This morning was one of those moments when several threads came together for me, providing a small insight into the shape of the world in which we live.
It’s related to a moment of revelation I experienced in about 1996. I was attending one of a series of monthly meetings that our then-new publisher, Fred Mott, had instituted to brief employees in general about the state of the business side of the newspaper. I was probably sitting there trying not to let my eyes glaze over too obviously when he said something that cut through. Something that should have been obvious, but was not until that moment.
He observed — I forget exactly how he said it, but this was what I got out of it — that Walmart had shifted the ground upon which the business model of newspapers had been built. The key element was “everyday low prices.” Everyone knew that Walmart was the place to get the lowest prices available locally on anything they sold. And they sold everything. If everyone knows that you have low prices every day — and not now and then, in the form of sales events — you have nothing to communicate, on a regular basis, through advertising.
To show how that affected but one of the newspaper industry’s key advertising constituencies… people were used to reading about all the grocery stores’ specials — which changed if not day to day, then at least week to week — in the newspaper. But what’s the point in that if you can get all those same groceries — same brands and everything — cheaper at Walmart? And every day. So beyond some general branding, which it does mainly through television, reminding people of said everyday low prices, what does Walmart have to communicate? There is no news to pass on. That gives it yet another competitive advantage over those regular advertisers, because it saves the ad costs. To try to compete, those advertisers cut back on their ad budgets, and so forth.
And since Walmart sells practically everything a mass market wants, there is no retailing area unaffected. Department stores, appliance stores, clothing stores — everybody is competing against an adversary that doesn’t have to advertise to the extent that they traditionally had done.
That was just a piece of what was strangling newspapers, but a significant piece. Hence the expense cutbacks and hiring freezes that were already a monotonous part of newspaper life. The next year, Fred made me his editorial page editor, and shortly thereafter, as a measure of his confidence in me and his perception of the importance of the editorial mission, I was able to grow my department by one FTE. That was it. From then on, every budget year was an exercise in doing it with less. And less. And less. Until, two publishers later, it was decided to do without me.
But where did Walmart come from?
I got to thinking about that this morning. I was reading, in the WSJ, an oped piece about Eugene Ferkauf, who recently died at the age of 91.
In the postwar years, he pioneered discounting through his chain of stores called E.J. Korvette. This required challenging the “fair trade” price-fixing laws then in place in many states:
Retail price-fixing in the United States—often packaged for popular consumption as “fair-trade” laws—was a Depression-era concoction. Launched in California in 1931, it was quickly copied by state legislatures across the country. These statutes were premised on the idea that manufacturers retain a legal interest in the price of their products even after actual ownership has moved downstream to retailers. The laws were written so that once a single retailer in a fair-trade state agreed to observe the manufacturer’s proposed retail price list, it would in effect impose those prices on all other retailers in the state.
Conceived as a means of protecting small, independent merchants against predatory chains, fair-trade laws were pushed through state houses by legislators beholden to the influential retail chambers of commerce. The big manufacturers, especially appliance makers like GE, Westinghouse, RCA and Motorola, usually lent tacit support. It was easier for them to deal with a multitude of small customers through their wholesalers than to directly confront retailers big enough to muscle them for price concessions and promotional allowances…
I had never heard of E.J. Korvette stores, but I got to thinking, when was the first time I experienced discount store shopping? I realized that it was when we moved to New Orleans in 1965, after having lived in South America since late 1962. One of the elements of modern American culture that made an impression on me that year was the local Woolco store, a short drive from my home.
Anybody remember Woolco? They went out of business for good in the 80s, but this one was thriving in 1965.
I looked it up on Wiki, and found that Woolco was founded in 1962. This made me curious, and I looked to see when Kmart was founded. 1962. When did the first Walmart open? As it happens, 1962.
Then there was this passage in the oped piece this morning about Ferkauf:
In the end, the demise of fair-trade laws didn’t help E.J. Korvette. Ventures into high-end audio, home furnishings, soft goods and even supermarkets made E.J. Korvette considerably bigger but also shakier financially. In July 1962, Ferkauf was on the cover of Time magazine, hailed as the PiedPiper of the new consumer-centered retailing. Four years later he was ejected from his company, which by 1980 went into final bankruptcy. Ferkauf’s legacy, though, was secure. He had finally killed off legally protected price fixing.
