Profit warnings are becoming the rule rather than the exception. Further rounds of cost cutting are being lined up. This is where things start to get tough.
Welcome to Act II of the recession.
Yesterday brought another significant revision in forecasts — this time from News Corp.
Until yesterday, the company had been forecasting 4%-6% growth in operating profit for its current financial year.
Now the tune has changed. Yesterday, Rupert Murdoch forecast a double digit decline in profitability.
The solution? More cost cutting, on top of the “big economy drives” that Murdoch has already instituted at Wapping and elsewhere.
Coincidentally, Murdoch Snr. added some intriguing detail about the state of British ad markets. In the words of the Telegraph’s James Quinn:
He went on to say that the downturn in advertising in the UK was ‘strange’with the Sun and the New of the World largely holding up until this week, but that its broadsheets – the Times and the Sunday Times – had seen a ‘more considerable’fall led by ‘mono advertising and classifieds.”
There could be all kinds of reasons for this two-speed decline. Unintended consequences following the switch to full colour production? Perhaps. The reorganisation of sales teams at Wapping may also have resulted in a blip in revenue generating activity.
But there’s a big demand-led explanation that also sounds plausible.
News International’s middle class audience has been suffering beneath the burden of increased mortgage payments for some time. They traded down from Sainburys to Lidl long ago. Hence, perhaps, the early decline in advertiser demand to reach this audience.
It’s possible that Murdoch’s tabloid readers have remained an attractive target for advertisers precisely because they have continued to spend money on the High Street.
Why? Perhaps they’re less indebted than their middle class counterparts. (They’re almost certainly less reliant on the phoney prosperity generated by the housing boom.)
Alternatively, perhaps tabloid readers have taken the Sun’s jokey coverage of the credit crunch (”Crash, bang, wallop”) at face value.
Either way, my guess is that the recent declines in ad revenues at the Sun and the News of the World are evidence of something new.
We’re looking at a reaction to the fall in consumer demand caused by rising unemployment.