Why is KR for sale? Because
the market makes no sense
By Brad Warthen
Editorial Page Editor
JENNIFER HARDING, The State’s vice president for advertising, was frustrated, exasperated and disgusted at her division’s October revenue figures.
“It was horrible, just horrible,” she said with vehemence at a senior staff meeting in November. (These quotes, by the way, are reconstructions; I wasn’t taking notes. But I’m sure I’m faithful to the spirit. If Jennifer feels misrepresented, she knows where to find me.) “We’re all going to go out back, build a bonfire and burn our calendars. Everybody’s welcome; bring marshmallows.”
After repeated budget reforecasts accompanied by a series of cost cuts that had started as early as January, this was not what we wanted to hear. (“We,” by the way, refers to the heads of the various divisions of the newspaper: news, advertising, circulation, human resources, editorial, etc.) One of our number asked glumly whether that meant October revenues had been down compared to the previous October.
“Oh, no! Of course not,” Jennifer said. She just meant we had “missed goal.” Her division had performed admirably. Advertising revenue for the month had been 2.8 percent higher than 12 months earlier. But that was 7.1 percent less than the much-higher number we were expected to hit.
And that’s today’s newspaper business in a single anecdote.
Who expected us to hit that number? That would be Knight Ridder, the corporation that owns this and 31 other dailies. So they’re the bad guys, right?
Well, it’s tempting to say “yes” — especially since those folks in San Jose (KR’s headquarters) are less and less likely to own us for much longer — but the insanity doesn’t start with them. They just pass it on, the same way my publisher passes it on to me, and I pass it on to the people who report to me. I’m the bad guy when I tell my folks that yet again, we’re going to have to do with less.
So while it’s easy to cuss corporate (an exercise that would lack novelty, believe me), I know those folks are just trying to keep their heads above the surging flood of irrational expectations from Wall Street.
I don’t begin to understand the stock market, and my experience with the way investors have batted the newspaper industry around in recent years hasn’t made it any easier to figure out.
For instance, I read recently in The Wall Street Journal that Wal-Mart — that monster of capitalism — maintains a profit margin of 3.5 percent. And nobody’s talking about angry investors demanding that Wal-Mart be sold.
In our industry, numbers such as 3.5 — indeed, any single-digit numbers — are used to measure expectations of growth in profit margin, not the total.
If a newspaper company isn’t making 20 percent or better, it’s in trouble. (Yes, I know Wal-Mart’s 3.5 percent, which is 2.5 percent of the U.S. gross domestic product, is worth more than any newspaper chain’s 20 percent. Still — and I guess I’m showing my ignorance — isn’t it better performance to get 20 cents back on every dollar than to get 3.5?)
Knight Ridder’s operating profit margin in 2004 was 19.4 percent. It hasn’t exactly shown dramatic improvement this year. So Knight Ridder is in trouble.
Hence all those budget cuts. Of course, we’ve been cutting for years. Our editorial department lost one full-time position years ago. But things got worse in 2005. My Sunday column mentioned that one plus in turning our entire Monday editorial pages over to writers in the community was that it meant “fewer editorials we have to write.” That consideration wasn’t rooted in laziness. It does reduce our writing load by 14 percent. But I now have 25 percent fewer writers.
We are, of course, far from alone. The State’s newsroom, a separate and much larger division, has lost more positions than I can count without taking my shoes off. The newsroom is particularly vulnerable because it tends to have a much higher rate of turnover than does a staid bunch such as the editorial staff. And when you’re in cost-cutting mode, there are not enough comings to match the goings.
That means everybody working harder to get the job done, which fortunately leaves us less time to think about the fact that the market is still not satisfied.
The reason the company is up for sale is that KR’s three largest investors had the leverage to act upon their displeasure.
Here’s the bit that makes it all surreal for us here at The State: If all of Knight Ridder performed the way The State does, the folks in San Jose wouldn’t have the Bruce Shermans of the world breathing down their necks.
Or to put it another way, if The State were a publicly traded company in its own right (although why it would want to be publicly traded in any arrangement is beyond me), it would be fine. More than fine, actually.
