Westchester Guardian/Catherine Wilson.

Thursday, September 3, 2009

Catherine Wilson, Bureau Chief
Northern Westchester

Lessons To Be Learned From The
Decline Of A Business Icon

For decades it was the largest-selling magazine in the world. It was found in every doctor’s waiting room, and on the coffee table in every senior citizen’s home. It was Reader’s Digest, a name that needed no further introduction anywhere in the world.

It represented knowledge, opportunity, and everyday life. An immigrant or poorly-educated individual could improve his language skills by using the Digest’s monthly Word Power section. Workers could relate to the anecdotes in the All in a Day’s Work columns and pursue their dreams by entering the sweepstakes.

Home owners could get helpful hints and expert knowledge on how to do basic repairs and improvements. Parents could get critical information
on their children’s health and education issues. And, commuters could fit it all on their lap on the subway, tossing it into their pocket afterwards.

The Digest became the butt of jokes by comedians in recent years; it was viewed as too stodgy and un-hip. Few of those comedians remembered
that it was Reader’s Digest who first drew attention to the link between smoking and lung cancer in the 1950’s in a groundbreaking series of articles
entitled Cancer by the Carton.

It was Reader’s Digest that financed Alex Haley’s research for Roots, an extraordinary novel and revolutionary television series that inspired all Americans to explore and honor their ancestry.

The international versions of the magazine allowed millions of people around the globe to learn about our country and about themselves. Millions
of individuals throughout the United States and the world saw the Digest for what it was, a magazine that acknowledged ordinary individuals and honored their achievements.

In an era of celebrity mania, Reader’s Digest celebrated the life of the ordinary person. But the magazine also served a strong conservative political agenda, often fronting ideas and platforms for Republican candidates to American voters. In 1988, Robert Bidinotto, a staff writer for the Digest, wrote an article entitled Getting Away with Murder about a prison furlough program in Massachusetts that released a murderer, William “Willie” Horton. That article was released during the presidential campaign of Massachusetts Governor Michael Dukakis effectively ending his race for the Presidency.

The Digest also published segments of Senator Newt Gingrich’s Contract With America several months before it was unveiled in Congress by the Republicans. The Digest, and the Republicans, had several months to “test the waters” and the reaction of the American population to this contract before its official release, six weeks prior to the 1988 Presidential elections.

At the time of this article, Reader’s Digest had a subscription base of over 18 million in the United States, with a readership of more than twice that amount, making it the largest read magazine in the nation. Its impact in America’s heartland was unequalled.

The Wall Street Journal once reported that “only the Bible had a higher circulation than the Reader’s Digest”. That is, until Reader’s Digest condensed the Bible in 1982, an act that brought death threats from the religious right to Digest executives who installed bullet-proof glass in
their corporate offices as protection.

It was not the first time that the conservative magazine encountered the wrath of a religious community. In 1980 the Digest reported on the growth of Scientology, publishing an article entitled Scientology: Anatomy of a Frightening Cult. The Digest revealed that Scientology “agents”
were breaking into Justice Department offices and working in CIA and defense areas, drawing ire from that group in the process.

Shortly after George W. Bush was elected President, the Digest appointed the new Vice-President’s wife, Lynne Cheney, to a paid position on their Board of Directors. For decades, reporters and writers, have been reporting on a possible connection between the Digest and the Central Intelligence Agency (CIA).

Local Pleasantville writer Benjamin Cheever, skewered the behind-the-scenes machinations of the Digest in his thinly-disguised book, The Plagiarist. But the ultimate irony came when the major target of the conservative right, Bill Clinton, selected a house down the block from the Digest thereby placing the Cheney-Bush-CIA-conservative camp literally on one side of the street, Route 117 in Chappaqua, and the Kennedy-
Clinton-Obama-liberal camp on the other. The struggle for the votes of the American populace was being played out right in Westchester’s own
backyard within feet of each other.

But while the Digest never lost its conservative bent, it did fall out of touch with the ordinary populace. After its peak circulation of 18 million
in the early 1990’s, the Digest followed the lead of the new darling of the magazine world, People magazine, and started putting celebrities instead of ordinary individuals on its covers. Words were replaced by images and graphics on the cover and the number of articles inside were reduced. In an effort to stay relevant in a changing media world, the Digest hired a team of consultants from now-defunct Arthur Anderson Consulting, the same consulting group that “advised” ENRON and handled their audits and financials, to advise them as to how to adapt to the changing environment.

Sadly, the Digest failed at the most basic rule of management, know your business. At the time, the consultants and Digest executives defined their
business as publishing. But there was little evidence to support this claim, there were no Pulitzers or editorial awards lining the halls, or accolades from fellow writers. Indeed, most writers in the media dismissed the Digest as not worthy of their craft. What the Digest failed to realize is that their business was unique. They recognized important and often ground-breaking materials from experts around the globe and condensed it into simple, ordinary language to be understood by the masses.

Rather than presenting a challenge for the Digest, the new electronic media presented an opportunity. Every American in the early 1990’s suddenly needed to know how to use a computer or a cell phone or access the internet. What they needed were simple guides showing them
how. Two other publishing groups saw this opportunity and seized it – the Dummy’s Guides and the Idiot’s Guides. During the 1990’s, these
two publishing groups were among the most successful titles ever published, taking over the niche created, and ignored, by the Digest.
In the mid-1990’s Digest’s executives and consultants determined that their best path for growth was to expand into new media forays and
to fund this expansion by increasing prices from their magazine base.

