Watching and Waiting at Reader's Digest
Will the latest turnaround turn around this giant
Chappaqua-based publishing-and-then-some house?
By Dave Donelson
An expectant hush fills the halls of the Reader’s Digest Association headquarters in Chappaqua. Employees walk down the art-filled corridors, but they move quietly. The cafeteria draws a crowd, but the chatter is subdued. It’s almost as if the nearly 1,000 employees are holding their breath, waiting to see what comes next.
They have reason to wonder. Reader’s Digest Association, Inc. RDA) is an 80-year-old company that the stock market treats like a burst remnant of the dot-com bubble. Reader’s Digest magazine, the largest paid-circulation magazine in the world, will sell seven million fewer copies in the United States this year than it did at its peak in 1974 when it sold 17 million copies. The company ended 2002 with nearly a billion dollars in debt and revenues that have fallen in three of the last four fiscal years.
This isn’t the Reader’s Digest Association for which many of its employees first came to work. The original company was not only profitable but paternal. Success wasn’t necessarily measured in monetary terms but rather by how the company improved the quality of life of its employees and its readers and customers. Declares Pocantico Hills-based novelist and former Reader's Digest editor Benjamin Cheever, "It was once truly great."
Before it went public, Reader's Digest was known for being one of the best places in America to work, where management handed out unexpected raises and told employees to go home at four o’clock. Profits went to charity and into the bucolic 113-acre campus of the headquarters that looks like a cross between the University of Virginia and Westchester Country Club.
"I remember driving to work in a blizzard, and finding that lunch in the cafeteria was free," recalls Cheever. "Most employees got a month's vacation and Fridays off in May so that they could put in their gardens. When it was pointed out that not everybody had a yard large enough to grow vegetables in, a section of the corporate campus was plowed up and sectioned off for those who wanted to garden where they worked."
Times have certainly changed since DeWitt and Lila Acheson Wallace used $600 borrowed from his family and sold 1,500 subscriptions for $3 each to publish the first issue of Reader’s Digest in 1922. DeWitt Wallace was a Minnesotan who married his college classmate’s sister, Lila Bell Acheson, the daughter of a Presbyterian minister from Pleasantville. According to company legend, he launched the magazine from the basement of a speakeasy in Greenwich Village on the premise that busy people of the era would want to read an article every day “of enduring value and interest” culled from other publications.
Things changed in 1973, when the Wallace’s, both then in their eighties, gave up active management of the company and even more since 1984, when Lila Wallace died and left the controlling shares of the then-private company in trust to benefit the DeWitt Wallace-Reader's Digest Fund and Lila Wallace-Reader's Digest Fund, philanthropic organizations the couple established to support the arts, culture, and youth. Recent recipients include the Asian Art Museum of San Francisco, the Community Foundation for Greater New Haven, and the Atlanta Public Schools professional development programs.
The biggest changes of all at the Reader’s Digest Association started in 1990 when the company went public to raise capital for growth. The plan worked for a couple of years, as then-CEO George Grune pumped up sales of specialty magazines, books, audio cassettes, and videos with an ever-expanding number of sweepstakes mailings. But the company seemed to lose direction.
Says a former editor of one of the company's publications: “It’s a perpetual turnaround story. Every six months, it seems like a new layer of people are laid off—many of them long-time employees."
Says Cheever: "I left in the late 1980s, and since then, the news from world headquarters in Chappaqua has always been bad. Most everyone I know has been fired, and the profits have fallen away dramatically. Often the new executives blame the spoiled employees and outmoded work methods for their failure to make money. They forget that when the employees were treated generously, they produced vast profits."
To date: Employee 401-K accounts have lost tens of millions in value, several magazines and other business ventures have been sold or shut down, 3,000 employees laid off in the last seven years, and $436 million in write-offs taken.
Layoffs, acquisitions, tremendous debt—what have they done to Reader’s Digest? Lila and DeWitt Wallace’s staid publishing company has become a global direct marketing conglomerate selling jewelry, chocolates, and cookware along with its magazines and how-to books.
