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Industry Issues -- Can Costs Be Passed On?

December 2005
By Erik Cagle

Senior Editor

Are you, the commercial printer, feeling the pressure of increased costs? If not, you soon will; this winter, in fact.

The curious, but frustrating, amalgamation of upward cost pressures have left printers in a catch-22 position. Pass on your cost increases to customers and risk losing volume (or worse, their entire business). But if you choose to swallow that pill, it's going to hurt all the way down your throat.

Isn't it fair that paper vendors and ink manufacturers get to pass on costs to you because of the late summer fuel price explosion? But why should printers have to eat those price increases with their clientele? Or any cost increases?

The issues that most affect commercial printers are clearly those that impact their bottom lines. But some of the increases in costs have YET to be felt by printers. The increasing cost of mailing? That happens next month. And those high energy bills won't be seen until the January or February statement.

But try tacking on cost increases in an age of commodity pricing. Would those ad agencies really leave you high and dry, with the threat of alternative (read: cheaper) outlets for marketing goods and services looming? Does anyone have the courage, or capacity alternatives, to find out?

Instead of playing 20 questions, we have a list of several high-priority issues that printers need to monitor closely as we usher in 2006. None are jaw-dropping revelations, but perhaps some can provide perspective as you attack the most relevant concerns facing your businesses.

Postal Reform: OK, we heard a few groans in the back of the room. This issue has been visited with alarming regularity as the printing industry closely monitors what will become of the U.S. Postal Service (USPS) as it continually grapples with a business plan that is older than Watergate.

This much is certain. Reform is stuck in a Congressional holding pattern. Ben Cooper, PIA/GATF's departing executive vice president of public policy, is intrigued by the philosophical standpoint the USPS will take on issues such as work sharing and negotiating service agreements as it seeks future rate increases.

Working on the assumption that reform remains in a perpetual policy purgatory, the rate increase that takes effect next month only offsets the cost of the civil service escrow payment. And it has been four years since the last increase.

The USPS opposes postal reform in its current state, according to Cooper, and is trying to duck this legislation. One way of doing this: the USPS states it doesn't anticipate increasing rates above the Consumer Price Index for the foreseeable future. The reform saber rattlers have preached that future rate increases should not stray from the rate of inflation. Is this a promise the USPS can keep or is it mere lip service? Cooper, for one, has his doubts and believes printers would end up absorbing most of the blow for future increases.

"Some people believe the postal service has exhausted all of what they call the 'low-hanging fruit'—it's gotten a lot of the expense wrung out of the system," Cooper says. "So the expenses they'll cut from here out will be painful. The biggest part of the expense package is labor so, in order to reduce costs there, they'll have to go into some tougher negotiations, and have to demand more productivity out of employees."

Energy: The Northeast and Midwest are the most likely regions to be impacted by increasing energy costs. Natural gas prices figure to be the most oppressive, with hikes projected in the 50 percent range. The impact on supplies and the aftermath of the past hurricane season will be a good indicator of things to come.

"Every delivery now has to include the increased fuel costs," Cooper remarks. "The cost of petroleum that goes into manufacturing ink and chemistry also have to be passed on. My counterpart at the American Forest & Paper Association said that (paper manufacturers) are facing enormous cost pressures. So that means they're going to pass on cost increases to their customers."

With printers feeling the pricing squeeze from all of their suppliers, Cooper feels the biggest question is whether printers will pass on the increases to their customers or absorb them going forward, adding that the 2001-2004 recessionary period didn't provide a solid backdrop for printers to raise prices.

Though while the Northeast and Midwest may feel the brunt of energy costs this winter, the West Coast has its own unique challenges, according to Gerry Michael, president of GA Michael & Co., an accounting and consulting firm based in Seattle.

Like Cooper, Michael feels it will be a tall task to pass rising fuel costs onto customers, and printers will be pressed to devise creative ways to coordinate deliveries. Fuel surcharges, in the end, could backfire and jeopardize future business, he notes.

"Perhaps a bigger energy-related concern is how printers will deal with fuel availability problems or power outages, should those return to the West Coast," Michael says. "Contingency planning for both is important. Examples might include preparing alternative, 'off peak hour' production scheduling to avoid brownouts or blackouts, and the use of hybrid or alternative fuel courier vehicles."

Hurricanes Katrina and Rita: A one-time issue for printers, but the natural disasters were a life-altering event for those who lived through the assaults. Ronnie Davis, chief economist for the PIA/GATF, notes that the projected loss in terms of property damage from the storms has been estimated at more than $200 billion. The impact on national print markets will be relatively short-term, with a $300 million to $400 million decline in printing shipments through the balance of this year.

The effect on those areas that took a direct hit from the storms, obviously, is much greater and somewhat difficult to measure. According to Davis, the areas hit hardest by the storms comprised $2.2 billion in annual print production, roughly 1.4 percent of total U.S. annual printing output.

While some printers in the affected areas may have experienced slight to no disruption in their activities, local customers may have endured extensive damage.

Davis also notes that affected printers unable or unwilling to reopen their doors will also be among the list of 700 to 1,000 printers which go out of business in a typical year.

Healthcare: Unfortunately, this appears to be the one area where printers have no choice but to pass on cost increases—to their employees. The good news, according to Cooper, is that 2005 was less of an increase burden than its predecessor.

Wal-Mart may be ahead of the curve with its acceptance of Health Savings Accounts (HSAs), Cooper points out. The retailing giant has taken a massive beating in the news recently for its handling of employees and their benefits, so it seems curious that Wal-Mart could be setting an example for other business sectors.

In short, an HSA is a savings plan that allows consumers to pay for their own healthcare. It allows the worker to pay for current healthcare needs while saving for future medical health expenses on a tax-free basis. This requires a High Deductible Health Plan (HDHP) that costs less than the typical coverage costs, with the savings deposited into the HSA. Employees control the account, and balances can be rolled over from year to year.

"That may be the very type of change we need in this country to start changing the dynamics of healthcare," Cooper contends.

Recycling and Sustainability: Cooper sees this as more of a market issue than an environmental one. Short of having paper supply problems, there is not a lot of pressure in this regard. And relative to the U.S. manufacturing realm, printing is a fairly clean industry.

Even without the pressure to rely on renewable sources of energy, some companies are committing to sustainability programs. Sandy Alexander, of Clifton, NJ, recently inked a seven-year deal to acquire half of its electrical power from clean and renewable wind-generated sources. The purchase of NewWind Energy will include power from the Jersey-Atlantic Wind Farm in Atlantic City, NJ, reportedly the first commercial wind project in New Jersey and the nation's first coastal wind farm.

According to Roy Grossman, president and CEO of Sandy Alexander, the benefit to the environment is the equivalent of planting more than 300,000 trees, eliminating 4.2 million miles of automotive driving or taking 357 cars off the highway every year.

Yet, from Sandy Alexander's perspective, there is no cost savings. Grossman says there is a substantial premium involved. But the project wasn't designed to save money.

However, that doesn't mean conserving energy won't equate to monetary savings. Grossman notes that Sandy Alexander invested more than $500,000 in a MegTec afterburner that will save roughly $175,000 a year in energy costs while reducing heatset web offset printing emissions to nearly zero.

"It's about using a renewable and clean energy source and fostering sustainability of our resources, which every responsible company has an obligation to do," Grossman remarks.
 

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