Not all of our businesses are destined to increase profits. When an industry’s underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, “If you want to get a reputation as a good businessman, be sure to get into a good business.â€) And fundamentals are definitely eroding in the newspaper industry, a trend that has caused the profits of our Buffalo News to decline. The skid will almost certainly continue.
These are the words of Warren Buffet in his letter to shareholders published earlier this month and reviewing 2006. If you want to read Buffet’s comments on the newspaper business (2 pages out of the 25 in the letter), the Australian Investment News is a better source.
Buffet is an extraordinarily successful business person. It would be foolhardy to dismiss his views on newspapers. Yet that is what some publishers seem to do in their representations to newsagents – they still want the best retail position and ask for a hefty capital investment in fixtures and do this while cutting margin and pushing more costs onto newsagents – they say that newspapers have a bright future.
Recent sales data for newspapers in Australia is okay – flat and even small growth. No US like downturn. My view is that we are around two years behind the US and that a downturn is inevitable. The publishers demonstrate they believe this by investing so aggressively in online business models and cutting costs in the print operation.
While Buffet is retaining his modest investment in newspapers, newsagents – with a higher proportion of their capital invested in the category – need to consider their position more carefully, just as publishers have been doing.
Newspapers are important to retail newsagencies – but not as much as previously. We need to carefully consider capital and real-estate investment in the context of shrinking returns and more retail outlets in the space. For example: should they have the best real-estate? Should they be given expensive fittings? While the answer is probably yes, we need to ensure that we leverage newspaper traffic better and to do this we need to ignore some rules publishers have set for us.