Just received a memo this afternoon from the Strib newsroom. Penned by publisher and chairman Chris Harte, it lays out in specific dollar terms the depth of the Strib’s financial hit over the past two years. Revenue has fallen $75 million — “well below the median for our industry,” Harte writes — and operating cash flow (to invest and pay down debt) is down 50 percent.
The upshot? “We have retained Restructuring Associates (RAI), a consulting firm headquartered in Washington, D.C. to help us work collaboratively throughout the Star Tribune to get our business on the right track to meet the significant challenges we face,” Harte writes. “RAI specializes in helping unions and management work together to improve performance.”
The Strib’s labor contract expires this summer and it’s no secret everyone is fearing the worst; Strib owner Avista Capital Partners will be negotiating its first contract — the first chance to change work rules and squeeze costs. The Strib has strong unions that previous editor Anders Gyllenhaal, for one, chafed under.
I’m still getting the dope on RAI’s ability to be an honest broker; they were mentioned favorably on this Yale University union site, though a New York Times story quotes RAI with harsh words for the union. A subsequent Wikipedia entry notes Yale subsequently fired the RAI official heading the project.
A couple of notes about Harte’s framing of financial issues: the two-year timeframe obscures the fact that Avista bought the Strib only a year ago. A sizeable chunk of the revenue drop should’ve been accounted for in Avista’s $530 million purchase price, which was less than half of the $1.2 billion that seller McClatchy Co. paid in 1998. And while newspaper profits have fallen in the past two years, it’s from a high point: margins of 20 percent, 30 percent or more were common in the industry. It’s noteworthy that Harte neither says the paper is losing money or that the prospect is likely.
Still, no one would pay $530 million for the Strib now, and Avista almost certainly underestimated how fast revenues would fall (or how much a Par Ridder settlement would cost). Another virtual certainty: a newsroom that suffered a tumultuous 2007 will get no respite in 2008. And neither will worried readers.
Here’s Harte’s memo:
Taking Charge of Our Future
By Chris Harte, Publisher and Chairman
Last fall I told you I would write about our overall situation toward the end of the year. I waited before writing because November ad revenue was slightly better than recent months, and I hoped it was the start of a modestly better trend. But December was right back to the pattern of steep revenue declines that we’d seen since early in the year.
We have budgeted for another large revenue reduction in 2008, and we hope we won’t be under budget again. What I’m hearing from other newspapers are similar expectations about further revenue declines.
I don’t mean to be gloomy, because I’m basically an optimist. I believe strongly in newspapers and their Internet sites. I believe in the importance of what we do. I believe that we will not just survive but prosper. I believe in the power of the Star Tribune’s people to make the business and cultural changes that will be necessary to right our ship and give our company a vigorous and successful future.
The current business realities are incredibly difficult, however, and I don’t want to pretend they aren’t. 2007 was far and away the worst year this industry has seen in anyone’s memory, and it was also the worst for the Star Tribune. We were not the hardest hit large metropolitan paper in the country, but our overall revenue performance was well below the median for the industry.
A few numbers tell the story well, I think. Total revenue (print and internet advertising and circulation) is down almost $75 million in the last two years. Classified revenue has been the hardest hit part of our business, and our 2007 classified revenue was down over 50 percent from what it was at the start of the decade.
While our Internet revenue has risen substantially almost every year over the past decade, and is three times what it was at the start of the decade, it’s not growing nearly fast enough to offset the declines in print advertising.
We reduced our costs substantially last year, some of it in easy ways but much of it with painful cuts. And we’re already reducing 2008 costs several million dollars below our original 2008 budget.
Despite all the cost-cutting, our payroll and benefits in 2007 were actually $10 million higher than they were in 2000, while total revenue had declined over $90 million in the same period. Payroll and benefits are well over half of all our cash operating expenses; the remaining cash costs are newsprint and everything else. Newsprint is the only one of the three major categories where we’ve had a meaningful drop in expenses, and that’s mostly because of a substantial drop in the price we pay per ton. Unfortunately, that price is going way up in 2008. All other cash expenses combined (utilities, office supplies, all the other things it takes to keep us operating) are at almost exactly the same level today as they were in 2000.
As a result of rapidly declining revenue — and expenses that haven’t been cut anywhere nearly as fast — our operating cash flow has declined dramatically since 2000. Operating cash flow, which is the cash we have left after paying cash expenses, and which we then use to invest in everything from new equipment and computers to new products, and to pay our debt, has declined 50 percent in just the past two years and more than that since 2000.
Obviously, we cannot continue on this course. We need to deal with these challenges quickly and collaboratively, working together all across the company to find the best solutions.
As a first step toward finding these solutions, we have retained Restructuring Associates (RAI), a consulting firm headquartered in Washington, DC to help us work collaboratively throughout the Star Tribune to get our business on the right track to meet the significant challenges we face. RAI specializes in helping unions and management work together to improve performance.
Starting this week, representatives of RAI will begin interviewing Star Tribune managers and soon will interview others involved with the business to get a better understanding of what we are up against and how to frame our approach to finding solutions.
RAI expresses its basic philosophy this way: “We help our clients become high performance organizations and better places to work by engaging employees in solving organization problems and implementing their solutions. By involving people, we build internal commitment to change, generate real solutions, and facilitate implementation.” I encourage you to visit their website at www.restructuringassociates.com for more information on how they work with companies to build high performance.
We selected RAI precisely because of its focus on a collaborative approach with strong involvement of employees and union leadership. We have been especially impressed that the firm doesn’t have canned solutions or preconceived notions. But it does have an outstanding track record of successfully dealing with complex challenges at many companies across many industries.
Despite all our challenges — and they are huge and obvious — we still have some great competitive advantages and the ability to leverage them. We have a century and a half of powerful brand equity with our readers and advertisers. We are still by far the strongest media company in the market. We have many more journalists than any of our direct competitors – and probably more than all our local competitors combined. We also have more ad sales people and a stronger support infrastructure.
In the past year, we have invested strategically to make our business stronger. Some of these investments have been in new technology — like a state-of-the-art web order entry system, a single copy returns-management system, a predictive dialing system for our call center, and a new sales management and reporting system. Plus we have also invested in our core business, spending significant dollars rebuilding our circulation, adding additional sales reps and instituting a new sales training program. You may have seen my note a few days ago about what we were able to achieve in just a few months with our new Cars website. That’s just the most recent example of our incredible capabilities, our competitive spirit and our ability to change quickly.
The fundamental change we are facing is not temporary. Yes, we will try to, and should, regain a portion of our lost revenue when the economy improves. But we don’t know how much, and we don’t know when that will be. What we do know for sure is that the competitive world has changed permanently and we will fail if we don’t change much more than we have already. In today’s jargon, we are going to have to reinvent our business.
And this is a matter more of attitude than of resources. Our intellectual capital is huge, and we need to draw upon it to find new ways of operating.
I am absolutely confident we can do that.
I believe our future is bright, and I invested a substantial amount of my own money in the Star Tribune on that belief. I believe passionately in what we do, and I know a huge number of you do, too.
We absolutely have the passion, knowledge and resources to continue as the leading information company in the Twin Cities. But we won’t do it by wishing we could go back to the way our business used to be. We must harness the passion that brought us all to the Star Tribune and point our efforts toward reinvention. We are all in this together. Thank you for helping move us forward.