Something about that year. A cusp of sorts. A changing of the guard, as retailing pivoted.
In his awesome book The Catalog of Cool (and if you can lay hands on a copy, you should buy it — although you may want to go the used route, since Amazon prices new copies at $127 and more), Gene Sculatti published an essay titled “The Last Good Year.” An excerpt:
Sixty-two seems, in retrospect, a year when the singular naivete of the spanking new decade was at its guileless height, with only the vaguest, most indistinct hints of the agonies and ecstasies to come marring the fresh-scrubbed, if slightly sallow complexion of the times. On the first day of that year, the Federal Reserve raised the maximum interest on savings accounts to 4 percent while “The Twist” was sweeping the nation. A month later “Duke of Earl” was topping the charts, and John Glenn was orbiting the good, green globe. That spring Wilt Chamberlain set the NBA record by scoring 100 points in a single game and West Side Story won the Oscar for Best Picture. The Seattle World’s Fair opened, followed five weeks later by the deployment of five thousand U.S. troops in Thailand. Dick Van Dyke and The Defenders won Emmys, and Adolph Eichman got his neck stretched. By that summer, the Supreme Court had banned prayer in public school, Algeria went indy, and Marilyn Monroe died of an overdose…
No mention of a major shift in retailing, though, as I recall.
One last tidbit, which you may consider to be unrelated…
Recently, I picked up several old paperbacks for 50 cents each at Heroes and Dragons on Bush River Road. One of them was The Ipcress File, which is what originally turned me on to spy fiction. You may recall the 1965 film, with Michael Caine — who expressed the cooler, hipper side of the 60s, as opposed to the mass-production James Bond.
In it is a passage in which the protagonist has a conversation with an American Army general who points out that the essential difference between the United States and Europe was this: A European develops a ballpoint pen, and sells it for a couple of quid and makes a modest living from it. An American, he said, invents the same thing and sells it for 5 cents a pop and becomes a millionaire.
Where am I going with this? Well, The Ipcress File was first published in 1962.
I notice that they didn’t include anything about how Walmart pays manufacturers/vendors for store inventory. With a small mom and pop store, the manufacturer/vendor sets the price for their inventory, with Walmart, Walmart tells the vendors what they’re going to pay for the merchandise or they won’t carry their items in stores. The manufacturer/vendor has no say in the negotiation.
Next we can discuss how slowly Walmart pays its creditors. Will I get paid this month, next month, 3 months from now? If I threaten to sue they will pull my merchandise from all their stores and bankrupt me in legal fees…
Walmart didn’t kill the department stores. Walmart apparel is not a substitute for Belk’s apparel, for the most part.
What killed the department stores is what also is killing The State: leveraged buyouts. The State makes a profit–just not as much as it’s corporate masters want. So they squeeze it, and in the process, are slowly killing it.
Nordstrom and Neiman’s realize that people will pay more for service and selection, and are doing well.
In a side note–Mr. Ferkauf was aptly named–“verkaufen” means “to sell” in German. His name is probably the Yiddish version.
its corporate masters. no apostrophe
I hate it when that happens.
Note that I’m describing the LAST great revolution in retailing, not the current one. I almost headlined this post “Today’s retail environment born in 1962.” But then I changed it to “Modern retail environment born in 1962,” thinking there’s something very 1962 about the quaint word “modern.” But, deciding that was a bit too subtle, I got specific, so we ended up with “Post-newspaper retail environment born in 1962.”
In fact, the bricks-and-mortar discount establishments are now being undermined by their purely e-commerce rivals, as evidenced by the titanic state-by-state battle between Walmart and Amazon over sales tax collections.
“Walmart didn’t kill the department stores. Walmart apparel is not a substitute for Belk’s apparel, for the most part.”
Tell that to JCPenney and Sears.
And Kathryn — that stuff about “corporate masters,” without or without an apostrophe…
That’s the sort of rhetoric we normally hear from Bud — business bad, people good.
It’s far, far from being that simple.
In the world of publicly traded corporations, corporate officers are slaves in the same sense that workers and, in the case of newspapers, readers are to forces beyond their control.
It’s the faceless marketplace that drives what happens.
