READER'S Digest: The Condensed Version

New CEO TOM RYDER is promising to shrink Reader's Digest Association costs by at least $300 million this year. It's Phase Two of his plan to make the company a smaller, swifter global competitor. But what's Phase Three?

You want the condensed version of the Reader's Digest Association story? It's simple: The $2.6 billion, publicly held company founded by Lila and DeWitt Wallace in 1922 is in big trouble. The most visible indicator of its state is the share price, which has fallen from a high of $56 in 1992 to a mere $17 at press time.

Not so simple, however, is how RDA, publisher of Reader's Digest, the most widely distributed magazine in the world, got itself into its current situation. More complex still is the question of what it can do to get out. Or, say some observers, whether it even can reverse its fortunes at this point. Ivan Obolensky, a supervising analyst at New York City-based Shields & Co., says, "This is a wonderful organization that has paid its dues, but it may have overstayed its leave. The world has passed them by."

Not so, says new CEO Tom Ryder, 54. "I think that Reader's Digest is one of the greatest publishing brands that ever existed, We just have to be very smart about positioning ourselves for future growth." A 14-yearveteran of American Express who was reportedly on the fast track to the top job there, Ryder was appointed to RDA's top job in April, after a protracted search.

With a first-year compensation package of about $1.7 million, Ryder told one analyst that he took a pay cut to join RDA. If that's true, why? Because if Ryder can turn RDA's aging battleship around and do it quickly enough to raise the stock price into the mid-$20s, where analysts are expecting it to go, he will be richly rewarded in stock options and holdings. And he will have the satisfaction of having done a job many said was impossible.

If he can't do it

Certainly Ryder has the right credentials. Unlike his predecessor, James Schadt, who came to RDA from Cadbury Schweppes, Ryder has significant magazine experience, having been a senior vice president at then-CBS Magazines (now Hachette). Even more germane, however, is four years as president of AmEx's Direct Marketing Group, where Ryder gained database marketing experience. So far, major shareholders and analysts alike voice confidence in Ryder's abilities, calling him "impressive," "charismatic" and "focused."

One major private shareholder, who asked not to be identified, comments, "I think it's a serious, big deal that the Digest could get a guy like this to take the job. I'm thrilled."

Adds Peter Appert, a San Francisco-based media analyst at BT Alex. Brown, "I think Tom Ryder is exceptionally smart. If anyone is going to succeed in this position, he's the one."

Ryder's September 16 presentation to the financial community of his tripartite plan (of which he revealed only Phases One and Two) evoked similarly enthusiastic responses from other major investment firms as well.

Capital liberation

Still, the task that looms in front of RyderA cutting costs and restoring growth in profits, doing things "better, cheaper, faster," as Ryder puts it-is massive and complex. Primary on Ryder's agenda is addressing the erosion in profitability. Operating profit fell from $228 million in fiscal 1997 to $100 million in fiscal 1998, a frightening drop of 56 percent. Although Craig A. Huber, research analyst at New York City-based Morgan Stanley & Co., describes RDA's balance sheet as "one of the best in the whole publishing business," with only $10 million in debt and $125 million in cash, Ryder still needs to increase available cash so that it can be redeployed toward more profitable ventures.

To that end, later this month RDA will put 39 pieces from its prized art collection up for auction at Sotheby's and expects to realize at least $100 million from the sale. In an equally culture-shaking move, Ryder is giving up the lease on the Digest's building on West 23rd Street and consolidating all New York City Special Interest Magazines' operations, except sales, at RDA headquarters in suburban Pleasantville, New York. Walking will remain in its offices in Boston, while the newly acquired American Woodworker will soon move to join Family Handyman in Minneapolis. In London, RDA's Canary Wharf building is up for sale and expected to generate $100 million.

The most widely shared pain of Ryder's cuts, however, is the reduction of the annual dividend, which, at $1.80 per share in 1997, was not justified by earnings. In August 1997, the same month he was ousted, Schadt halved the fiscal 1998 dividend to 90 cents. Ryder followed that by slicing it again to 20 cents. The immediate net result to the bottom line: $75 million in freed-up cashflow.

And then there's the public embarrassment of having to roll back the rate- base on the flagship magazine's U.S. edition. Announced October 1, the ratebase cut goes into effect in two waves: For January to June 1999, the ratebase will be 13.3 million, down from 15 million. From June 1999 into the next few years at least, it will hold at 12.5 million. Although the move seems to validate the comments of critics, like Obolensky, who believe time has passed both the Digest and its readers by, circulation experts, like Dan Capell, editor of "Capell's Circulation Report," salute the move. "This is one of the biggest ratebase cuts of all time," Capell says, "but everyone is cutting ratebase. You save a bundle by eliminating marginal subscribers."

The last major, and also painful, cut is going to be to staff, as unprofitable lines of business are folded. Unlike the 1,300-person voluntary reduction in staffing worldwide that was implemented in April 1997, this one is targeting "several hundred" employees for termination, mostly in the Books and Home Entertainment division, which was responsible for the heaviest losses this year, and will see several lines of business scaled back or eliminated, including the Today's Best Non-fiction book series. A one-time charge associated with the staff cuts may reach as high as $50 million.

Who's left, who's right

Ryder is satisfied with his Phase Two efforts to free capital. "We've got the money," he says, "The question is whether we have the brains." Flip though the remark may be, it is, fundamentally, the issue at hand: Ryder must put the right people in the right jobs. Toward that end-putting the brains in place that will untangle the various divisions' problems-Ryder reorganized senior management in August, Phase One of his master plan.

