ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, July 28, 1996 TAG: 9607260067
SECTION: BUSINESS PAGE: 1 EDITION: METRO
DATELINE: CHAPPAQUA, N. Y.
SOURCE: ROBIN POGREBIN THE NEW YORK TIMES
Commuting to his New York City office the other day, Gregory Coleman, the publisher of Reader's Digest, watched as a young man who had been reading the magazine tucked it inside the pages of a newspaper before getting off the train.
Coleman could not resist approaching him. ``I said, `I've got to ask you a question. Why did you hide your magazine? It's like I caught you reading Penthouse.'''
Coleman said the man told him: ``Reader's Digest is my favorite magazine, but I really didn't want anybody to see me reading it.''
Therein, Coleman said, lies the 74-year-old magazine's current challenge: to convince those who do not read Reader's Digest that the magazine is not merely the stuff of grandparents' night stands, doctors' waiting rooms and supermarket checkout lines.
``Over the years, an image has been built up that we need to address,'' Coleman said at Reader's Digest headquarters in Chappaqua - though Reader's Digest has kept its euphonious postal address in Pleasantville, one railroad stop away.
On the face of things, it would seem that the Reader's Digest Association has nothing to worry about. Its pint-size magazine - published in 48 editions and 19 languages - has the second-highest circulation in the United States, 15 million, and has 28 million worldwide.
The company has a strong balance sheet and saw its worldwide revenues increase 9 percent in 1995, to $3.1 billion from $2.8 billion the previous year.
But when the company went public in 1990, it lost the luxury of answering only to itself. Wall Street has been watching. And these days the company's analysts and investors do not necessarily like what they see.
Its stock, traded on the New York Stock Exchange, tumbled earlier this year, falling as low as $40.75 a share, down from $51.125 at the start of the year.
``All bets are off on Reader's Digest at the moment,'' said James Dougherty, an equity analyst who follows the company for Dean Witter Reynolds. ``Where is the value for investors? It's generally been a poor performer this year.''
In an industry in which many publications remain privately held, the last six years in Reader's Digest's history have proved an object lesson in what it means when a magazine company lets the world in.
For nearly 70 years, Reader's Digest could do just as it pleased - expand on the multimillion-dollar art collection at its leafy campus far from the reach and rush of Madison Avenue; distribute plump turkeys to its employees at Thanksgiving; and churn out Horatio Alger-esque homilies on subjects such as ``What Motherhood Really Means'' in its magazine.
Indeed, DeWitt Wallace, who in 1922 founded Reader's Digest below a New York City speak-easy with his wife, Lila, was once reported to have exulted, ``We do as we damn well please, and that's close to ideal.''
But given an increasingly competitive magazine industry and a sensitive stock market, Reader's Digest can no longer declare such independence or rest on its quaint laurels.
In April, the company posted a loss of $114 million for its fiscal third quarter of 1996, compared with a profit of $66 million in the third quarter of 1995. The loss was caused by a $245 million charge resulting from weak European operations, along with increased paper and postage costs and the increased costs of promotions.
``The real question for me as a potential investor is `Does this business have the potential to grow?' And that I'm not sure of,'' said Peter Appert, who follows the Reader's Digest Association for Alex. Brown & Sons Inc. ``The company talks about a 10 to 15 percent growth target. It's not clear to me that you can really get to the high end of that range.''
Investors typically do not pay much attention to the actual Reader's Digest magazine, given that it brings in only 25 percent of the company's overall revenues every year. But as the gateway to the company's lucrative direct-marketing business - Reader's Digest calls it ``the front door'' - the magazine matters.
By increasing its readership and trying to reach younger people (the median age of its readers is 47), Reader's Digest hopes to add to its widely coveted, top-secret data base of more than 100 million households worldwide to whom it can pitch the books, tapes and other products that make up 68 percent of its sales.
Some suggest that these Reader's Digest direct-mail products - compact discs such as ``Those Were the Days: 30 Years of Great Folk Hits,'' videos such as ``The 15-Minute Acupressure Face Lift (Defy the Aging Process!)'' and books such as the ``Complete Book of Cross Stitch'' - could use a heavy dose of hip.
``They've got great packaging that may be desirable to my parents, but is not desirable to me,'' said Brian Stansky, an analyst at T. Rowe Price. ``And they've already got my parents, so they need me.''
