Newspapers Gird For Online Circular Battle

When Borrell asked her why she just spent $4 only to toss the paper in the garbage, she said, “There’s at least $20 of savings right here,” gesturing to the clutch of coupon-laden preprints in her hand.

Such is -- or at least was -- the power of the preprint, or free-standing insert (FSI).

“The public has been trained for decades to get these FSIs out of the newspaper,” Borrell, CEO of Borrell Associates, said. But that public now has greater access to circulars and deals on more fronts than ever before in the digital realm. Old consumer habits may keep preprints in circulation, but rising costs and increased digital migration by consumers have pushed newspapers to a reckoning: Their preprints cannot stand alone in print anymore.

In response, newspapers are developing a pipeline of Web-based preprint iterations to curb their losses from declining FSI revenue, offer their advertisers an e-commerce powered Web component to their ad buys and jump into a digital space already crowded with competitors, including the retailers and even the manufacturers themselves.

All of which leads to a critical question: Can newspapers offer up a solution innovative enough to compete with a dizzying field of players on the Web and in mobile?

For newspapers, preprints have long been a tent pole in their retail ad revenue. “Typically, FSIs will account for anywhere from 35-40% of their total retail ad revenue,” Newspaper Association of America senior vice president of business development Randy Bennett said. Given that in 2010 total retail ad revenue for newspapers was $12.9 billion, that means that preprints constitute an approximately $5 billion chunk of the business. (Bennett stressed that these numbers are estimates, however, as most companies don’t break out their preprint revenue separately.)

Borrell estimates that about 290 billion FSIs are distributed each year, not all of them going out through newspapers. Direct mail and the retailers themselves are also distribution points for the ubiquitous circulars.

The problem for newspapers is that preprint revenue has been falling alongside retail revenue in general, although not as steeply, according to Bennett. “In 2010, the declines have moderated in preprint,” he said, noting that first quarter declines were around 11% but had softened to approximately 3% by fourth quarter.

The fall might not be as precipitous, but it continues due to a number of contributing factors.

Chief among them is dropping newspaper circulation, Borrell said. “The problem with newspapers in most markets is they’ve slipped below what would be considered mass media,” he said. “They’ve slipped below 50% penetration.”

Declining circulation has been augmented by another long trend according to Borrell—the rise of online retail loyalty clubs. Major retailers have spent the past decade making online offers and harvesting the e-mail addresses required for consumers to receive them, thus compiling distribution lists of their own.

“They think they’ve got the e-mail addresses of their most loyal customers, which further diminishes the value of an FSI,” Borrell said.

Online, retailers now publish their preprints on their own sites. And then there are the nearly incalculable array of coupon sites and Google’s Product Search with which to contend.

Wade Beavers, the CEO and founder of Minneapolis-based DoApp, which develops mobile applications, said there’s yet another layer of competition to consider.

“The thing the digital world delivered for these retailers was a direct relationship,” Beavers said. “They’re not required to get to the user through some other venue.”

Retail manufacturers, then, have had no reason not to jump into the fray themselves.

“What’s ironic is you’ve got big box retailers trying to leapfrog the news properties and go direct to the consumer, and then you’ve got product manufacturers who are trying to leapfrog the retailers and get to the consumer in a closer relationship,” Beavers said.

Faced with so many options, channeling the power of consumer habit through preprints just isn’t what it used to be.

That said, preprints aren’t just going away, either. “The only glimmer of hope that they have is that the niche that they hit is actually the niche that retailers want -- the people that have higher disposable income and greater education,” Borrell said.

The NAA’s Bennett is more upbeat on preprints’ tenacity. “There’s the serendipitous nature of the printed insert that people spend the time to leisurely go through it whether or not they’re looking for a particular product,” he said. “Just the nature of the product allows them to browse.”

That’s not enough to curb the flow of digital migration, Bennett acknowledged, but it has opened up a space for newspapers to build a digital bridge. “Newspapers have forever been the local marketplace for local shopping information,” he said. “There’s a chance to migrate or enhance that marketplace online and to build the newspaper Web site as a general marketplace as they have done in print as an offline marketplace.”