Take the example of the late, great Knight Ridder, which owned The State. By the end, Tony Ridder and the gang were so much flotsam and jetsam, bobbing about on an ocean that was in no way of their making.
Most of the corporation’s stock was owned by entities that were simply investors, and didn’t give a damn whether what they were investing in was newspapers or widget makers. They just wanted to continue to get the same return on investment that the stock was providing when they bought it. When that failed to happen — when profit dropped below the obscene 20 percent that had been the norm, back in the middle of the last decade — they rattled KR’s cage until it collapsed.
That happened because of market forces beyond the control of anyone involved.
We had hoped that with the purchase by McClatchy, with two levels of stock — most of the preferred stock held by an unusually small group of heirs — we could be shielded from those mindless market forces long enough for the papers to right themselves.
But… the very summer than the deal was closed (2006), the bottom dropped out of the retail advertising market in a way that made the previous decline look like the days of wine and roses. It has never recovered. And McClatchy, having swallowed a company twice its size, is overleveraged to the point that it really has no choice as to how much money it has to make.
I’m not privy to the company’s finances any more, but I’m about as sure as I can be that it’s far from a situation of making a profit, just not big enough to satisfy a greedy market. That was the situation in 2005, but not now.
I’m 99 percent certain that if the paper tried to operate with staffs, and newsprint bills, as large as 10 years ago now, the revenues are so low that it would be operating with a significant deficit.
and thus explains why the New Orleans Times Picayune now prints and distributes only 3 days a week and why WalMart advertises on TV and not in print.
Oh, and Kathryn, I should add… shortly after I was laid off, one of the “corporate masters” — the McClatchy VP who was over The State — was laid off as well.
Since I already have the reputation as the anti-business rhetoritorian I may as well us it. But in a surprising way. Walmart has done wonders for keeping prices somewhat manageable for the poor working folks out there that simply can’t afford the high prices of somewhere like Publix. Nothing evil about Publix mind you but they are extremely expensive unless you play the coupon game with reckless abandon. Of course Walmart with it’s monopolistic market power can trash its employees so it’s not really this ambivelant force for the greater good that it’s defenders would have you believe. Still, Walmart does serve to keep prices down. That’s more than we can say for healthcare insurance companies and colleges.
Don’t worry, Wal-Mart’s problems extend far beyond the internet.
I agree with ‘Kathryn, but it’s not just corporate buyouts, it’s too much leverage in general, either for a buyout or an attempt to juice profits.
Um, Brad–I am a former silk-stocking law firm corporate lawyer, so I know how it works.
Corporate masters means the people who OWN the company–the investors, who need not be faceless ROI sharks, but *could* be people who care about newspapers.
“And McClatchy, having swallowed a company twice its size, is overleveraged to the point that it really has no choice as to how much money it has to make.’
Leveraged buyout, like I said.
“Um, Brad–I am a former silk-stocking law firm corporate lawyer, so I know how it works.”
Oh gooodie, we’re talking about what we used to do. I was in charge of getting milk once every 21 days back in grade school.
We subscribe to The State for two reasons.
1. The Crossword Puzzle
2. The grocery advertisements.
My wife looks forward to reviewing the ads in the Wednesday paper. Those ads tell her what deals she can garner from Food Lion, Bi Lo and The Pig. Prices lower than found in the Wallmart store.
Also, keep in mind, that when we shop at Public, we find a parking lot packed with cars. Somehow they manage to compete to the close by Walmart store.
Price is NOT everything.
PS: I shopped at E.J. Korvette. The stores failed because of shoddy merchandise and poor management.
It grows tiresome. Snarky has it’s moments, I freely admit. But then, one has to take stock of one’s demeanor.
We are all older; we have all done things that we are proud of, things that have meaning, and things we regret. Some of us have done things no fair-minded person would find acceptable. That’s life.
Figure it out. Add to the conversation.
@Mark – Save the lecture. I’ve never been on any forum where people dwell on what they used to do like on this place. Brad got canned, Kathryn quit… why don’t they both talk about what they do now.
We had a Sunday only subscription to The State, but we dropped it when they tried to make us get a “weekend” subscription. We were mostly using it for the coupons. Now I get my news for free, and I don’t spend any more time clipping coupons.
Andrew Sullivan has a link this morning to a Harvard Business Review article about the demise of newspapers.
