THE REACH OF THE YELLOW PAGES

They are decidedly unglamorous. The big, bulky Yellow Pages are the directories most commonly hidden in drawers, tucked away in closets and tossed under sofas. Sometimes they even double as booster seats for children too small to sit at the dining room table. We take them for granted — after all, they've been around forever (the first one was published in 1876). Some might even think that online directories have made them obsolete. Yet those familiar sunny pages are actually one of the best ways to reach the majority of adults ages 18 and over (57 percent) — some 119 million people — who turn to the publication at least once a week. In fact, 90 percent of adults in the U.S. use the Yellow Pages (YP) in any given year, and 76 percent refer to them at least once a month, according to Knowledge Networks/SRI, a Westfield, N.J.-based research and consulting firm. Although many consider YP publishing to be a mature industry with little potential for growth, this old ad medium has managed to survive in an era of new technology and is even undergoing a makeover to ensure that it becomes more relevant. Some publishers are increasing type size, offering popular mini versions of the directories and presenting more in-depth information for shoppers. These efforts have helped keep usage and ad sales revenue steady in recent years while other forms of advertising have suffered significant losses. According to Ken Ray, vice president of marketing for BellSouth Advertising and Publishing, the big book has “unlimited potential.?? What makes YP users especially valuable as potential customers is their mind-set: They're ready to spend. No other ad medium can claim that 9 in 10 customers who see its ads ultimately make a purchase, according to New York City-based Simmons Market Research Bureau. YP users spend 25 percent more per year than the average consumer, reports CRM Associates, a Boulder, Colo.-based market analysis firm that conducts research for the YP industry. And those who let their fingers do the walking are more likely than the average consumer to pay full price for a product or service, because their spending is driven by need, not by discounts or special offers they saw in other media. It's therefore not surprising that profit margins on YP users tend to be higher than those on customers attracted by sales markdowns. And the directories deliver: The typical YP display ad for an attorney pulls in an average of 900 calls per year and generates $17 in sales per ad dollar spent (bankruptcy lawyers generate an average of $31 in sales per dollar spent), according to CRM Associates. Restaurants take in $3.50 in sales per dollar spent, and at the higher end of the spectrum, car dealers and car services average $280 in sales per ad dollar. “During more than 20 years of cyclical advertising peaks and valleys, the Yellow Pages have offered advertisers and businesses an extremely strong and steady return on investment in a medium they can count on — providing a direct, measurable, cost-efficient vehicle for their marketing expenditures,?? says John Greco, president and CEO of the Yellow Pages Integrated Media Association. The YP trade is something of an anomaly in the advertising industry. The YP business has been plodding along as more nimble media leapt ahead. Between 1991 and 2001, the YP industry grew by 48 percent, though cable TV and radio grew by 394 percent and 111 percent, respectively, according to estimates from Robert Coen, director of forecasting for Universal McCann, the global media services operation of McCann-Erickson WorldGroup. Yet the industry is also less volatile in a down economy. Between 2000 and 2001, the YP posted an estimated ad revenue gain of 3 percent, whereas almost all other media saw losses. For example, broadcast TV, the Internet and consumer magazines fell 13 percent, 12 percent and 10 percent, respectively. “They're almost recession-proof,?? says Gabe Samuels, director of member services at the New York-based Advertising Research Foundation, referring to the YP. Still, annual revenue growth for the industry has been slowing, dropping to a projected 1.5 percent in 2002 from 7.1 percent in 1999, according to American Demographics' sister publication group, Simba Information, which publishes a newsletter and annual market forecast on the industry. The drop, according to Simba's analysis, reflects an economy still weakened by the Sept. 11 terrorist attacks and continuing fallout in the corporate sector. However, the fallout has not hurt all YP publishers equally. Approximately 240 publishing companies produce some 7,270 different YP directories in the U.S. each year, with a total circulation of more than 530 million. Total circulation for the four Bell regional directory publishers, which accounted for 83 percent of YP ad sales last year, was flat, at 373 million, compared with the previous year's circulation. However, independent publishers — those not affiliated with any telephone company — are a growing presence in the industry. Revenues at nine leading independent YP publishers increased 12.4 percent in 2001; their total revenue was $1.09 billion, up from $972 million in 2000. Yellow Book USA, the leading independent publisher, generated estimated revenues of $530 million in 2001, a 27.7 percent increase over 2000, according to Simba. And there's more good