01-01-05 | Printable Version

Advertising Revenue Outlook 2005

Significant structural changes, whose importance has been disguised by recession and a stop-and-go recovery, will begin to make themselves evident in 2005.

Growth will be harder to come by, and the newspaper group will seem besieged from many angles and in several key categories.

Here are some key points regarding our view on newspaper revenue in 2005.

Ad Growth is Slowing

Total advertising revenue for the sector should decelerate, from about 3.7% in 2004 to about 3.3% in 2005. We have raised our 2005 ad revenue forecast from 3.1% due to stronger retail.

Retail advertising, the largest newspaper category (about 47% of advertising and 37% of total revenue) should grow around 2.3%, slightly less than 2004.

It will be restrained by the drag resulting from market share gains by Wal-Mart et al and a shift to TV by department stores.

We have raised our retail forecast to 2.3% from 1.8% for 2005 due to the recent strength seen in this category.

National should grow slightly (3.2%), but will remain choppy due to waning wireless advertising and the continuing loss of movie advertising to the web. Travel appears to be the best hope for national newspaper advertising, yet we doubt it will be enough to offset weakness in other key sub-categories.

Help Wanted Hurt by Online

Help wanted, which once had the potential to hit 30% to 40% year-over-year growth in a recovery, will hover around 18%, limited by the share gains of online recruitment.

While 18% is certainly solid, it won’t add the incremental growth that is did when it went from a decline of 9% in 2003 to an increase of 15% in 2004E.

Auto should improve on current negative trends, but we are expecting no growth. Recent trends suggest that OEMs are using production cuts in conjunction with incentives to control inventory levels. We think the Internet, where a preponderance of car buyers are influenced, will gain share.

Real estate, after years of strong growth, will likely decline year-over-year due to rising interest rates. Although, this is one category that continues to beat our expectations.

Small Markets Doing Better

Small markets are outgrowing large markets by two percentage points (200 basis points). Eight large-market newspapers conducted layoffs in 2004, what should have been a solid, recovery year.

Most companies also missed their 4% to 6% ad revenue guidance for 2004, also suggesting things are not going to plan.

We think advertising shifts and circulation pressure, mainly in larger markets, are to blame. Our view is that small markets will continue to outperform large markets in 2005 due to structural, not cyclical, reasons.

Sears and Kmart Merger

The impact of the Sears and Kmart merger on newspaper advertising will be minor, in our view, as the combined company did only $218 million of newspaper advertising in 2003 (only 1% of total newspaper retail advertising).

The key impact will be not how much the new entity advertises, but who takes over the up to 300 Sears locations (out of 870 total) that the new entity is likely to put up for sale.

It would be beneficial for the newspaper industry if traditional department stores took over the locations, but clearly negative if non-promotional retailers did.

Paul Ginocchio, CFA, joined Deutsche Bank in London in 1998. He moved to New York with Deutsche Bank in 2003 to initiate coverage of the U.S. Publishing and Information Services sector.