“The business model that the owners of the metro dailies gravitated toward in the decades after World War II was this: 1) establish monopoly, 2) milk that monopoly. The monopoly was on the delivery of printed advertising messages into homes in a given city or (better) metropolitan area: department store ads, supermarket ads, car dealer ads, and, most of all, classifieds.
Notice that I didn’t mention news. That’s because, once a monopoly was established, the editorial content of a newspaper had no detectable impact on its financial success”
“Over the decades, the monopoly dailies saw some signs of trouble: newspaper readership kept declining, and new retailing giants such as Wal-mart often bypassed the papers in delivering ad messages into homes. When the Internet came along in the 1990s, though, they were still big and profitable — and, it turns out, profoundly vulnerable. As the account above should make clear, the challenges that the Internet posed to these newspapers had much less to do with new sources of news than new channels of advertising.
If the newspaper companies had been nimble, well-managed organizations (news alert: monopolies usually aren’t) trying to follow Clay Christensen’s playbook for dealing with disruptive innovation, they would have set up separate ventures aimed at exploiting new digital advertising opportunities. ”
I think the point about newspapers not being “nimble” organizations is key. Anyone who has read The State since 1990 as I have can see that innovation has not been a core competency.
<3 Mark Stewart, again.
@ SDII–My reference to my former job was to establish expertise in the discussion at hand. I am not sure what your milk duties in grade school add to the discussion. Please enlighten us.
The writer of that piece is missing the point when he points to “exploiting new digital advertising opportunities” as a way for newspapers to have saved themselves.
They have exploited such “opportunities” like crazy, with huge percentage increases in that kind of revenue year over year.
Problem is, the base is so tiny. Converting print ads to digital ads is one of the surest recipes for going out of business yet devised, because the market will not bear the ad rates online that are needed to support newspapers’ cost structure.
As for “monopoly” — newspapers came far closer to being a monopoly on the news side. Before the cuts of the past dozen years or so, newspapers’ news-gathering capabilities were SO dominant in their communities, comparing them to, say, the largest TV news team in the market was like comparing the U.S. Army to that of Argentina.
On the BUSINESS side, which is the only one relevant to this discussion, there were competitors everywhere — TV, radio, billboards, free weeklies, and one that should never be overlooked, direct mail.
Direct mail was sort of a forerunner to the Internet. It was about directly connecting with particular customers and potential customers, rather than casting a net wide (the way newspapers, TV and radio did). There has been a significant shift toward that sort of marketing over the last 30 years, and all the Internet has done is facilitate it.
That’s something everyone seems to miss. The problem with newspapers’ economic model wasn’t that bad decisions were made. It’s that the marketplace ceased to want what newspapers offered — mass-audience print advertising.
As for setting up new ventures… over the past decade and more newspapers have done that at such a pace that they often seem to forget the core business — mostly niche print and online products (such as, locally, Lake Murray Magazine and GoGamecocks). This is done while resources to the company’s main excuse for being — informing a community about the news — are cut back further and further.
You see, if the point is to make money, there are better ways to do that now than publishing a newspaper. To me, the point was always to make enough money so as to be able to publish a newspaper (whether literally on paper or not). Otherwise, the enterprise should be dissolved, because it’s just a bunch of people beating their heads against the walls.
Of course, there’s an alternative theory that pops into my head now and then.
Under this theory, the decline of newspapers is NOT inevitable, as I posited above. Instead, the explanation is that the people on the business side over the last couple of decades simply haven’t been any good at making money. This results from a couple of causes.
The first is that in the previous generation, it was so easy to make money in that business that when it ceased to be easy, those people didn’t know what to do.
The other is that people who are really interested in making money, and good at it, choose other lines of work. I mean, if making money is what you’re into, why not make widgets, if widgets are what is selling?
This of course creates a self-feeding downward spiral.
I’ll also take issue with this: “new retailing giants such as Wal-mart often bypassed the papers in delivering ad messages into homes.”
As I explained above, it’s not that Walmart advertised through other means. It’s that the Walmart business model simply didn’t need the kind of advertising that had sustained newspapers. Big difference. And it speaks to central problem in the first theory: Newspapers didn’t fail because they weren’t good enough at what they did. They failed because the marketplace ceased to want or need what they did (on the business side).
