Commercial Printing Outlook : Improvement By Numbers

The U.S. economy is beginning to mirror a moody, temperamental teenager. From day to day (in this case, from quarter to quarter) it's tough to gauge which economy will show up at the dinner table: the cheerful, productive lad who vows to continue doing well, or the surly, depressed kid that locks himself in his room for weeks on end.

When the U.S. economy exploded on the launching pad in the first quarter of 2014, the printing industry followed suit with printing shipments slipping 4.7 compared to the same period in 2013, according to the U.S. Census Bureau. While there was improvement, the Q1 misfire for the Gross Domestic Product (GDP) set the stage for an overall 2 percent bump for the year as a whole.

That 2 percent was pretty much on the mark for what Dr. Ronnie Davis expected. Davis, the senior vice president and chief economist for Printing Industries of America (PIA), notes that many of his colleagues projected a 3 percent GDP growth rate. Had that been the case, a number of printing sectors (packaging, labels, wrappers) that track the overall economy would've benefitted nicely.

Mid-term elections certainly helped direct mail printers, especially, as "many politicians still believe in the power of print," Davis notes. But even the increase in political printing jobs couldn't help overcome the sluggish start to 2014.

Davis is projecting a 2 percent to 2.5 percent increase for the economy during the next two years; an uptick over 2014, but still a far cry from the typical recovery range of 3 percent to 4 percent, according to the "Economic Print Market Environmental Scan for 2015," prepared by Davis and his Center for Print Economics and Market Research.

Davis presents a wealth of numbers that tell a number of stories. One statistic that raises a red flag is total shipments for commercial printing and print-related media, which dropped off by a little more than a billion dollars compared to 2013 ($159.5B vs. $158.4B). However, printing and related support activities saw a $1.7 billion increase, which means that the more traditional print-related material (magazines, newspapers, books) dragged the overall number down.

But again, not all of the numbers are cause for alarm. The report points out that capacity utilization, which plummeted to 60.8 percent at the nadir of the recession, climbed to 70.0 percent in Q4 of 2013, a bounce of 10.7 percent.

Maybe, too, we should be more impressed with printer profits than total shipments. Just 10 short years ago, profit rate averages stood at 1.7 percent for all printers and 8.7 percent for profit leaders. In 2013, those figures were 2.7 percent for all printers and 9.9 percent for industry leaders. The high-water mark of 3.4/10.1 was realized in 2007, just before the recession hit and bottomed out at -1.4/7.0 in 2010.

"The profit leaders in the top 25 percent are doing extremely well," Davis notes. "The leaders make 9.7 percent, on average, but there are printers out there making 15 to 20 percent (profit). We wish they would stand up and tell us who they are and what they're doing. But the bottom line is that there are opportunities out there."

Andrew Paparozzi, vice president and chief economist for the National Association for Printing Leadership (NAPL), notes that the Blue Chip Economic Indicators expects GDP to grow 2.1 percent in 2014—the full-year projection may be revised up slightly—while NAPL estimates total industry sales grew 2.2 percent during the first three quarters.

The Blue Chip Economic Indicators are pointing to 3.0 percent GDP growth in 2015, with the NAPL forecasting industry growth of 2.5 to 3.5 percent. Paparozzi believes that the economy is gaining strength, and although it doesn't offer the same salutary effect on the printing industry that it once provided, it should still pay dividends.

Paparozzi notes that the economy is clearly getting stronger across the board. He points out that during the four quarters ending in September 2014, GDP grew 2.5 percent, consumer spending was up 2.4 percent, business investment in equipment and software grew 6.4 percent, and exports were up 4.1 percent. By comparison, the corresponding numbers in 2013 were lower: 1.8 percent for GDP, 2.1 percent for consumer spending, business investment stood at 4.2 percent and exports were up 2.5 percent.

"There's no reason to think the economy will slow in 2015," Paparozzi states.

Equally as encouraging is the strength of printing sales. The previous four quarters saw sales increases of 2.7 percent, 2.5 percent, 1.5 percent and 3.3 percent—the industry's strongest growth performance during four consecutive quarters since 2007. On the flip side, prices remain under great pressure, with just 39.3 percent of NAPL State of the Industry participants reporting that prices are higher than they were a year ago.

Margins are also under fire. A mere 46.3 percent of the NAPL's research group report that their pre-tax profitability is higher than a year ago. In the cases where profitability is higher, it's usually the case where companies have done something to increase revenue or decrease costs, Paparozzi notes, as opposed to competitive pressure easing.

During the course of the next two years, PIA's Environmental Scan report envisions increased sales in segments such as package printing, converting, label/wrapper printing, general commercial printing, quick printing, direct mail printing and signs/signage. And, even with sales figures stabilizing, printers are improving their productivity and management, as well as incorporating value-added, higher profit services to bolster profitability levels.

Davis also encourages printers to climb the golden stairs and test the market from a pricing standpoint, especially those companies that have built high barriers to existing customers being able to exit print deals. "Printers should be sensitive to market opportunities where they can raise prices," he says. "That has a really profound effect on profitability."

Likewise, Paparozzi feels pricing power will go a long way toward influencing 2015's fortunes. "Although our industry is growing again, pricing power is still very limited because the demand for what we do is still running far behind, despite record consolidation," he says. "Put simply, there still isn't enough work to go around. If we gain a little more pricing power next year, we'll end up toward the top of the 2.5 percent to 3.5 percent range. If we don't, we'll end up toward the bottom." PI