news: The share of adults who use the print YP has held steady since 1985, despite the advent of the Internet. The bad news is that people turn to the directories slightly less often than before: Weekly usage in 2000 averaged 1.4 references a week, where it remains today. This is down from 1.8 references a week in 1996, according to Knowledge Networks/SRI. The changing demographics of the population is a factor in the decline. An increase in the minority population means that there are more immigrants who lack a history of using the YP, thereby reducing usage rates, says Burton Michaels, vice president of Knowledge Networks/SRI. For example, the Mexican American population in Southern California has increased, but frequency of YP usage in that area has declined to one reference per week today, from two references per week in 1985-1986. The relative aging of the population is another factor, because older age groups have historically been lighter YP users. For example, between 1985 and 2000, the size of the 18 to 34 age cohort in Arizona dropped to 25 percent from 49 percent, while the number of those 50 and older increased to 47 percent from 23 percent. The growth of the older population was accompanied by a drop in the frequency of YP usage, to 1.8 references per week from 2.9. Not to be ignored is the Internet's small but growing impact on the directories, as an increasing number of people go online to search for the products and services they need. In 2001, almost 1 in 3 (27 percent) said they used the Internet to look for products and services instead of consulting the YP, up from 17 percent in 1998, according to Knowledge Networks/SRI. As information seekers increasingly refer to the Net for such categories as furniture, florists and travel, online directory use may eat into print directory use. Analyst John Kelsey, president and CEO of the Kelsey Group, a Princeton, N.J.-based research consulting firm that specializes in the YP industry, believes that within five years the Internet directories (including switchboard.com and Yahoo!'s Yellow Pages) will take market share away from the print YP, as many more homes will have quicker Web access because of broadband connections. Today, online lookups make up just 10 percent of all YP references and account for only 2 percent of revenue, he says. But assuming print usage remains flat and Internet searches continue to rise by at least 25 percent a year, by 2006 the Internet's market share of revenues could be as high as 35 percent, says Kelsey. So far, however, says Dennis Fromholzer, president of CRM Associates, “We do not see a drop in the percentage of customers using Yellow Pages, in weekly Yellow Pages reach or in calls received by advertisers.?? YP users are most likely to be between 25 and 49 and to be well educated, with some college experience behind them. The higher the household income, the more likely one is to refer to the YP. Some 64 percent of consumers from households earning $60,000 or more per year refer to the publications weekly. People who move a lot also have a greater tendency to turn to the directories for help, whether they're looking for pizza, painters or pet groomers. Past-week YP use is also heavier among those who have traveled in the prior year (62 percent) compared with those who have not (43 percent). However, the biggest drivers of YP usage are life-changing events that create specific needs and thus spur spending, i.e., the purchase of a first home, an engagement, a move, a separation or divorce and the birth of a child or grandchild. Simmons data shows that at least 70 percent of YP usage is driven by people experiencing major life events in the past year or those who anticipate such events in the coming year. “These are people who are actively shopping,?? says CRM's Fromholzer. “It's the ideal time to influence a purchase decision.?? Indeed, these consumers are particularly receptive to advertising. They like reading the information on labels and are less brand loyal than average, preferring to experiment, according to CRM Associates. More than half of the people who consult the top YP categories patronize businesses that are new to them. The aging of the Baby Boom population is also expected to provide growth opportunities for the YP industry, says Fromholzer. As 78 million Boomers (currently ages 38 to 56) approach retirement, the over-50 group is expected to grow about 52 percent between 2000 and 2020. And although consumers age 50 and older have not been heavy YP users historically, Fromholzer believes that will change as Boomers age, partly because they are better educated than their predecessors and, by extension, more research-oriented. Unlike their parents, Boomers tend to be information sponges, he says. People who are heavier users of the YP are information gatherers, he adds. They consider themselves smart shoppers, and part of that involves comparative shopping to ensure they get the best value for their money. Categories that Fromholzer predicts will do well as a result of this increase in the older population include home improvement, financial services, entertainment, housecleaning, travel and health-related services. “That's where a lot of the spending in the future is headed,?? he says. Marketers should also bear in mind that YP users aren't afraid to flaunt their wealth. According to Simmons data, they like