It has become almost conventional wisdom that the sector worst-hit by the downturn in consumer confidence and by structural change was retail. After this week’s interim earnings reports, however, it would appear that retail may have been displaced by media as the industry being most adversely impacted.
Seven West Media’s result on Wednesday actually looks impressive with hindsight, despite an effective 6% fall in earnings before interest and tax, now that Fairfax Media and APN have reported and Ten Network has provided an update.
Fairfax’s first-half earnings were down 41% (18% on an underlying basis), APN incurred a loss of $46 million (a 24% fall in profit to $78.2 million on an underlying basis) and Ten has flagged a 39.6% slump in earnings before interest, tax, depreciation and amortisation fort the half.
By way of comparison, David Jones yesterday announced a fall of 6.1% in its sales for the half — which was better than expected — while reaffirming its profit guidance of a 15-20% decline. Its second quarter showed a slowing in the rate at which sales were shrinking, with sales for the three months to January 28 down 2.4% versus the 3.1% fall in the first quarter.
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Fairfax disclosed that sales in January were down 7.5%, indicating some acceleration from the 5% fall in the December half. Fairfax’s advertising revenues have been falling since the March quarter of last year. In the September quarter — the first quarter of the latest half — they were down 3% before plummeting 8% in the December quarter.
That provides some insight into how difficult advertising markets became towards the end of last year and remain. Retailers, of course, had a similar experience so it isn’t surprising that they have cut back on their advertising spends.
Both sectors are very sensitive to the mood of consumers, which is gloomy and defensive and unlikely to be improved by the events in Washington and Canberra over the past 24 hours. Media companies are also being hurt by the stresses being experienced by the finance sector and the steep slowdown in the real estate market, which are themselves part of the explanation for the mindsets of consumers.
They are also both experiencing pressures from structural change, although the impact of what is likely to be a permanently higher dollar and the growth of online retailing is at a far earlier stage than the effect of the internet and digital technologies on traditional media.
Audiences are fragmenting and shifting to lower-yield platforms, with Fairfax and News Corp’s once golden metropolitan newspapers bearing the full force of those irreversible changes to the media landscape.
Fairfax’s metro media division experienced a 6.3% decline in sales in the latest half and a 27% slump in earnings before interest, tax, depreciation and amortisation. Its regional media business was somewhat more resilient, with sales down 1.4% and EBITDA 7.2%.
For newspaper publishers such as Fairfax and APN there is no easy or obvious way to reverse the long-term trends that see high-margin revenues disappearing faster than new lower-margin digital revenues can be generated.
Both have responded with severe cost-cutting programs. Fairfax is already in the midst of an $85 million cost-cutting program. Yesterday it unveiled a “Fairfax of the Future” program that will double those savings over three years. APN is taking $25 million out of its cost base.
Fairfax’s Greg Hywood described the “Fairfax of the Future” program as one that would reshape the group around its core capabilities in content delivery and advertising sales, which today account for only 30% of the group’s cost base.
The obvious conclusion is that everything else is open to scrutiny, with Hywood saying print distribution would be reduced, content shared across platforms, sales, systems and services centralised, duplication reduced and more partnering and outsourcing pursued.
There is also a shift in focus, from circulation (which has been shrinking for years) to “audiences”. Thanks to their websites, The Age and The Sydney Morning Herald audiences have grown 26% in the past five years despite their declining circulations.
The intimidating challenge for a Fairfax, where digital revenues might be growing strongly (up 14% to $189.8 million), but are still only a fraction of the $900 million-plus revenue generated by the group’s newspaper operations — two-thirds of it in the metro business — is managing the rates of digital growth and old media run-off finely enough to give it some hope of ultimately ending up with a meaningful digital business with a cost structure that fits with a low-yielding environment.
Regional media companies such as APN or Fairfax’s own regional media aren’t being as aggressively impacted by the shift of audiences online, but that’s only a matter of time and, perhaps, the national broadband network.
In the meantime, the cyclical downturn is making the attempted transition from old media companies to new that much more difficult.
*This article was first published at Business Spectator