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paidContent - No More Easy Living For Conde Nast

This story was written by MediaGuardian.

[by James Robinson] Early in September, as models and magazine editors arrive in the capital for London fashion week, a report by management consultants McKinsey & Co is set to land on the desk of “Si” Newhouse Jr at Vogue publisher Cond Nast. The octogenarian chairman of the luxury publishing house summoned the men in grey suits to its New York offices six weeks ago in a bid to protect profits in the wake of the worst advertising recession in a generation.

McKinsey is expected to put forward a cost-cutting programme at the American arm of the group, which also owns fashion magazine Allure, GQ and the New Yorker. The idea of sombre management consultants ploughing through the expense account of Vogue editor Anna Wintour and quizzing Graydon Carter, who runs Vanity Fair, about the cost of the title’s lavish Oscars party is a delicious one for Cond Nast’s competitors, which include National Magazines, publisher of Esquire and Harper’s Bazaar. All publishers are struggling, but Cond Nast has carved out a niche at the top end of the industry by investing huge sums in its titles, using their market dominance to charge the highest advertising rates. It is not a company usually associated with cutting corners.

Jonathan Newhouse, Si’s cousin and head of Cond Nast International currently outside the remit of the review concedes that perks at the company, ranging from expensive stationery to lavish parties, are “part of the magic of our magazines”. The recession, however, makes housekeeping measures inevitable.

Charles Townsend, president and chief executive of Cond Nast in the US, paints a gloomy picture of the company’s short-term prospects: “We feel strongly that the recovery of revenues lost through the recession will be painfully slow in the US luxury marketplace.” He emphasises that McKinsey has been asked “to look at processes and approaches to our business, not salary lines and headcount”.

Cond Nast is owned by Newhouse’s Advance Publications, which also runs dozens of American newspapers, and its accounts are notoriously opaque. In a good year its American operation is thought to make a profit of around $200m. This year, with the number of advertising pages down by between 30% and 40% at key titles, reflecting similar falls in the market as a whole, there is speculation in New York media circles that it could plunge into the red for the first time in its history. A spokeswoman simply said: “Cond Nast carried more ad pages here in the US in the first half of the year than any other publishing company. From the advertising that is available, we have maintained market share. The recovery will come, but there is uncertainty around timing.”

The group’s titles are heavily reliant on advertising from luxury goods houses and fashion brands, which have dramatically curbed their spending this year. In April, the second largest publisher after Time Warner (NYSE: TWX) closed its business monthly Portfolio, after spending up to $100m on the title in two years.

The situation in the UK is not as severe, and advertising is down by around 20%, in line with the European average. Industry sources say Cond Nast UK, run by Nicholas Coleridge, made 22m-23m in 2008 and had a turnover of 125m. Coleridge concedes there are few signs that advertising is about to bounce back, but emphasises that the UK arm, which “has been profitable for 22 years”, will remain so this year, despite two expensive launches, Wired and Love. “Individual magazines have seen green shoots throughout the summer, but there i no sustained recovery yet,” he says, conceding that revenue will be down this year after record profits in 2008. “British Cond Nast was late into the recession (the autumn 2008 issues were notably fat with ad revenue) and we expect the downturn to last into 2010. Our main advertisers are not yet ready for a return to their previous levels of spend. But it will happen. During the recession of 1990-91, many predicted that the magazine industry would not get back to its previous levels. In fact, 1998-2008 was the strongest ever period for magazines.”

Cond Nast International is run out of London by Jonathan Newhouse. He says it accounts for about 40%-50% of the group’s revenues, but will not be drawn on how much it makes. Industry analysts believe the international business turned a profit of $170m (102.6m) last year and estimate that could fall to $100m (60.4m) in 2009 as a result of the advertising recession, but Newhouse seems sanguine. “We are withstanding the strain rather well and we will come out of it stronger than our competitors. So I’m not alarmed. You have to engineer your business to withstand downturns, which are part of the economic cycle.” Of its outposts in 23 countries, only one is operating at a loss, he says. He adds that Cond Nast globally is stronger than it was in the last recession and launches have not been put on hold.

In the last year, it has unveiled “seven or eight” new editions, including Vanity Fair in Spain last September, and Bulgarian versions of Glamour and GQ. Vogue will launch in Turkey soon and a Chinese GQ will appear in October. Coleridge says the international business has trebled in size in 12 years and now employs 4,500 people, adding that it will also make a profit this year, “following record profits in 2006, 2007 and 2008”.

The workforce at the international arm has been reduced by close to 10% over the past year by not replacing those who leave, according to Newhouse. He describes the measures as neither “drastic” or “draconian”, but they are unusual at Cond Nast. Expenses have been targeted, with spending on taxis and flowers curbed; corporate hospitality has also been hit. During Paris fashion week, Newhouse says, “I would [normally] have a dinner for all the Vogue editors, fashion editors and designers in a nice restaurant as a way to build the spirit of the company.” That didn’t happen last season and has also been cancelled this year, as was Vanity Fair’s opulent party at Cannes. That matters for a magazine company that operates in the upper echelons of the market, and where editors and publishers are expected to fraternise with the luxury goods houses that bankroll many of their titles, often claiming costly gifts for clients on expenses. Some staff complain that the unique character of a company whose titles are aimed at an “aspirational” audience is being slowly eroded.

Newhouse insists, however, that the magazines are in rude health, despite the recession and the problems in the US: “There’s not a lessening of demand for magazines, even if some people are prophesying that.” Even so, some observers believe advertising will not recover as more readers migrate to the internet.

The international arm’s websites are being overhauled following the recruitment of a new president of its digital division, former Skype executive James Bilfield. More power has been handed to magazine editors, who previously had little involvement with the sites, and print journalists are now filing more copy online. Fashion writers at Vogue, for example, now write daily blogs for the website. “At one point we were operating the internet [sites] as a separate business,” Newhouse says. “We’ve now reintegrated it and the magazine editors are all deeply involved.

“It’s something w are doing because it’s where our readers are devoting a good deal of their attention. We have to create products and services that correspond to the needs of our readers and advertisers.”

The reorganisation is an acknowledgment that the internet will play a huge part in shaping the company, and maintaining profitability, long after the advertising downturn has ended.

In the meantime, according to employees, a new mood of frugality has taken hold at the privately owned company. Graydon Carter, a Manhattan-based media linchpin who usually lunches in New York’s most fashionable restaurants, was even spotted at the staff canteen at the American headquarters in New York’s Times Square recently. Newhouse will not discuss the situation in the US, but when asked about the Vanity Fair editor, he says, archly: “Graydon Carter has been to the company cafeteria more than once.” He may be frequenting it more often in future.

By MediaGuardian

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