Unfortunately, the predominately privileged and young Anderson consultants failed to comprehend the economic constraints of a mostly retired
subscriber base whose income would not increase in tandem with the 15% annual subscription price hikes they recommended. The executives at the Digest increasingly relied on these outside consultants, failing to listen to advice from long-term employees who saw the opportunity for growth by condensing materials from new sources.

Life-long employees who started working for the Digest straight from high school or local colleges and worked their way up the ranks found
their jobs in jeopardy as the Digest increasingly hired from Ivy League and upper-echelon schools for management positions. The Digest management saw the glitz of the frenetic dot-com stock era and aimed for it, losing touch with their strong supportive base in the process.
That extent of the Digest’s subscriber base, and their access to the heart of hundreds of millions of individuals worldwide, rivaled the capability
of many small governments. At the beginning of the 1990’s, the Digest computers had a data bank of names, addresses, and customer information
that was second only to the United States Government. The Digest alone accounted for approximately 1 percent of all mail in the United States,
again only rivaled by the government and American Express. In many countries, local postal carriers would conveniently “call in sick” on days that
major Digest mailings or books were due to be distributed. The company’s income and net worth placed it solidly in the Fortune 100 listing during
this era. The infamous art collection that graced the halls of the Chappaqua building and the offices of every employee; a collection that included works by Van Gogh, Monet, and Modigliani, were worth several billion dollars. So how did such a giant in the publishing industry, with so much wealth and so many customers fizzle out so rapidly?

While the current recession might have been the proverbial straw that broke the camel’s back here, Reader’s Digest’s problems started long before
now. Bad management and poor decisions led to its ultimate downfall. A coup in the late 1980’s for control of the company resulted in the new management team, led by George Grune, to take the company public. The Digest was founded by De- Witt and Lila Wallace in 1922 and was held as a private company until the coup shortly after Lila’s death. For the first 50 years of its existence, both DeWitt and Lila ran the company with a familial touch. Local employees were bused to work, Fridays in May were declared “too nice to work” by Lila so employees had these days off resulting in Reader’s Digest sales by local merchants on May Fridays.

Until the late 1980’s, the Digest deliberately withheld 15% of each employees’ salary, distributing this amount in annual checks every January.
The result was a forced savings scheme for prudent employees and a bonanza for local merchants who increased their inventory of cars, refrigerators, and televisions in mid-January to accommodate the rush of purchasing by Digest employees flush with bonus funds and eager to
spend them.

Cafeteria food was subsidized, everyone received a copy of the magazine and the Condensed Books, and key employees, including editors, were rewarded with private stock shares of the company. Those stocks were valued with a formula that linked them to the overall stock market, and their value to the employees was adjusted once at the end of each fiscal quarter.

When Grune and his associates decided to take the company public, they made a fatal error, they announced the public offering at the time of the stock market crash of October, 1989. Any long-term employee knew their stock would lose a majority of its worth at the next valuation date of December 31, 1989. For those employees over 50, the decision was easy, cash in the stocks at the higher value and retire, or wait it out and lose over half of what they’d accumulated over decades of work. The senior staff left in droves, taking with them the top four editors and anyone with a wealth of knowledge of the company. Grune and his team made an estimated $10 million each in their public offering but the damage to the company was set in place.

There were few seniors staff left with enough experience to run the ship. A new round of managers were brought in, on the advice of the Anderson
consultants, mainly individuals from major corporate publishing conglomerates. These new managers sought to take the Digest into unknown territory such as television producing, forsaking their company base of loyal subscribers.

However, thanks to the billions in cash in the company’s coffers to fund these exploits, the impact on the company was not immediately noted by most of the Wall Street analysts. In 1990, only one analyst correctly determined that the growth in the company’s bottom line in prior years was due to favorable currency fluctuations and not from growth in subscribers or product sales, all of the other analysts attending the public offering meetings voted the Digest stock a “buy”.

In 1993, at the height of the Digest’s success, their stock was trading at a high of 51½. It fell to a low of 16 in 2007, taking with it the value
in the 401K accounts of Digest employees. The company has since been bought by an investment firm, Ripplewood Holdings, LLC and is now a privately-held company once again.The lessons to be learned from Reader’s Digest’s downfall can be applied to any business; know what your core business really is. Respect your customer base because once you lose them, they’re gone, possibly forever. Listen to your staff and respect their knowledge and ideas.

Don’t fall for glitz whether it’s in the form of a “hot” new idea, venture, or business, or walks through the door in an Armani suit armed with an Ivy League degree. Sometimes simpler really is better.

Reader’s Digest through the years was a major impact in the Westchester economic and cultural scene. Their support of local nonprofit groups was invaluable. The Digest poured hundreds of millions into their Foundation alone to assist non-profits in education and the arts. The modern art wing at the Metropolitan Museum of Art would not exist if not for Lila Acheson Wallace.

And every local resident knew someone who worked there at one point. The Digest may be down, but it is not yet out for the count. On August
17, 2009, the Digest announced it was declaring bankruptcy, a move that will allow it to renegotiate with its creditors and reorganize the company.
Hopefully this move will be successful and allow another generation of readers to test their wits at Word Power or laugh at the Humor in Uniform or be there at the birth of a new Roots. But hopefully the Digest will endure if only to remind us of the power of the individual, and, that everyone should have Fridays off in May. Just because it’s such a pretty month.