Gannett positions himself for the future by cutting today
This article originally appeared on Northwestern University’s Medill Local News Initiative website and is republished here with permission.
Earlier this month, Gannett’s Michael Reed had the opportunity to chart a new course for the nation’s largest newspaper company after disappointing financial results in August.
Instead, it doubled.
Reed doubled down on its cost cuts, promising to cut $200 million to $240 million from the “declining parts” of the business – mostly printing. He doubled down on debt repayment, which exceeds $1.34 billion. Above all, he doubled down on his efforts to increase digital subscriptions, while promising to develop a unit specializing not in journalism, but in the sale of web services to small and medium-sized businesses.
Speaking at a Wall Street conference just weeks after posting a quarterly loss of $53.7 million and warning of a loss for the year, Reed said his long-term strategy remained unchanged. Gannett’s print business will continue to decline, but its smaller digital businesses will grow. In two years, he promised, digital revenues will grow enough to more than offset the decline in Gannett’s “legacy” business.
“We are crossing the inflection point in 2024,” said Reed, the company’s chairman and CEO. “The math is as simple as that. You see an overall stabilization and it is starting to develop.
So far, Wall Street isn’t buying it. Gannett’s stock plunged 70% to $2.10 on September 20 from a high of $7 a year earlier as Reed’s bullish forecast for 2024 failed to lift the stock price. stock. Also leaving investors indifferent was his decision to invest $1.2 million of his personal wealth in Gannett stock shortly after announcing the second-quarter loss. The stock rose on the news, then fell again.
“I know there’s a lot of skepticism out there,” Reed said at the Sept. 9 investor conference. “I feel good about our future, and I would say that’s proven by the fact that just a few weeks ago I bought 500,000 shares of Gannett because I believe so much in the future.”
The big risk is that Gannett continues to do what he did in the second quarter: the print decline accelerates, while digital business revenues fail to compensate. The company’s leverage leaves it little room for error and, as Jim Friedlich, CEO of the nonprofit Lenfest Institute of Journalism, has observed, “Dropping profits are never a good thing. thing for the credit ratings of indebted companies”.
Still, one of the few Wall Street analysts tracking the stock expects Gannett to be close to hitting Reed’s 2024 numerical target, despite an industry-wide drop in the pages. views on local news sites. Douglas Arthur of Huber Research predicts that digital will account for 42% of total revenue in 2024, up from just over a third today, but not the 50% or more of revenue that Reed promised.
Arthur said his projection came with a caveat: “I and (the) company have tended to be overly optimistic about the revenue outlook.”
And as Friedlich noted, reaching a tipping point where digital growth outpaces print’s decline is “something of a Pyrrhic victory, as it reflects the fact that print has declined so much that there’s not much to lose.”
Reed’s anticipated numerical gains will likely have to come from a smaller log base. Industry insiders say Gannett is buying at least 60 of its nearly 500 posts, having dropped more than 100 since 2020. A spokeswoman didn’t address specific numbers, but said the company had made changes “to better align its product portfolio with our ongoing digital transformation.” while remaining attached to local journalism.
Four Gannett weeklies in Massachusetts and another in New York state were recently acquired by CherryRoad Media, an acquired New Jersey tech company that has purchased dozens of Gannett newspapers over the past two years. .
Jeremy Gulban, CEO of CherryRoad, said Gannett was playing to its strengths by shedding smaller papers in more isolated markets. “This is a difficult time for the newspaper industry. They have to play the best possible hand,” he said. “They have a national brand in USA Today and strong regional markets.
“No one disputes that printing revenues will continue to decline,” Gulban said. “It needs to be replaced by digital revenue and the question is how much and how fast?”
Progress can’t come soon enough for Gannett. The company has limped since being acquired by GateHouse Media in a high-leverage deal struck in late 2019, shortly before the pandemic hit. GateHouse took Gannett’s name and promised to cut $300 million from its annual costs while reducing its punitive debt, which it did.