In 1998, Thomas Ryder, a 58-year-old New Canaan resident, was named Chairman and CEO or RDA. A well-known figure in the magazine industry whose long career included positions as president of American Express Travel Related Services, and Senior VP at CBS Magazines, Ryder quickly sold the company jet, 38 pieces of art worth $100 million, and went to work to turn the company around. In his first full calendar year, operating profits more than doubled, followed by another 20% increase in 2000. Sales didn’t grow, but the bottom line did as Ryder slashed expenses and trimmed under-performing units. However, in 2001, the company took two major blows. The first came when its sweepstakes mailings were called deceptive by a group of state attorneys general and Reader’s Digest agreed to change them. Nearly all of the company’s core revenues were related to direct mailings that offered millions of dollars in sweepstakes winnings. That was followed by the attacks of 9/11 and the anthrax scare, which knocked the legs out from under every company’s direct mail business. The core businesses have not recovered.
Still, Reader's Digest has its perks. They include half-day Fridays in the summer, free shuttles to the train station, and a giant, full-service fitness center which opened two years ago (complete with free weights, Nautilus machines, and a sauna). That’s not to mention the library; book store, sales of art, jewelry and other items, a dry cleaner, auto center, barber, and hairdresser on the premises, and an excellent cafeteria with soup and salad bars, special diet menu, barbeque, deli, and pizza. Two other perks probably unmatched anywhere are legacies from the Wallace’s: those aforementioned free garden plots for employees and 5,000 pieces of world-class art on view. Declares Jason Tuthill, a manager of investor relations: "The amenities afforded to us are unbelievable. The fact that we can have our cars fixed during the workday, our hair cut at lunch, and our clothes dry cleaned on campus, is just tremendous."
In the public’s mind, the Reader’s Digest Association is Reader’s Digest magazine. Corporately, however, it’s much more than that. In fact, magazines (including Family Handyman and Selecciones, the hot U.S. Spanish language edition of the original magazine, and the various international publications) accounted for only about a third of company revenues in fiscal 2002. The lion’s share of the company’s income is from selling books, music, and other merchandise through direct mail, display marketing, and other means. And Reader's Digest today is in the third year of a turnaround program. It has a new editor-in-chief, award winning editor Jacqueline Leo, whose credentials include stints with Consumer Reports, ABC TV's "Good Morning America," and Family Circle. Leo says she's endeavoring to conduct what Ryder called a “quiet revolution” at the magazine--attract new, younger readers while holding the attention of the magazine’s 43 million current readers (their average age is 49). Today, there's a concerted effort to feature stronger editorial content penned by the likes of boldface names like Tom Brokaw.
When Manhattan-resident Leo arrived, the magazine had already undergone some face-lifting (taking the table of contents off the cover in 1998 was an earth-shattering event). “It’s a new generation of older people out there," says Leo, "and they’re as familiar with the visual world as anyone. I think we have a common language in this country that is mostly driven by television. I don’t think that the generations are as separated as people want to believe.”
Despite all the changes, Reader’s Digest remains true to its roots. “We are unapologetic about doing stories that inspire people,” Leo says. “Very few magazines would feel cool enough to do that.”
Reader’s Digest magazine is only a small part of the financial makeup of the Reader’s Digest Association. When financial analyst Karl Choi said at a Merrill Lynch Advertising conference in February that the Reader’s Digest Association is “…a publisher of magazines as well as a direct marketer,” Ryder rebutted, “Actually, we are mostly not these days and that's a fact that's widely misunderstood.” As Ryder points out, there are five other operating segments that contribute to the bottom line, including Reiman Publishing, on which a great deal of the company’s future—and $760 million in borrowed money—has been wagered. Reiman's cooking and country-themed magazines carry no advertising, but they are valued enough by their readers to produce about $300 million in annual sales. The real plum in the pie, though, is the Reiman database of 32 million customers. Ryder hopes they will prove avid buyers of Reader’s Digest books, magazines, CD’s, insurance, and credit cards.
“You have growth almost built-in from selling Reader’s Digest products to the Reiman people and vice versa,” according to Dennis McAlpine, managing partner of McAlpine Associates in Scarsdale, an independent securities analyst that follows media stocks among others.
The darkest cloud, though, lies over the largest segment of the company: direct marketing at home and abroad, which brings in over half the company's revenues. It was a very healthy business before the 2001 sweepstakes debacle and, unfortunately, there seems to be little sunshine ahead. For the nearly 1,000 employees in Chappaqua (and 4,000 more worldwide), not to mention the many other people with a stake in the Reader's Digest Association's financial future, the wait isn't fun. But, then, holding your breath seldom is.