Top marketers desert Martha

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Unilever spent $4.8 million in Martha Stewart Living in 2002, but so far this year it has spent only $130,000. The packaged goods giant is just one of a raft of blue-chip advertisers who spent more than $1 million with the flagship title of the Martha Stewart empire in 2002, but next to nothing in 2003.

The impact of fleeing advertisers is being keenly felt. On Aug. 11, Martha Stewart Living Omnimedia announced its earnings fell 86.4% to $931,000 in the second quarter and projected a net loss between $7 million and $9 million for 2003.

Of course the sharp decline in revenue is not solely attributable to advertisers pulling out of the company's flagship magazine. Retail sales of its Kmart Everyday line declined on a same-store basis, and ran below minimum guaranteed royalty levels. Ratings for the syndicated "Martha Stewart Living" have also slid. For one branding expert, something historic is happening to one of the marketing world's biggest names. "It was one of the strongest brands around," said Robert Passikoff, founder and president of customer-loyalty and branding consultancy Brand Keys. "It will never be the brand it was."

Omnimedia CEO Sharon Patrick, who engineered Ms. Stewart's exit from Time Inc. that made today's company possible, vehemently disagreed. Current Kmart sales trends are positive, she said, citing July sales were up 12% over the year before, driven mainly by increased patio furniture sales that were finally picking up after a cold, rainy spring. She also points to this year's launch of magazine Everyday Food, and the continuing rollout of new furniture lines under the Martha Stewart Signature rubric-the latest is Turkey Hill, named after Ms. Stewart's Westport, Conn., estate, and slated to hit stores next spring.

still buying

Consumers "are still buying the products-in increasing amounts," said licensee Alex Bernhardt, CEO of Bernhardt Furniture Co., which is manufacturing the Signature line, one that is still relatively new to the market. Currently the Everyday line accounts for the vast majority of merchandise revenues.

"We stand for quality. We stand for how-to expertise. We stand for value, we stand for affordability, and we stand for style," said Ms Patrick who took over as CEO after Ms. Stewart stepped down in the wake of her June indictment. "Those brand elements are not at question."

Allegations of insider trading against Ms. Stewart first surfaced 14 months ago. She was indicted for securities fraud in June.

The wide range of advertisers whose spending topped $1 million in 2002 but have yet to spend a cent in Martha Stewart Living through July, according to TNS Media Intelligence/CMR, include Avon Products, Apple Computer, Federated Department Stores, Hallmark Cards, Home Depot, Levi Strauss & Co., Pfizer, Sears Roebuck & Co. and Toyota Motor Co.

"Clients I have talked with have felt [they'll] stand on the sidelines, and wait with the hope that she'll beat the rap," said a key media buyer who requested anonymity. "But standing on the sidelines is not helping her cause."

Ruby Gottlieb, senior VP-planning and affiliated services, Horizon Media, New York, said the company's advertiser predicament was "exacerbated" by the state of the economy. "It's really easy to walk away from her properties when [advertisers] are cutting spending anyway."

The flagship title represents the largest piece of the Publishing division, which accounted for more than 60% of total revenues in `02. Ad pages at the flagship magazine dropped 34% in the second quarter, and the company is girding for about a 40% fall in the current quarter. An MSLO spokeswoman declined to comment on marketers' specific plans, but contended some have future plans to advertise with the company.

The timing of Ms. Stewart's trial, scheduled for January, means that the company`s "difficult and unique period" will continue through spring of 2004, Ms. Patrick said. That timeframe is troubling, because some key negative indicators of consumers and advertisers are snowballing.

Advertiser and consumer slowdown in some Martha-branded products was not immediately apparent through the early days of the scandal. Ad pages at the flagship magazine were up 5.4% last year. Merchandising revenues in '02 rose 37.5% to $48.9 million, but the company attributed that to new product roll-out and a higher Kmart royalty rate, and noted some same store sale comparisons at Kmart were negative.

Newsstand sales of the magazine continues to slip, with an 18.1% decline for the first half of '03. In MSLO's earnings call, Chief Financial Officer James Follo broadly hinted that a rate-base reduction at the 2.3 million-circulation magazine was imminent. Additionally, the company has lost its segments on CBS's "The Early Show." Some of the Viacom network's affiliates in top markets will shift the syndicated "Martha Stewart Living" to late-night segments in '04.

Brand Keys' Mr. Passikoff has tracked customer loyalty, via interviews with target consumers of a brand, since 1984. At its peak in 2000, the Martha Stewart brand clocked in at a strong 122 (in comparison, McDonald's hit around 150, he said, with 100 representing the average). But since the ImClone allegations, the customer loyalty index has declined 40% from 120 to 72 in its most recent reading earlier this month.

"I haven't seen any [drop] this big, ever," Mr. Passikoff said. The shoe designer Steve Madden was jailed with a smaller impact on his brand's loyalty index, he said.

Vital Signs

"The residual performance of this brand is still solid," Ms. Patrick said. "We have the 11th [TV] season going forward. We launched a new magazine. We launched a huge collection," meaning Turkey Hill. "These are not the vital signs of a company-a brand-that is in the kind of disrepair suggested."

Ms. Patrick said that measuring results from a Kmart that had not emerged from bankruptcy-it reorganized under Chapter 11 from April '02 to May `03-against its previous year was "not comparable."

Still, some worry. "There is significant risk that company fundamentals could erode precipitously over the next 24 months," wrote Credit Suisse First Boston analyst William Drewry in a mid-August report on the company. "The negative effect on fundamentals is increasing."

Asked what happens if the worst comes to pass and Ms. Stewart is sent to jail, Ms. Patrick repeats what she said during the earnings call. A "rebound will be more difficult, take more time, and require further investment-but is achievable."

Ms. Patrick refused to speculate on whether the company might consider more explicit distancing from its founder. A company insider said some months ago the idea of renameing Martha Stewart Kids was floated. And the next issue will feature a logo that downplays her name, which Ms. Patrick noted the company earlier did with Weddings. "You introduce with the person and you evolve the brand label,"she said, citing the company's long-stated strategy. "But it all gets caught up in the personal situation and the uncertainty of the moment."

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