As it stands, we could get new owners who will strip our resources down to a point that we’ll look back on 2005 as the fat old days. And we won’t be the only ones noticing. You’ll see it in the quality of the product.
Or we could be bought by a company that believes in investing in the product, and is better insulated against the whims of the equity markets.
Or something else could happen — something I can’t imagine.
So why am I telling you all this? Because nice people in the community keep expressing their sympathy that we’re doing so poorly. It’s as if we were losing money, or maybe only making pitiful, Wal-Mart-sized margins.
Well, I would laugh, except that under the circumstances, it would probably hurt too much.
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Brad, the “percent margin” can be misleading. don’t get it confused with simple interest. In Walmart’s case, or retail in general, it’s about fast inventory turns that generate quick cash. Simply put, I had rather have 3 1/2% of $10 per week than 20% of $10 per year. In walmart’s case, it’s more like 3 1/2% of $300 billion.
Brad,
Investors invest for (1) income and (2) growth. Wal-Mart is expanding, building new stores, and adding real value. Investors are willing to accept less of a profit ratio if the value of their owned stock goes up in the market place.
On the other hand, we have the Newspaper Industry as a group facing declining sales and diminishing importance. And, operating within that group, KR is not expanding, growing and adding value, so it has to make itself attractive to investors by having a higher profit level.
It is possible that one of the factors prompting KR’s sale or break-up is that the media companies must consolidate in order to grow market-share and improve efficiency.
Ansel, the 3.5% profit of Wal-Mart at their current sales volume is also the same slim margin they made when they were a much smaller company, and the same margin their mom-and-pop competitors earn.
Bill Smith’s answers the puzzle here.
First, I appreciate all of y’all’s perspectives on this (except maybe cizzla‘s). I am always on shaky ground when it comes to discussing business issues, and it’s good to have savvier folks out there providing additional perspective. It’s one of the main advantages of a blog.
I will say, though, that I was aware of the main differences between a newspaper company and the retail industry. Wal-Mart has the advantages of explosive growth and "volume, volume, volume." I would not have dared to make the comparison at all if I hadn’t been encouraged to do so by this paragraph in the Wall Street Journal piece that I linked to:
Of course, the piece goes on to make many of the points that y’all do. But I would still maintain that most newspapers, including this one, are still quite profitable. If not for the inflated expectations the market has for our industry, no one would say that KR is "not… an especially profitable company." Twenty cents on the dollar still sounds good to me.
I was further encouraged to draw that analogy by this piece, which showed that, while they’re not demanding sale of the company or anything, some investors are apparently less than pleased with Wal-Mart at the moment (admittedly, for reasons other than profitability, but still — any time you share a negative headline with General Motors, that’s not a good sign).
Lee, I’m neither sure what Sam Walton’s margins were initially nor how they compared with competitors, but I suspect you are right.However, he was successful because he managed his business by controling costs and increaseing volume through marketing, customer service, pricing or whatever and, unfortunately, very few,if any, of his competitors were as fortunate.
It is never fair to compare financial ratios across industries. Margins for a newspaper must be compared across the industry, not compared to Walmart, Microsoft, or Exxon. I’m not going to tell you that the State does better than other newspapers, because frankly, the subject bores me, and I haven’t done the research. Industry-wide, newspaper subscriptions are down though, from what I understand, but mostly because people don’t trust the paper anymore. There have been too many scandals and too much bias. Throw in the rise of the internet, and newspapers are slowly losing subscribers. Coincidentally, they hurt themselves by putting the paper online so that nobody has to buy the paper, just view it online.
If these statistics are correct, then the problem for newspapers lies a lot deeper than just the Internet and their webpages:
http://home.fuse.net/mllwyd/literacy_statistics.html
It seems serious reading and comprehension is becoming a rarity these days. Keep plugging for improvement in public education, Brad.