Ryder's key lieutenants: Greg Coleman, 44, a Digest veteran of eight years and ex-CBS Magazines exec, moved up from worldwide publisher of Reader's Digest to president of U.S. magazine publishing; Robert Krefting, also with eight years of Digest service and an exCBS Publishing president, moved to president of international magazine publishing. And John Bohane, 61, who has put in 30 years at RDA, takes over as head of Global Books and Home Entertainment, having previously served as president of the Digest's international operations. Thomas Belli continues as president of QSP, RDA's school-based magazine sales program.

If RDA is to fulfill its potential as a significant magazine power--rather than a direct marketing company centered around a single title-its success or failure in that aspect is in Coleman's hands. In fiscal 1998, the Special Interest Magazines-American Health, Family Handyman, New Choices, Moneywise (in the United Kingdom) and Walking-were a mere blip on the balance sheet, contributing only $97 million in revenues and $1.7 million in operating profits. That figure did, however, represent a solid increase over 1997, up from $81.9 million in revenues and $400,000 in profits. Much of the increase is attributable to RDA's acquisition of Walking from then-Cowles Enthusiast Magazines (now Primedia) in March 1997.

Both Ryder and Coleman say that they want to see the magazine group grow and that New York City-based investment bankers Veronis, Subler & Associates are on the prowl for opportunities.

"We have a bright green light and we evaluate deals every single day of the week," says Coleman. In the next two to three years, Coleman notes, he would like to add five more magazines and double revenues.

The $20 million acquisition of the American Woodworking group from Rodale Press in September certainly hints at the direction Ryder and Coleman are likely to take. Not only did RDA get a magazine, American Woodworker, that appears to mesh nicely with an existing property, Family Handyman, but it also gained a consumer expo and a book series, all potentially a good fit with RDA's audience. Do-it-yourself, health, food, cooking and home and garden are all topic areas that Ryder and Coleman see as complementary to current RDA magazine or book lines. "I believe magazines ought to be the foundation of a business," says Ryder. "I want to see magazines as an affinity around which you can create products." But, he adds, "I'm probably more interested in magazines outside the United States."

In the coming months, Coleman and Ryder are also going to have to work hard to pump fresh blood into the 140-million-name RDA database, since with an average reader age of 48, the Digest needs to bring its numbers down or face the obsolescence some already assert it has achieved. And that means spending some serious money on advertising, promotions and direct mail, a fact that Ryder acknowledges. But with its traditional bulwark for name generation, sweepstakes, underperforming expectations by as much as 20 percent worldwide, RDA management has got to do something new-and do it fast.

Ryder's initiative to revitalize the files with new and younger names generated from radio and television advertising has won tentative praise from analysts, even though he warned them point blank in his September presentation that, "The bad news is that these subscriptions will cost us 50 to 100 percent more than direct mail." Given the historical lack of success with television ads experienced by publishers that don't also own the medium, magazine experts are more skeptical about the effort, which will debut in January. "Not many magazines have made it work," notes Capell. "But," he adds, "Ryder is a smart direct marketer. I have confidence in his figuring it out."

The final phase

Ryder's most brilliant tactical move so far may have been dividing his reengineering of the Reader's Digest Association into three phases, since it has had the effect of making Wall Street hang fire. Had he announced all three phases-reorganization, cost-cutting and growth strategy-on September 16, he would likely have been savaged, since investors-having watched the stock tumble from $31 to $17 over the last 12 months alone-aren't feeling terribly generous.

As it stands, however, Wall Street and the two foundations that hold the controlling block of stock are essentially forced to take a guardedly optimistic watch-and-see attitude until Ryder reveals the plan behind the curtain in January. Although the details will stay hidden until then, Ryder has already indicated several likely elements, including the expansion of the magazine division, especially outside the United States. Further, the $30 million acquisition of the Portland, Oregon-based "Good Catalog" and the American Woodworker consumer expo group suggests Ryder's intention of opening new marketing channels for new and better Reader's Digest Association products. Then, too, says Ryder, "We've got to play in a big way in electronic publishing."

RDA's greatest threat at this point is the running clock. Ryder's timetable, as he explains it, is three years for the cost reduction phase and "longer" for the growth plan. Analysts insist they, too, recognize that the turnaround will be a "long-term" effort. But ask what "long-term" is and you discover they're giving Ryder a scant 18 months to goose the stock price. Morgan Stanley's Huber, a Ryder partisan, says, "Given time, I think [Ryder] can turn around the company. In a year and a half, [it] will be back on its way to prosperity. Nobody on Wall Street is going to wait 10 years.

With the dividend cut to practically nothing and the stock languishing, Ryder is RDA's last hope to maintain its independence. If Phase Three doesn't pull the stock up during the course of 1999, it seems likely that the two controlling foundations, which are solidly behind Ryder right now, would consider selling the company. (Two charitable trusts, or foundations, set up by the Wallaces before their deaths, control about 70 percent of the company's voting stock.)

At the September analysts' meeting, Ryder told the following anecdote: "A few years ago, on a trip back to my home in Louisiana, I visited an old friend who had been a farmer all his life. We sat on his front porch and looked out at what had been acres and acres of sugar cane. Instead, we saw a massive construction site-a shopping center where the cane fields had been. I asked him why he sold the land and business he loved. He took a sip of bourbon and said, 'pays better.'"

Such is the nature of business even for an American icon like the Digest. For Ryder, the watchword is not "pays better," but "better make it pay."

COPYRIGHT 1998 Copyright by Media Central Inc., A PRIMEDIA Company. All rights reserved.
COPYRIGHT 2004 Gale Group