@ Mark Stewart —
Are you this Mark Stewart, by any chance?
@Brad–you are coming around to my point, to an extent.
“They failed because the marketplace ceased to want or need what they did (on the business side).” The marketplace didn’t *cease*–it decreased somewhat, but there are plenty of pretty universal desires–food, shelter, movies….
“You see, if the point is to make money, there are better ways to do that now than publishing a newspaper. To me, the point was always to make enough money so as to be able to publish a newspaper (whether literally on paper or not). Otherwise, the enterprise should be dissolved, because it’s just a bunch of people beating their heads against the walls.”
It does come back to the notion that newspapers can survive, but only if they do not have to have the same ROI as other investments. Perhaps employee ownership?
Brad, I think you’re just in denial here. Newspapers just aren’t relevant in the same way they used to be. I find it an extreme stretch to suggest the market for advertising changed. What changed was the overwhelming number of alternatives to receive the information once only available through newspapers. And the newspapers just didn’t keep up with the changes.
In percentage terms, what do you suppose The State is doing in terms of ROI?
With a declining subscriber base combined with an aging demographic, I find it hard to believe there is a long term viability to hardcopy newspapers. The cost of production and distribution is so great compared to digital I don’t see how it could be profitable.
Exactly. But the newspaper clings to the “paper” part of the business for a couple of reasons. One, as diminished as it is, it still brings in a disproportionate amount of the enterprise’s revenue.
Second, there continues to be a persistent demand for the product — not what it was, but still significant.
Take those two things together, and you see why such an organization doesn’t just go to online-only publication: A low-cost operator (one with even less of a newsroom than the diminished general-circulation paper has today) would come in and snap up the money that remains on that table.
Online advertising just doesn’t come close to supporting the cost of a newsroom (much less the “luxury” of an editorial board). If these organizations are to continue to perform the role they once did in our democracy, they have to come up with something that produces more revenue than that, because the thing that DID provide that revenue is going away.
And Bud is fooling himself if he thinks there is an “overwhelming number of alternatives to receive the information once only available through newspapers.” Or any alternatives, in fact. I think perhaps he’s dazzled by the overabundance of sources of information about NATIONAL news and politics (because the business model still sort of works with an advertising audience base of that size).
There has never been a substitute for the coverage newspapers once provided on the state and local levels, and nothing is emerging to effectively replace it. Yes, there’s a vibrant online rumor mill on the state and local levels on the Web. But nothing like an authoritative, nonaligned, comprehensive source of news. Not on those levels. And that’s where the crisis is.
Huh? What BS. Where was The State when Alvin Greene was running for the senate? It certainly wasn’t covering his credentials. But an ALTERNATIVE news gathering organization was. I get far more useful local and state information from Fits, The Free Times and yes even Brad’s blog than I ever get from The State.
I now get not one, not two, but three weekly local papers in Blythewood. The ad pages in each one appear to be growing.
I can only speak for myself so maybe others differ but I gradually lost a great deal of respect for The State over many years simply because of the utter banality of the front page they put together. They have huge stories about lawn mower races, high school breakfast meetings and a much to grandiouse coverage of Gamecock sports (and this comes from a huge USC sports fan). I still take it but only on very rare occassions does it provide me with much in the way of useful information. Granted there is some decent coverage concerning the state budget and the pension debate but most of that is easy to find from other sources. All in all The State just isn’t the information must-read that it used to be.
We missed two paper deliveries last week, so I had to read it online over breakfast. I missed doing the sudoku–they aren’t as much fun online, but otherwise, we just had less to recycle.
Crickets. Well, if I was Steven and I was getting a sermon — I would want to know exactly who is preaching. But that’s just me.
@Heidi–Yes, that is our Mark Stewart
@Heidi – It’s like getting listening to a sermon from the weekly door knockers (Mormons or Jahovah’s Witness idiots)… or maybe because he used the word “snarky”, what a dorky word. Either way, I’m busy and get off my lawn.
Is he any relation to the former SLED director? I have always wondered this and so now have asked.
No. Our Mark’s from Oregon. He went to Hamilton College in upstate NY.
@ ‘Kathryn — thanks. The alternative would round out the inner circle really weirdly.