Bloom is off, but FSI's play upside in a down market

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Kmart's former CEO last year called preprinted inserts a "$200 million heroin addiction." Package-goods marketers tried to go cold turkey in the late 1990s. And a host of online and offline technologies have tried to render them irrelevant.

Yet, preprinted newspaper inserts, the medium many marketers love to hate, have proved a hard habit to kick. Industry watchers say the free-standing insert market was flat to down mid-single-digits last year, but still outperformed newspapers' run-of-press advertising and the sputtering media economy generally.

FSIs are outperforming other ad media in part because they're centered on local marketing, which is relatively recession-proof, and bargain-hunters, whose ranks multiply during recessions, says John Morton, president of Morton Research.

staying power

Kmart's experience may be an object lesson in preprint's staying power. While former President-CEO Chuck Conaway tried to wean Kmart from reliance on promotional circulars, he ultimately acknowledged those cuts hurt business before the No. 3 mass merchandiser filed for bankruptcy and he left the company earlier this year. Even in bankruptcy, however, Kmart executives have told analysts the company is sticking with preprints.

"It looks like it wasn't heroin in the needle, it was adrenaline," says John Kimball, senior VP-chief marketing officer at the Newspaper Association of America.

Whatever some marketers may say, consumers like FSIs, Mr. Kimball says, citing an NAA-sponsored study released early this year showing FSIs are the most-relied-upon medium for purchase decisions.

But Kmart's bankruptcy and impending closing of more than 250 stores, combined with last year's closing of Montgomery Ward & Co. and bankruptcy of Service Merchandise, are bad news long-term for inserts, Mr. Morton says, adding that broader retail consolidation also hurts.

Offsetting such losses have been the rise of national electronics retailers and other specialty retail chains, says Scott Harding, chairman-CEO of Interpublic Group of Cos.' Newspaper Services of America, which buys about 22% of U.S. preprint advertising.

Tighter marketing budgets can help inserts, he adds, since large insert advertisers can buy a 10-to-12-page insert for the cost of one ROP ad page.

Mr. Harding also is seeing some advertisers shift funds from direct mail to inserts, a trend he expects to continue as postal rates keep rising.

FSIs "drive shoppers into stores, and if the competition is there, [marketers feel] they have to be there. Advertisers have conditioned shoppers to find the inserts in Sunday papers. And they're a very efficient way to communicate a multiproduct retail story. For those reasons, [preprints] continue to stand up against threats of all kinds," Mr. Harding says.

couponing star

One area where FSIs still reign supreme is couponing. Despite competition from direct mail, Internet couponing and such in-store distributors as Catalina Marketing Corp. and News Corp.'s News America Marketing, the share of coupons distributed via FSIs increased 2 points to 84% last year, according to NuWorld Corp.'s NCH.

But this time around, FSI couponing hasn't seen the usual bounce that comes during recessions, says Alan Schultz, chairman-CEO of co-op FSI publisher Valassis. Indeed, Valassis and News America, its primary FSI rival, trimmed weekly co-op drops by a total of four to a combined 87 for 2002. And Valassis recently rolled back a 5% price increase instituted last year after losing share to its rival.

Meanwhile, FSI alternatives remain on the prowl. Online couponing company CoolSavings has signed about two dozen package-goods companies to distribute electronic coupons on brand Web sites and is in talks with publishers of the top 20 newspapers to bring an electronic version of the Sunday coupon insert to their Web sites.

CoolSavings President-CEO Matthew Moog sees in-store coupons, not FSIs, as his main rival. The company faces serious challenges: Its auditor has raised "substantial doubt" about whether the ailing dot-com will continue as a going concern.

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