box retailers, the newspaper industry has countered with a variety of programs aimed at small and medium-size companies. In addition, larger retailers and national advertisers have been targeted with campaigns that mix Internet and print advertising.

"The newspaper community has been dealing with this for a number of years, especially the past three to four years," said Jim Conaghan of the Newspaper Association of America. "When a Wal-Mart comes into a market, the effect on local retail and local advertising is pretty apparent."`

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