KR may be either making or shooting for a 19-20% annual profit target, but Mr. Warthen doesn’t claim those numbers for The State. Heck, he even begins his piece by saying that the Vice Pres for advertising at The State was about to slash her wrists because they’d only shown a 2.8% increase in ad revenue compared to October ’04. I know this isn’t the profit number, but surely profit is directly related to ad revenues, and I reckon 2.8% annual growth sounds pretty dismal to me too. The newspaper industry in general and The State newspaper in particular seem to me to be going the way of the buggy whip and the vinyl record…increasingly irrelevant. The State newspaper gives me nothing that I cannot get faster, better and cheaper from other sources…except maybe obits, marriages and local color and fluff, none of which I care about anyway. In its’ unwavering support for more powerful government (Richland county land use plan for example), and higher taxes (never met a tax they didn’t like apparently) The State editorial board is completely disconnected from the tough realities that are faced by most South Carolinians every day of our lives. Personally? I’m ready for The State newspaper to cease existing as it does now. Hate to be the Grinch…but that’s how I see it. Dave
Stock investors determine the price of a stock based most simply on the supply and the investor demand for that stock. I own some WMT and from what I see first locally is their stores are jammed with shoppers even in off shopping hours. First good sign, and secondly they beat the heck out of most other stores on pricing. Recently I was in a new ACE hardware, ready to add a container of Andro fire ant killer to my buy, and saw it was $22.95. I held off, stopped at Wal-Mart a little later, and I think it was $6.95 there, exact same product, same size. Just one example. WMT is also growing like crazy in China, S. America, and less so in Europe. I am sure that their expansion costs are hitting their bottom line and the market knows that, so investors will make a decision to go with a growth engine that is a market leader, knowing that management controls the buttons to raise that bottom line. The newspaper industry is in almost the opposite scenario. The US market is tapped out. Every tiny hamlet has a daily or twice weekly rag to cover the local stuff. And the delays in the entire print operation, distribution, etc. are behind the news cycle. Brad referred some time ago to ideas on taking the State paper fully electronic. Their is merit to that idea but then again Google has a few hundred billion dollars to play with and wants to do the same thing, re: Yahoo, MSN, etc. So investors in the market are aware of all of this and ultimately that doesn’t bode well for the newspaper corporations.
Brad, do we have to have Maureen Dowd in the State? I mean, I’m all for opposing views, but this lady is pure poison more than half of the time. OK, she has a pretty face. See Proverbs 11:22 — http://www.biblegateway.com/passage/?search=Proverbs%2011:22;&version=31; — and I will get this hyperlink thing down someday!
If newspaper sales, worth and revenue are down, and I have no reason to doubt that they are, isn’t this just supply and demand at work?
As has been stated, with instant access via the internet, radio, and cable “news” networks, print news is anything but. Meaning, by the time the edition of print media hits the stands, the stories have been covered. Brad, or anyone else for that matter, is the same effect being felt by news magazines such as Time, Newsweek, and such? Or does the fact that they are national, as opposed to local, shield them from these concerns?
As far as the column concerning media bias goes, I don’t view any network as “conservative.” Fox has drawn the ire of the left, but I consider them to be more pro-Bush than conservative, and I do not view that as one in the same.
Talk radio is not journalism, and doesn’t fit my definition of news or reporting the news. It is personality driven, not credential driven; purely for entertainment and to pass the time while stuck in traffic.
For me, I read as many online editions of print news as are available, in addition to the Beaufort Gazette in print (my hometown paper). I use blogs such as this to feel the pulse of the public on current events. The only network news channel I actually watch is MSNBC. With the exception of ESPN reject Keith Olbermann, I find them to be fairly balanced in both how and what they report. And just to clarify balanced, I mean they do a decent job of presenting commentary from many sides of an issue or story without attempting to tell me what to think.
I think Fox has gone too far in trying to be the anti-CNN, and CNN is…well, it’s bleeping CNN! With the exception of Lou Dobbs, they are a classless act that still reflects the views of Ted Turner. For the more obscure stories, I tune in to NPR or the BBC. I know the slant they have, but they go more in depth with their presentation, rather than relying on soundbites and press releases.