A spokeswoman for Gannett said the company would repay between $100 million and $200 million in debt principal in 2022. “We are strongly committed to repaying debt and believe Gannett has strong prospects as we continue to deliver and progress.”
Cost reduction has been Reed’s calling card since the acquisition. The two companies had about 25,000 employees when they merged, a spokeswoman told The Associated Press at the time. By the end of 2021, the ranks had fallen to 13,800 in the United States and 2,500 overseas, according to government documents from Gannett.
This year, the layoffs are on the rise. Poynter reported that Gannett laid off 400 employees in August and closed 400 additional vacancies. Reed told investors he was looking to address the talent drain by increasing automation and outsourcing customer service, accounting and other core business functions.
And while dozens of reporters were among those fired in August, Reed said Gannett is “not focused” on the newsroom cuts. “We understand that content is a big part of our growth strategy,” he told investors. “We’ve had to do some work in this area given this environment, but it’s a small part of the overall cost reduction program…very small.”
The cuts were necessary because of a rapid and severe downturn in activity between March and April, Reed said. Digital advertising revenue was hammered in part by changes Google made to improve data privacy, which hurt programmed ad placements. Under the pressure of inflation, consumers have cut spending on discretionary items like newspaper subscriptions. Fuel and newsprint costs were exorbitant. And, more importantly, a tight labor market has left the company without carriers to deliver print newspapers, disrupting service and causing cancellations.
Reed said it is making the necessary investment to hire and retain carriers, but expects to continue cutting costs in 2023. “A natural question would be: are we cutting too much, are we cutting into the bone? The answer is no,” he told investors. “We are advancing cost actions that we would have taken in future years that are associated with the decline in our business.”
All is not dark. Gannett has a stable printing and commercial distribution arm, for example, and its paid obituaries and legal notices continue to do well, Reed said. The company uses data analytics to deliver more personalized and researched content. Some new products, such as a crossword puzzle app, have worked, and the number of registered website users, instead of remaining anonymous, now exceeds 10 million. This gives the company millions of likely targets to convert into paying users.
The brightest spot is Gannett’s Digital Marketing Solutions unit, which helps businesses such as plumbers, dentists and restaurateurs increase their local digital presence, maximize their advertising reach and convert leads into paying customers. It’s growing and profitable, and Reed said it could be worth up to $2 billion if it were a standalone business.
So, is a spin-off in sight? Lenfest’s Friedlich notes the long history of newspaper companies separating strong businesses from declining newspaper operations — including the 2015 split of broadcaster Tegna Inc. from Gannett’s former publishing business.
“Unfortunately, this leaves the newspaper business without a growth engine and the remaining business needs further cost cutting,” he said. “Investors win and newsreaders lose.”
Huber Research analyst Arthur doubts the marketing unit would grow as quickly if it were a stand-alone business, without “as many long-term local relationships from its press business”, he said. declared. Arthur pegs his value at $700 million, far less than Reed’s estimate but still more than double Gannett’s $318 million market value as of September 20.
Asked if the company expects a spinoff, a spokeswoman said, “Our digital marketing solutions segment is an important part of Gannett’s business strategy.”
At Northwestern University’s Medill School of Journalism, Media, Integrated Marketing Communications, Senior Associate Dean Tim Franklin sees Gannett in “a race against time,” he said.
“The question is whether Gannett can grow digital subscriptions and marketing services fast enough to offset the accelerating decline in print — and weather it against headwinds like decades-high inflation and a slowing economic,” said Franklin, who serves Medill as a professor. , John M. Mutz Chair in Local News and Director of the Medill Local News Initiative. “They will have to make this transformation work at the same time as they are under the pressure of servicing huge debt. And they’ll have to pull that off without cutting their newsrooms too deeply. Because in the end, consumers won’t hand over their credit cards for digital subscriptions unless the media coverage they get has compelling value.
Even as Gannett rushes to achieve his digital goals at a pace comparable to “dog years,” Franklin said, “None of these major corporate reengineers will work if the reporting doesn’t meet readers’ needs.”