April 30, 2009, 12:00 AM

Channel Shift

With newspaper circulation falling, this is an ideal time for retailers to highlight the sale circulars posted on their web sites.

For multichannel retailers, the best thing to come out of the current recession is that it may compel them to finally pay close attention to the important role that the Internet plays in driving offline sales.

As an industry analyst going back to 1998, I have consistently argued that retailers should seek to quantify the impact that their web sites have in driving bricks-and-mortar sales, and that they need to build incentive systems to motivate this behavior among dot-com executives. Eleven years later, however, I am surprised that the majority of dot-com executives within the multichannel retailers that I talk to still tell me that their bonuses are almost exclusively based on sales and profits generated online.

I do see hope on the horizon, though. Unfortunately, it comes at the expense of the nation’s dwindling number of printed newspapers.

Why printed circulars matter

It would not be breaking news if I told you that printed newspapers are struggling. Newspaper circulation has been declining since 1984 with the advent of cable news. In 1984, newspaper circulation hit its high water mark, with Sunday circulation of 63 million in the United States. By the end of 2007, that number stood at 51 million.

And, of course, the number of newspapers has been dropping as well. In 1984 there were 1,688 newspapers in the U.S., compared with 1,422 at the end of 2007. The recent failures and cutbacks at The Seattle Post-Intelligencer, Rocky Mountain News, and Detroit Free Press are only the most recent manifestations of a trend that is 25 years in the making.

This decline directly impacts bricks-and-mortar retailers, who spend between $5 billion and $8 billion annually on newspaper circular advertising. These are printed advertisements, typically delivered in the Sunday paper, promoting the coming week’s specials.

For a typical retailer, circular advertising is their third-largest expense, behind inventory and labor. This expense is well justified, as circulars are such a critical tool in driving consumers into stores. With the exception of a few large national retailers, such as Target Corp., J.C. Penney Co. Inc., and Wal-Mart Stores Inc., most retailers do not spend substantial amounts of money on television advertising. Those that do advertise on television typically focus on brand development, as opposed to specific promotions.

Online silver lining

While this is all pretty bleak, I do believe that there is a silver lining. The drop in newspaper circulation may act as an important catalyst in pushing bricks-and-mortar retailers to finally consider the ability of the Internet to drive customers into their stores.

Many bricks-and-mortar retailers post their printed circulars to their web sites, and have been doing so for many years. As the adjacent charts show, traffic to retailers’ online circulars rose in November 2008 over November 2007, as overall newspaper circulation has declined.

The next step that these retailers must take, however, is to become more aggressive in calling attention to these online circulars.

Simply linking to their circulars on their web sites is not enough. We’ve run some back-of-the-envelope estimates using Nielsen Online panel data, and found that in an average week, that is, excluding Thanksgiving and the big Friday sales that follow, between 2 million and 3 million people visit circulars online. This pales in comparison to the (again, back-of-the-envelope) 59 million people that read circulars in the Sunday newspaper.

Retailers need to learn how to drive prospective online shoppers to their circulars, as the Sunday newspaper allows them to do offline. To provide a familiar comparison, the online circular distribution strategies of a typical multichannel retailer is akin to Best Buy’s printing 20 million newspaper inserts and keeping them at the print shop, hoping that people pop in to pick up a copy.

Tested circular tactics

There are two mature tactics that we recommend retailers utilize to make better use of their online circulars; search advertising and display advertising.

Retailers should consider as basic blocking and tackling the aggressive use of search advertising (purchase of sponsored links and search engine optimization to drive non-paid clicks) to drive consumers to their online circulars. But the reality is that most retailers are so focused on driving the online sale that they often don’t try to drive online circular visits.

There are exceptions, however, and Target is good example. Not only is Target buying sponsored search links to drive people to its circulars, but it is buying sponsored links for items that are on sale in its weekly circular. Essentially, Target is breaking the circular up into the pieces that coincide with consumers’ searches. Sadly, the far more common example is the bricks-and-mortar retailer whose web site is not optimized to place well in natural search results, and that has not bought sponsored links to bring searchers to its online circulars.

Search marketing, though, is not the perfect substitute for what newspapers are able to provide in printed circulars. I, for example, received six printed circulars in my Sunday paper this week, but I didn’t ask for any of them to be delivered. For retailers that need to reach consumers who haven’t explicitly sought circulars online, online display advertising is the better proxy, as it allows retailers to push their online circulars to those third-party sites that consumers are visiting, such as Yahoo, MSN and iVillage. Fairly common now is the ability to geo-target ads, which means that retailers can get the correct localized version to users with a high degree of accuracy.

What is particularly appealing about all of this is how measurable online circulars are, from initial search and display impressions, to views on the retailers’ web sites, to the offline sales that follow. Retailers do not need to blindly scramble their way into the online circular opportunity.

In fact, the effectiveness of online circulars can probably be measured more precisely than printed circulars. With printed circulars, retailers are only able to understand the number of circulars that are distributed. Online, they can use a combination of web analytics and panel data to see how many people actually look at circulars, what pages they look at, how much they spend, and who they are.

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