COMMERCIAL PRINTING OUTLOOK — PRINTING WORK TO RUN SHORTDecember 2006
Another factor contributing to PERC’s modest outlook for 2007 were indications that the gains in pricing power had begun to plateau in the second half of this year, Vincenzino says. “We’ve still seen problems with profitability for printers in 2006. Profitability didn’t improve at the same rate as top-line sales growth.”
Data from the 2006 PIA/GATF Ratios Survey backs up the NAPL economist’s assessment. PIA/GATF reports that the average before-tax profit on sales among printers was 2.7 percent during the latest survey period. That’s a slight increase compared to the 2.5 percent return in 2005, but is still below the 3.0-3.4 percent range experienced from 1995 to 2001, according to the survey summary.
Along with the general slowdown in 2007, NAPL’s Vincenzino says printers will have to contend with greater variation in geographic economies than in the past.
“There are going to be some pockets where the local economy is much weaker than the national average,” he explains. “Printers are going to have to pay closer attention to the conditions in the specific markets they serve.”
There’s one wrinkle in PERC’s research the economists are still mulling over. NAPL’s Printing Business Index (PBI) measure of business activity dipped below 50 this summer, but then spiked back up, Vincenzino points out. “We think it may too high.”
A reading above 50 means more printers are reporting activity is picking up than say that business is slowing down. “The spike could be a positive reaction from a sense of relief that all of the negative scenarios in the summer months—oil going to $100 a barrel, the Israel/Lebanon conflict, etc.—abated,” the economist explains. “Historically, the PBI has been accurate in signaling turns in business, but it could be over- stating business conditions now.”
PIA/GATF uses a very broad definition of the printing industry in its forecasting. Its last “Economic & Print Market Flash Report” projected the 2006 total shipment volume to be $171.1 billion, an increase of 3 percent. The report broke out some components of the total volume, noting that ink-on-paper sales should lag (up 2 percent ) and digital printing lead (up 4 percent).
For the economy as a whole in 2006, PIA/GATF projections call for growth in the 3.0-3.5 percent range, says Ronnie H. Davis, Ph.D., vice president and chief economist. Davis predicates his outlook for 2007 on three scenarios:
• continued growth—GDP growth of 3.0-3.5 percent and print sales up 2.5 percent;
• economic slowdown—GDP growth around 2 percent and print sales up 1 percent; or
• recession—GDP growth under 1 percent for the year and print sales down 2 percent.
Davis advises printers to “expect the best, but prepare for the worst.” He puts the odds of seeing continued growth at about 60 percent, and the other two scenarios at 20 percent each.
The postage rate increase scheduled to go into effect around the middle of 2007 will impact the outlook for a significant segment of the industry, the economist adds.
“PIA/GATF estimates that about 45 percent of the dollar volume of printing ends up in the mail stream. In dollar terms, this amounts to around $70 billion in annual printing shipments,” he notes.
Given an 8.4 percent increase in postage that doesn’t take effect until mid-year, the result should be a “push down” of around 1-1.5 percent in the portion of printing volume that ends up in the mail stream, Davis estimates. That translates into a negative 0.4-0.6 percent impact on total printing shipments for all of 2007.
Dr. Joe Webb, president of PrintForecast.com, uses a narrower definition of the printing industry. He tracks the U.S. Department of Commerce’s NAICS 323 report data for the commercial printing sector. “It looks like 2006 is going to end up in that data series at $90 billion in sales,” he says. “For 2007, the forecast I’m working with is a decline to $87 billion in sales.”
Webb has a working theory that credits the mid-term elections for the pickup in industry shipments during the second half of 2006. “Local political campaigns still need printing,” he observes. “We’re not going to be sure (about the validity of this theory) for months, because we’ll have to wait to see if sales start to decline without that stimulus.”
Going much further out on the limb, the industry researcher notes he is working with a forecast for the year 2010 of $77 billion in commercial printing sales. However, Webb also has a more aggressive statistical model that indicates a drop to $52 billion in sales by 2010. “I prefer not to believe that one.”
Looking at the industry on the macro level, Webb says the more he’s analyzed the data over time, the more evidence he’s found that the industry is experiencing a general decrease in sales. Demand is declining at roughly the same rate in all segments of the industry, the researcher contends.
General economic data still has relevance in forecasting printing industry sales, Webb notes, but what he gives the most weight to are developments on the demand side and trends in media use. “We are still undergoing some radical changes in the way people use media,” he says. “The inability of printers to get any kind of increase in pricing is a sign of weak demand.”
There’s also pressure coming from the supply side, Webb points out, with non-traditional providers such as Staples making printing an important part of their business strategy and making rather significant investments in this capability. That takes volume away from the mainstream commercial printing industry.
In 2005, the industry researcher published an in-depth report on offshore print production (“A Critical Look at Offshore Printing”) and he has continued to follow developments in that arena. Webb says the wave of competition from the Asia/India region now seems to have subsided a bit. However, the trends that favor outsourcing remain unchanged, he adds, so that threat is still going to be lurking on the business horizon.
After a decade of being the “next big thing” in the industry, digital printing is now achieving the status that had been predicted. It is the bright spot as far as growth opportunities go, but still represents a minor portion of total printing industry sales.
The digital printing sector will pass a milestone at the close of 2006, with color digital printing sales surpassing monochrome for the first time, reports George Alexander, senior analyst with Caslon & Co., a research and consulting firm based in Rochester, NY, that specializes in digital printing. Color sales are projected to total $10.6 billion, while monochrome should come in under $9 billion, Alexander says. In terms of pages, though, color represents only about 6 percent of the volume, he adds.
Direct mail and books, along with transactional printing, remain the key applications, according to Caslon’s research.
Direct mail, which accounts for around 290 billion pages, is showing strong growth in digital production despite growing slowly overall, according to Alexander. Digital color output is expanding at the expense of both offset and monochrome digital printing.
Book page volume currently totals nearly 600 billion pages, but a tiny fraction is currently produced digitally, adds the researcher. Digital production is growing rapidly, at 15 percent annually for monochrome and well above 50 percent for color.
Catalogs are another digital color printing application exhibiting a rapid rate of growth, but from a very small base. Typically, just an insert or wrap is produced digitally to enable customized marketing opportunities.
One other element of good news in the overall 2007 outlook is that the bad news isn’t so bad. The economists don’t expect to see a prolonged slowdown in GDP and a recession doesn’t seem to be in the cards. PI