Slow Growing

N ewspaper advertising in 2004 consolidated a recovery that began the previous year, and the outlook for 2005 is for a second straight year of growth in the low single digits, analysts say. Amid overall modest growth, 2005 is likely to feature sluggish growth in retail advertising as mass discounters continue to transform that sector, and better performance from classified ads as a growing economy calls forth more recruitment ads. One bright spot: Lured in part by the appearance of free urban daily tabloids that aim to attract younger readers, national advertisers appear set to increase their newspaper buys.

“We don’t necessarily see a blockbuster year,” says Stefanie Kane, a partner in the entertainment and media practice at PricewaterhouseCoopers. But, she adds, “We see a few highlights.” For the newspaper sector, having even a few highlights represents a welcome departure from the doldrums that followed the general economic slump in 2001 and 2002. Newspaper advertising volume dropped in each of those years.

Now, analysts agree on a rosier scenario. PwC forecasts overall ad spending in daily newspapers will rise at a 3.4 percent compounded annual rate, to $53.2 billion in 2008—up from a projected $46.2 billion in 2004 and $47.7 billion next year. The Newspaper Association of America, the trade group for daily newspapers, expects overall newspaper ad spending to rise 4.1 percent from 2003, coming in at $46.8 billion this year, with another 4 percent growth next year for a 2005 total of $48.6 billion. Merchant banker Veronis Suhler Stevenson calls for 5.8 percent overall growth this year, followed by growth of 4.8 percent next year.

Kane says the national category—the smallest of the three major ad categories, rounded out by classified and retail—would be “the strongest driver” of ad growth for newspapers. PwC, the NAA and Veronis project national to grow at rates between 6 percent and 9 percent this year and in 2005.

Trouble in TV land accounts for part of national’s vigor, Kane says. Major networks face shrinking audiences, leaving newspapers among the few venues for advertisers to cover large demographic swathes in a single buy. “Newspapers still have tremendous reach,” Kane says. “You’re able to get into a huge portion of the market, quickly.”

Growth in national advertising is also bolstered by the growth of free dailies, such as Tribune Co.’s AM New York, The Washington Post Co.’s Express and the Metro newspapers that have cropped up in several cities. Advertisers find these publications, which are aimed at an urban audience, to be a route to the coveted younger demographic. Advertisers buying significant space in the free dailies include movie studios such as Metro- Goldwyn-Mayer Studios, Miramax Film Corp. and Warner Bros., according to PwC. The firm also suggests that with the advent of the national do-not-call rule that crimps telemarketing, the financial and telecommunications industries likely will divert some of their spending to newspapers.

The national category accounts for about 17 percent of all newspaper ad spending, with classified roughly double that amount. The largest category, retail, amounts to nearly half of all spending, and forecasters are calling for sluggish growth this year and next, with predictions of annual gains ranging from little more than 2 percent to estimates as high as 3.7 percent.

“Retail is challenged,” says Robert Broadwater, managing director at Veronis. “Retail is a real issue.” Newspapers face troubling changes in the landscape of the retail sector, which produced 47 percent of all ad revenue in 2003, according to the NAA. Discount and specialty retailers that do not rely heavily on newspaper advertising are growing at the expense of the traditional department store that long relied on newspaper ads. At the same time, big department stores are cutting back on newspaper buys. “The overall department-store category is still down and unlikely to move back into positive territory this year,” James Conaghan, the NAA’s vice president for business analysis and research, wrote recently in the association’s magazine Presstime.

The changes in retail leave newspapers with hard work ahead, especially in light of some advertisers’ perceptions that newspapers are overpriced and not terribly good at customer service. But Broadwater points to newspapers’ agility in responding to the appearance of Internet job boards by launching their own online ads, and capturing a big share of that market. “The newspaper industry needs to do what they have done—find new categories, or have new categories find them,” he says. “Do you kiss off the old department store? No. But you better find some business that is growing.”

The national economy is expected to continue growing next year, and analysts generally believe that could lead to growth in classified advertising. Help-wanted ads should rise, says Conaghan. The NAA is predicting growth in classified of more than 5 percent this year and next.

PwC, however, believes classified will show little if any growth as rising interest rates dampen demand and hold back growth in real estate and auto classified.

Todd Shields is the Washington D.C., editor for Mediaweek.