other people to think they're rich. They're style conscious and make a point of keeping up with the Joneses. (This might mean that when they pack their kids off to college, they will be ready to trade up from their Ikea home furnishings and go to Ethan Allen or Crate & Barrel.) People who consult the YP weekly are more likely than average to enjoy shopping, while those who are light users or nonusers avoid shopping. The YP categories expected to be the most popular in the future are those that have held the top spots for years, such as restaurants, physicians, and automobile-related products and services, according to Knowledge Networks/SRI's Michaels. YP users are also a prime market for home-related categories, such as home-improvement services, general contractors and kitchen cabinetmakers. Formal-wear shops, caterers and florists are high on the lists of those celebrating milestone events. To make the directories more useful and profitable, publishers need to address the ongoing resistance to placing ads in the books, analysts and marketers say. Although restaurants are the most referenced heading, market penetration tends to be low, says BellSouth's Ray. Restaurateurs tend to feel that the flimsy paper and the quality of the printing don't project a polished image. Last year, BellSouth published a stand-alone dining guide on heavier weight paper and inserted it into the YP restaurant section in 13 Southern markets. Between 100,000 and 200,000 copies were distributed to hotel concierges. Menus will be added in 2003. In just one year, the dining guide enabled the publisher to increase its revenue from restaurant ads to $6.3 million, from $5 million in 2000. In response to the common complaint that the books are too heavy, some publishers now offer business owners free CD-ROMs that contain page views of the print directory. One publisher discovered that small is better. In 1994, Irwindale, Calif.-based Clarke Directory Publishers, which issues four directories in the Los Angeles area with a circulation of 806,500, launched the Clarke Mini Phone Book. Three weeks after delivering the regular books, the company distributed the mini version, which is roughly half the size of the standard YP book, in an affluent neighborhood. Clarke targeted business owners and likely early adopters, such as cell phone users who might want a thinner directory for their cars. The reception was favorable, with people wanting several copies of the mini books for their homes. (The format has since been adopted by other publishers.) “It's one of our best marketing and advertising tools,?? says Jim Clarke, president of the company. By 1998, the publisher began producing mini books only because the public “just liked the handiness of a smaller phone book. The big book is passé,?? he explains. And in response to user complaints that the typical YP directory is hard to read, his company pushed the type size of regular listings up to 8-point, from 6-point, and changed the font. Alltel Publishing, whose directories for 350 Alltel telephone company markets in the East, the Southeast and Alaska have a circulation of 5.4 million, has started to target specific advertisers in areas that draw tourists. Fast-growing communities can be fertile markets for YP advertisers, given the needs-driven use of the directories. In the suburbs of Houston, for example, the population of Fort Bend County grew 57 percent between 1990 and 2000. To reach the people moving into new homes, Alltel recently focused its marketing efforts on four specific groups of advertisers, based on the growth opportunities in the market and the increased demand for the services provided by: restaurants, insurance agents, real estate companies and lawyers. “The west suburban Houston directory has performed exceptionally well for us,?? says Julie Leonow, Alltel Publishing's director of marketing. “The Yellow Pages are like no other medium. They're the most direct link to consumers.?? TOP 10 CATEGORIES People reference the Yellow Pages to search for car dealers, doctors and attorneys. TOP 10 MOST-REFERENCED HEADINGS, 2001: SERVICE ECONOMY People whose household income is $100,000 or more are 69 percent more likely than the average American to have looked to the Yellow Pages for general contractors during the past year. PEOPLE WITH A HH INCOME OF $100K+ SEARCHED FOR: MONEY IS NO OBJECT Yellow Pages users spend more than average. For example, they spent 70 percent more than the average financial services customer last year. STARTING OVER Divorced or separated people were 74 percent more likely than the average American to have used the Yellow Pages to find a store selling or renting videotapes. PEOPLE WHO ARE DIVORCED/SEPARATED WERE MORE LIKELY TO HAVE SOUGHT THE FOLLOWING IN THE YELLOW PAGES IN THE PAST YEAR: IMMEDIATE NEEDS Nearly 1 in 4 people who turn to the Yellow Pages for a restaurant crave pizza. WHO READS IT? Yellow Pages users tend to be an upscale, mobile market. PERCENTAGE WHO USED THE YELLOW PAGES IN THE PAST WEEK: LIFE CHANGES Major personal events drive Yellow Pages usage. Those who have separated or divorced in the past year are 99 percent more likely than average to be weekly users of the Yellow Pages. LIKELIHOOD OF LIFE EVENTS FOR WEEKLY YP USERS, COMPARED WITH THE GENERAL POPULATION:

THE REACH OF THE YELLOW PAGES

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