National advertisers. For years, these have been the advertisers newspapers craved. They advertise year-round, tend to launch long-running campaigns, take out full-page ads and yes, they pay top dollar.

But unbeknownst to many in the marketing field, national advertisers already do support papers – to the tune of $500 million a year. And despite all the recent efforts by daily and community papers to court national advertisers (such as the Canadian Community Newspaper Association’s ComBase readership study), it’s likely that the national spend on papers will trend down, not up.

Let me explain.

What newspapers – and many other marketers, for that matter – don’t realize is that national ad money is flowing in through a circuitous, backdoor route. It’s in vendor co-op dollars flowing into retail advertising flyers from the manufacturers, or national advertisers, whose products are featured in them. And it’s newspapers that distribute the vast majority of these flyers.

With the possible exception of the on-again, off-again Flyer Distribution Standards Association, no association or marketing bureau represents flyers, or keeps track of the money being spent on them. They’re a sort of orphan medium, never mentioned in the same breath as TV, radio, newspapers and magazines. Since they’re mostly done by retailers and mostly done in-house, flyers are rarely even on advertising industry radar screens.

Some retailers even profit from their flyers

Nevertheless, flyers are big business. Kubas Consultants estimates that Canadian advertisers will spend about $1.3 billion in 2004 to produce and distribute them, excluding catalogues and direct mail.

This makes flyers a major advertising medium, as big as radio, and larger than magazines. Newspaper will see about $500 million of this for distribution, with most of the rest going into paper and printing.

Vendor co-op pays for anywhere up to over 100% of retail flyer programs, depending on the retailer. (Yes, some retailers boast privately that they make a profit on their flyers.) Across the industry, a working average might be that 40% to 50% of all retail flyer advertising is underwritten by national advertisers.

That’s worth at least $500 million, which happens to equal what newspapers earn from flyer distribution.

Vendor co-op, by the way, also makes its way into ROP. The dollars involved are much less than for flyers, but still represent newspaper revenue that began its journey from a national advertiser’s bank account.

Vendors themselves may not even have a clear picture of the situation. Their accounting usually classifies flyer co-op as ‘trade promotion’ rather than advertising. Long ago, trade promotion was a minor part of a vendor’s marketing budget, something like 30%. Now it’s the major component, more like 60%. This in part reflects a shifting balance of market power in favour of retailers over vendors.

But there’s more to it than negotiating position. The trends imply that many national advertisers are content to go along, despite occasional grumbling, and often feel that they’re getting more value for their money through flyer co-op than from advertising directly.

And when their products go on sale at 30% off, it’s the retailer doing it, and not the manufacturer ‘cheapening’ their brand. Flyer co-op allows vendors to push product in print without worrying about the niceties of brand image and editorial environment.

Flyer usage is growing steadily. Our estimates are that Canadian households are currently receiving an average of roughly 20 flyers per week, up from 17 five years ago. Flyers in Canada are increasing at about 4.5% per annum in terms of total number of pieces, easily out-pacing newspaper ROP lineage growth, and the same pattern is evident in the U.S. In fact, flyers appear to be growing more quickly than any other advertising medium except Internet.

One new trend is that some national advertisers have even started doing their own flyers, particularly for information-intensive products like computers (Dell, IBM), wireless, automobiles and financial services.

Papers won’t get more national ads

So, will newspapers get more national advertising? Vendor co-op for flyer advertising and other trends indicate that the opposite is more likely.

Newspapers are in competition with retailers, whose flyers they distribute, for share of national advertisers’ marketing budgets. A large portion of these funds is going to trade promotion – namely retailers – limiting what’s available for conventional media advertising, particularly newspaper.

National advertisers, however, are still getting into newspapers, through the vendor co-op backdoor, and at cheaper rates than they can get from newspapers otherwise. Retailers are effectively publishers, offering an alternative print advertising medium, and they have a far stronger negotiating position with vendors than newspapers do.

For their part, it’s difficult to see what newspapers are practically doing to win over national advertisers. Just look at the rates. Newspapers charge nationals significantly more for the same space they sell to retailers, even though the business is usually much easier to handle.

Newspapers still cling to ‘national’ and ‘retail’ categories, ‘net’ and ‘gross’ rates, and the ‘15% agency commission,’ concepts long past their expiry date. In fact, national gross rates are often more than 15% higher than retail net rates. The Toronto Star’s 2004 rate card, for example, shows premiums ranging from 20% to 35% for national over retail.

High rates drive nationals to co-op

National advertisers are well aware of the rate differentials. Some even try to buy retail through a branch office, dealer or some other local presence, even the occasional rented post office box. Most of all, however, it’s retailers telling vendors that ‘we can get it cheaper.’ This completes the loop: newspaper rates help drive national advertisers to retail co-op.

In addition to rates, there are logistical and technical issues for national advertisers when it comes to using newspapers. There are dozens of newspapers across the country, many of which have different sizes, mechanical specifications and reproduction capabilities. Instead, a national advertiser can deal with half a dozen retailers and get into flyers in a big way. And the targeting will end up exactly matching where the vendor’s products are available for purchase.

Another limitation for newspapers is the type of marketing communications nationals have to do once they’re already in retail flyers. With a mechanism for immediate sales promotion covered off, a vendor’s advertising can be more focused on brand image and awareness objectives, best brought off in media other than newspaper.

A Coke ‘lifestyle’ commercial or a Hewlett-Packard ‘innovation’ spot will never translate well into newsprint.

Ed Strapagiel is a SVP at Toronto-based marketing research and consulting firm Kubas Consultants. He can be reached at: eds@kubas.com.