Soon after this column appears, many printing companies may find themselves struggling on the unfamiliar terrain of a deflationary contraction. Even companies that have done well during the long period of uninterrupted growth—now perhaps about to end—may be faced with new and severe challenges. Before winter is over, slower demand may begin to reduce the number of cylinders in the market. Or not.
I'm reluctant to predict an imminent downturn. I'm just not sure the hard times are really waiting for us around the next turn in the road.
Moreover, I know little about deflation, too little to be confident of my advice about how to market in a deflationary setting. No one has much practical knowledge of the subject. The U.S. economy has not experienced a sustained period of deflation within the memory of any economist or business leader.
Human Nature
It's human nature to ignore bad news that we understand poorly. We feel we can't do much about the circumstances. So we become passive—often at our own peril.
There are other reasons that also explain why business leaders may be inclined to ignore forecasts. Here's an example from the last month.
Just when financial markets seemed headed for a long journey south, the markets recaptured lost ground as the Fed made two adjustments in interest rates—the second a mere 16 days after the first. Federal Reserve officials are concerned about a credit crunch, yet at least one senior Treasury staffer warns about the risk of loose lending practices in commercial banks.
Or how shall I interpret the following? A number of third-quarter corporate profit reports exceeded expectations, while production rates for the same quarter are reported to have slipped to levels not seen since early '91. And year-to-date inflation is running at an annual rate of 1.4 percent, a 12-year low.
Explanations are not hard to find for what seem at first glance to be contradictory reports. But the prognosis remains unclear: slower growth (remember the famous soft landing?), a significant recession or something worse, something created by the spread of a mishandled international financial crisis?
Add to this questions about whether historically low and dropping rates of inflation are signs of economic health or harbingers of deflation.
I am well aware that messengers who bring unwelcome news are seldom received warmly, so it's risky for a columnist to pursue the subject. Nevertheless, the matter is worth thinking about because there are strategies printers can adopt to lessen the impact of a slowdown, perhaps even to thrive, while preparing for the expansion sure to follow.
I write this, knowing that few companies have plans in place for a downturn, even when they know that one is out there, just over the horizon.
False Prophets?
Beyond the human tendency to ignore bad news and to turn away altogether when evidence points in contradictory directions, people are especially unlikely to plan for hard times when the experts have recently been profoundly wrong about what is happening.
Just in the past year, the forecasters have been blind-sided by the severity of crises in Asia and Russia. Major failures, when repeated often enough, make us close our ears when the prophets speak.
Under these circumstances, who can confidently claim to know what next year will be like—in financial markets and, more broadly, in the economy as a whole?
But this much I know. In a market-driven economy, whose operational principles we have learned to understand only after two centuries of often painful experience, the notion that we don't need to think about business cycles anymore is almost as bizarre as a decree suspending gravity.
Given the instability and the reasonable expectation that some kind of slowdown is either already under way or just beyond the horizon, a prudent manager will ignore the uncertainty and make plans for reduced demand.
In an industry plagued by excess capacity for as long as anyone can remember, the impact of a recession on the printing industry will be disproportionately great. During past downturns, companies responded by hunkering down—canceling orders for expensive equipment and postponing other investments. This time around that option may also provide some relief, but it is not likely to be enough.
Like their counterparts in other industries, printing executives learned during the past 15 years to run a tighter ship, hiring fewer people and providing higher levels of training. Shorter production and delivery times allowed companies to reduce their inventory of consumables. Digital technology may have reduced labor costs in prepress and lessened the need for administrative staff. So there may be few savings to be achieved by cutting staff.
I'm neither an economist nor an operations guy, but here are some other ideas.
All Hail the Cash
Cash is always king. In a deflationary cycle, it becomes the Holy Roman Emperor. As a marketer, I'd look for customers in industries that turn inventory fast and run large cash positions. Retailers, especially supermarkets, are an example. If I were a CFO, I'd hate to have a large debt-to-equity or debt-to-sales ratio during a time when money is increasingly more valuable. I would take dramatic steps to reduce my company's debt. I'd also ask department heads to create a fall-back budget for '99 that projected a 10 percent decrease in sales.
If I were a plant manager, I would favor suppliers with just-in-time delivery programs that reduce my inventory to the lowest practical level. To achieve this, I'd be willing to forego volume discounts that require a large inventory. I'd compensate by reducing the number of vendors and getting the discounts by distributing given volumes among fewer suppliers.
While surely not conclusive, I hope these examples are thought-provoking. Printers are unlikely to be surprised by a downturn. Most have been in business long enough to remember the last recession. The greatest danger lies in passivity, in the fatalistic belief that little can be done to plan. An imaginative approach will go beyond cost-cutting. It will identify where additional business may be found and make appropriate investments.
Hard times provide their own opportunities—different than those offered during periods of expansion, but opportunities nonetheless.
—Jacques Marchand
About the Author
Jacques Marchand may be phoned at (415) 357-2929. His firm, Marchand Marketing, provides strategic consulting services, research, market planning, segmentation, lead generation, positioning and marketing communications to help companies in the printing industry increase sales. Send e-mail to jmarchand@marchand.com. Information about the firm's work for clients is also available on its Web site, www.marchand.com.
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