MAGAZINES OF THE YEAR;AD AGE SPECIAL REPORT;THE DYNAMO THAT IS MARTHA STEWART REFUSES TO SETTLE FOR A HANDY NICHE WITHIN TIME INC. AND INSTEAD GOES ON AN EMPIRE-BUILDING SPREE-FROM PUBLISHING TO PAINT--NOT SEEN IN A LONG TIME

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When time Inc. gave the green light to to begin regularly quarterly publication five years ago this spring, even some of its biggest boosters envisioned the magazine as little more than a narrow special-interest title.

"They truly thought it would be a niche magazine-no more than 800,000 to 850,000 circulation," recalls Martha Stewart.

Today circulation is climbing above the 1.5 million mark, and the title has emerged as the cornerstone of a multi-media empire that includes TV, books, and a mail-order business, earning Martha Stewart Living the title of Advertising Age's Magazine of the Year for 1995.

POSTING A PROFIT OF $5 MILLION

Capping its third consecutive year of explosive growth, the rate base for the now ten-times-a-year magazine reached 1.2 million. Paid circulation is up 52.8% for the six-month period ending Dec. 31, according to Audit Bureau of Circulations. Industry experts estimate Martha Stewart Living enjoyed its first year in the black in 1995 with a $5 million profit on total revenues of more than $50 million.

With that success, Martha Stewart Living's mix of gardening, cooking, shelter and entertainment has turned many one-time skeptics into believers.

"She's made a connection that other magazines strive for," notes one-time critic Mike McGrath, editor in chief at Organic Gardening. "There's no way I can make fun of her anymor...In the great anonymous era, she connects with people."

Ms. Stewart herself says she never had any doubts.

"I always thought it could be a big circulation magazine," she says, "and we had envisioned it as multimedia from the start."

Initially, the idea of developing a magazine around Ms. Stewart, a book author and writer for several women's magazines, seemed a gamble.

S.I. Newhouse Jr. actually funded the original prototype but ultimately passed. Also passing were Rupert Murdoch at News Corp., and New York Times Co., which then owned Family Circle, where Ms. Stewart was a contributor.

Finally she landed at Time Inc. and found the company already at work on a prototype for a magazine similar to the one she envisioned. In 1990, Martha Stewart Living tested its first ever Christmas issue as a one-shot that sold phenomenally on newsstands.

With one more test, Time Inc. was convinced, launching the publication in '91.

WIELDS A DEFT TOUCH

Surprisingly, her touch is particularly deft for someone who's an admitted magazine outsider. "I think I have a good feel for what our readers want," says Ms. Stewart.

So does Editor Susan Wyland, who has been snatched up by Walt Disney Co. to start up a new electronic magazine, Family.Com, effective March 15.

Though Ms. Stewart once appeared on virtually every cover, she's cutting back to appear on only about 50% in the future. In a sense, her personal appearance is no longer a necessary: her name alone is a brand icon.

`She's a real media star," says Leo Scullin, president of a consultancy bearing his name. "There have been attempts to imitate her, but there is nobody with the same image, prestige, market value or market phenomenon as Martha Stewart."

That's also carried over into her weekly TV program syndicated by Group W, for which the magazine sales staff also sells advertising.

"We package our assets for advertisers," says Martha Stewart Living Publisher Shelley Lewis Waln.

And what a diverse group they are.

"You won't see Comet [cleanser from Procter & Gamble Co.] and Jaguar Cars together in any other magazine," says Ms. Waln.

BMW of North America, Ace Hardware and Estee Lauder are loyal advertisers while new ones such as Avon Products are coming on board.

"It's nice to be with a winner," says Valerie Muller, exec VP at DeWitt Media, New York, media buyer for BMW, which pulled back from most women's magazines in '96-but not Martha Stewart Living.

Part of the appeal of Ms. Stewart is that she and her magazine exude an air of competency, elegance and fashion-infused with a belief that people can actually do many of the projects she describes in the magazine.

ANOTHER SPINOFF OPERATION

The criticism by some that it is more "wish list" than reality and that the materials depicted are hard to find has actually inspired a new fledgling spinoff company: Martha By Mail. For anywhere from $5 to $330, Martha by Mail will send out the cookie cutters or spatulas to complete the job-all contained in a metal container for easy storage.

Martha Stewart Living editors now say there is a greater emphasis to assure that suggested projects are doable.

"There's real actionable information in there," says Russ Hardin, group VP at Avon Products' in-house Creative Agency & Advertising. "She shows you how to bring an element of style to your life."

Most amazing of all, the magazine doesn't look like it has even come close to peaking yet.

"We'll do significantly better in '96 than we did in '95," predicts David Steward, the exec VP of Martha Stewart Enterprises, which oversees all the Time Inc.-related properties.

A $200 MILLION EMPIRE

Time Inc. sister title Entertainment Weekly estimates the total Martha Stewart empire last year was worth $200 million. Ad pages for the magazine last year were up 50.2% to 598.8, according to the Publisher's Information Bureau, while PIB ad revenue figures soared 123% to $33.3 million.

The rate base, already boosted to 1.55 million early this year, is slated to jump to 1.65 million in September-which will translate into a 38% rise over its rate base at the close of '95.

TV SHOW LURE

Helping to fuel that momentum is Ms. Stewart's TV show. In addition to providing a multi-media combination for advertisers, it also assists magazine subscription sales.

Acquiring names for new magazines is often expensive-somewhere in the neighborhood of $15 to $18 per name for startup books. For most magazines to reach 1 million circulation requires an expenditure that could approach $20 million in circulation promotion costs alone. But Martha Stewart Living, making use of a toll-free 800 number, has managed to lower those costs drastically.

There have been some months, in fact, where up to 50,000 new subscription orders poured in over the phone lines, according to one insider, making Martha Stewart 's low acquisition costs the envy of the industry.

Still, there is one potential stumbling block. Time Inc. and Martha Stewart have not come to a new agreement on a contract for Martha Stewart Enterprises.

Neither party seems interested in making Ms. Stewart a free agent at this point, although she has hired high-stakes entertainment lawyer Allen Grubman-whose client list includes Robert DeNiro and Bruce Springsteen-to handle her side of the negotiations.

BIGGER TIME WARNER ROLE?

When the deal is finally consummated, there is a good chance she will be doing more with parent company Time Warner-not less.

New projects definitely in the works include a daily one-minute radio show.

"We have two proposals that we're working with right now," says Ms. Stewart, who hopes to have it up and running "sometime in '96."

Also in the development stage: a transaction-supported online service.

She's even marketing a line of paint.

"We had ours before Ralph Lauren," says the ever-competitive Ms. Stewart.

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