From a business perspective, isn’t this the price to be paid by being owned by large conglomerates? If you were just competing in your market, and not trying to standout on a spreadsheet being viewed by accountants, wouldn’t your viability be more secure? Besides, with the exception of local stories, most every newspaper uses the same wire sources, so there is no variety in how print covers, or even words the news.
I have noticed that since Infinity and Clear Channel have gobbled up the radio market, there seems to be less emphasis on rating shares. After all, what does it matter which station has the highest ratings when you own all the stations? Can the same be said of print media?
Just food for thought.
Brad, The NY Times stock price was $49 in April of 04. It is now at about $26. Their anti-American stance on nearly every current event is a major part of their rapid downfall. From the Jayson Blair affair, to the juvenile trash coming from Maurice Dowd (which obviously passes editorial muster), to the unbelievable publishing of top secret classified intelligence to intentionally harm our nation, here is one person’s wish that we see them and their atheist rotten to the core ownership and management go out of business. What is surprising to me is back in November of this year you called it America’s finest newspaper.
Brad,
A few notes:
1. I have been doing some unscientific polling lately, and I cannot find anyone from work who reads the editorial page. It’s shocking-I mean, I’ve asked about fifty people, and regardless of their educational background, they do not read the editorials. Heck, they don’t even know where to find the editorials within the newspaper. It is not just a local problem because most of the management comes from out of state, and they did not read the editorials in their hometown newspapers either. It is hard for me to relate to this phenomenon since I usually read the editorials from cover to cover every day.
2. Many people I talk to do not read the paper (or the editorials) because they see no benefit by doing so. Modern corporations are so powerful, and people spend so much time at work, and are so outmatched by Human Resources and corporate policy that are set up against them, that they realize the company is the de-facto government. It is too hard for people to collectively change their situation through the democratic process using our current system; so most people figure that it is better to use other methods (often Machiavellian) to get ahead or to secure their positions within the company. Most people that I talk with today do not see civil government as being especially pertinent in their own lives. Everybody takes corporate governance seriously because his or her livelihood depends on it.
3. Many of these same folks do watch Survivor and/or The Apprentice. These shows for years now have been promoting Social Darwinism. When Survivor first appeared some years ago, I quickly understood that although the scenery was in some exotic, remote location, the show was really about cutthroat corporate culture. Unsurprisingly, the first winner of Survivor was a corporate trainer. I once asked someone close to me why she would waste her time watching such tripe, and her reply was that it was not tripe at all. She watched these kinds of shows to learn how to act in the new workplace. People are confused about how to act ethically in situations when the rules are unethical to begin with. How can you be a team player when you are trying to eliminate the competition on your team for material gain? People on these shows struggle with this question all of the time, and that’s why huge audiences watch so-called reality television; so they can figure out what they would do in a similar situations-in situations that are bound to occur on their own jobs. Now that is relevant. I have never read an opinion piece by any editorial writer addressing this very important cultural issue.
4. I would not fret too much about being bought out by another company because there is not that much that you can do about it anyway. It’s the market and Globalization at work. It’s almost all based on chance (I have a real mathematical reason for saying this) and market capitalization. I do think however that The State has something to offer that the other guys can’t. I would like to see more local writers interpret news and events on the editorial page. I don’t care so much about what Maureen Dowd and George Will think-their opinions are easily obtainable online. Local writers on the other hand can really bring issues into focus at the regional level. Despite the hard time that I’ve given you and The State editorial staff over the years, I hope that you can keep your jobs. No one can complain about the quality of your writing, but I just wish that you would publish a broader spectrum of local writers.
Re: a couple of the above posts..
I don’t know Mark W., but had he polled me, I, too, read the editorial page (although I frequently skip Warren – nothing personal). For a market the size of Columbia, I think it’s excellent, and I hope you stick around as long as you wish to.
Like another poster, I’m also tired of Dowd. Used to think she was a must read, but to me, she flamed out sometime in the 90s. I’m sorry to hear Rasberry’s retiring – I’ve always thought he was among the most overlooked great columnists in the business. Particularly for a guy from Okolona, Miss. (not far from where I grew up).
Can we expect anyone new in the new year?
Geez, no Brad for 8 days, I’m having withdrawl!