Reader's Digest is profitable and has 100 million readers worldwide, counting pass-alongs in public places. Only Modern Maturity, which automatically goes to every member of the American Association of Retired Persons, has a larger circulation in the United States.
But there are still those who would never think to pick up the magazine.
About a year and a half ago, Reader's Digest developed a name for these people.
It calls them ``misperceivers'' - those who do not know, and would probably be surprised to learn, for example, that the magazine has a mention of sex in almost every issue; that it has more 18-to 19-year-old readers than Entertainment Weekly, Spin, Vanity Fair and Rolling Stone combined; and that only half its articles are condensed from previously published material - the rest are original.
``It's very much on our radar screen to say, `Let's do something about the people who really don't understand us,''' Coleman said. ``So we're making painstaking efforts to listen to America. We must get a handle on what their thoughts are.''
With the planned move of its printing operations to Lancaster, Pa., in December, Reader's Digest plans to produce more of its special ``demo'' editions, which aim advertising at specific demographic groups in the United States, such as families with parents younger than 50 who have children at home, and households with incomes of $75,000 or more.
The magazine has also begun producing what it calls ``un-serts,'' sections slipped into the front cover of the magazine, for that same purpose, and has been conducting extensive market research outside its usual direct-mail channels.
As for the magazine's content, editor Christopher Willcox has begun experimenting with subtle alterations, such as using more photographs and what he calls ``contemporary'' graphics, listing contributors' biographies and photographs on a separate page in each issue to point up the magazine's prominent writers, and offering more service-oriented information.
Indeed, while Coleman said he will be making a concerted effort to market Reader's Digest more broadly, the magazine itself will remain almost unchanged. ``I feel very strongly that we don't need to touch the product at all,'' the publisher said.
But some believe that Reader's Digest could use a few substantive changes, that the magazine has become too staid and stodgy, and that its political conservatism might alienate readers with more liberal views.
``It's a 75-year-old American icon that one could argue is in its final death throes,'' said a former editor of the magazine who insisted on anonymity. ``It's not relevant to readers today. It's predictable.''
In the meantime, the financial pressure is on. The magazine's operating profits declined to $78.3 million in 1995 from $97.3 million in 1993, caused in part by start-up costs of new editions in countries such as Poland and the Czech Republic.
But it is the rest of the company's operations that have investors the most concerned. In Europe in 1994, the company suffered lower unit sales of its books and home entertainment products, largely because of the overwhelming number of mailings to customers. Too many mailings caused a similar downturn in the company's U.S. sales earlier in the decade.
``In our effort to increase our customer base and achieve profit targets at the same time, we mailed product offers too aggressively and fatigued our customer list,'' James Schadt, the chairman and chief executive officer, wrote to shareholders in the company's last annual report.
Reader's Digest is well aware of its problems and has already set about addressing them.
The company has also asked Wall Street and its stockholders to be patient. ``We deliberately slowed down the growth rate of the company so that we could invest in the future growth of the business,'' Schadt said. ``We're in this two-year restaging period, and we're going to grow the company responsibly.''
As part of this restaging, Reader's Digest last year entered into strategic alliances with Meredith Corp. and Avon Products Inc., along with the Public Broadcasting System. The company is also seeking potential new customers through the Internet and plans to launch a Web site in September.
In February, after reporting a 10 percent decline in second-quarter profits, the company announced it would sell one of its special-interest magazines, Travel Holiday, and lay off 20 percent of its work force - 1,300 employees worldwide.
``They're not just sitting there; they're really trying to find the problem and solve it,'' said Dougherty of Dean Witter. ``That being said, there is no sign so far that any of this is working. The best you can say is that any turnaround - if there is going to be one - will be measured in years, not months or quarters.''
Several institutional investors have been unloading large quantities of Reader's Digest stock. T. Rowe Price Associates, for example, sold 961,000 shares in the first quarter (holding on to only 190,400).
``Investor expectation got ahead of what was realistic,'' Stansky of T. Rowe Price said. ``I think very highly of the senior management at Readers' Digest - I think they're doing the right things. But what they're doing can't be done overnight.''
Reader's Digest is taking it slow, fearful of crossing that fine line between missing the boat and messing with a good thing. ``You will not see radical change, you will not see revolution,'' Schadt said. ``You will see evolution.''
LENGTH: Long : 175 linesby CNB