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PI 400 -- Commercial Printing - Cutting Down Times

December 2001

Every boom must have its bust. It's still just the nature of the business cycle, despite all the talk about the "new economy." Knowing that really doesn't make it easier to cope with a downturn, though, especially one marking the end of one of the longest periods of economic expansion in U.S. history.

But maybe it should be a source of some comfort. The U.S. economy has always shown the resiliency to bounce back, even from a depression, and printing sales have followed right along. In addition, many of the same fundamentals that fueled the expansion are still in place, working to stem the fall and ready to drive a recovery.

The problem is many people still are left with a nagging feeling that things may be different this time. The main reason, of course, is the uncertainty created by the war on terrorism and the potential for future terrorist attacks. Every business/economic forecast seems to come with a disclaimer, something to the affect: "Assuming there are no more terrorist attacks..." Obviously, that's not an assumption anyone can comfortably make.

Added to this is the unsettled feeling—or outright despair, in some cases—about the future of print that has permeated the industry. For those in attendance at PRINT 01, it was hard not to reflect a little ominously about the timing of the attacks, which came in the middle of an already nervous show.

As with the broader economy, though, the prevailing wisdom holds that the printing industry should not be counted out any time soon. Nonetheless, printers do need to be realistic about the business outlook for the future, the experts warn. That's easier said than done, of course.

"Even though it is very difficult to accurately forecast in these tough times, printers still need to develop a business plan for the next three, six and 12 months," notes Ronnie H. Davis, Ph.D., chief economist at Printing Industries of America in Alexandria, VA. "And, this plan must be based on some view of the future." Davis concedes that printers may need to develop alternative plans based on different scenarios.

"Once all of the numbers are in, they will show the U.S. economy ended up being in a recession for at least two quarters (the third and fourth quarters of 2001) and perhaps a third (Q1 of 2002)," the economist predicts. As for print sales, "the market segments most impacted by advertising and the mail—magazines, catalogs and direct mail—will be down the most. Packaging, general commercial and quick printing may be the least impacted," he says.

Overall, the economy should climb back to an annual growth rate of 3 percent by the second quarter of 2002, resulting in a 2.5 percent growth rate for the entire year, Davis projects—assuming there are no "additional significant terrorist acts." He expects print markets to grow by only 2 percent for the year.

Even though printing sales no longer grow at the same percentage rate as GDP, they do still generally move in step with the economy through both up and down cycles, Davis says. "But printing sales as a whole take a little longer to recover since much of the business is based on advertising spending."

A similar set of expectations are contained in "The NAPL 2001-2002 State of the Industry Survey" report put together by Andrew D. Paparozzi, vice president and chief economist at the National Association for Printing Leadership in Paramus, NJ. "The diminished confidence and heightened risk and uncertainty that have accompanied the September tragedy will weaken the economy considerably into 2002," Paparozzi asserts. "But around the middle of next year things are likely to change, largely because the talk in Washington has changed."

Focus Has Changed
Prior to September 11, the discussion in Washington, DC, was about maintaining budget surpluses and paying down the national debt, the economist notes. The focus now has shifted to stimulating the economy, potentially by accelerating and expanding last spring's personal income tax reductions, extending tax relief to businesses and cutting capital gains taxes, he says.

No one knows exactly where all this talk will lead, but it's likely to result in the federal government enacting a much more aggressive stimulus than would ever have been considered before September 11, Paparozzi believes.

"When all that stimulus kicks in during the second half of 2002 and combines with the stimulus already in place, the economy—and printing, by extension—will get a huge boost," he asserts in the report.

According to the NAPL economist, the consensus economic forecast calls for GDP growth to accelerate from just 0.3 percent during the first half of 2002 to a robust 3.7 percent by 2003. If that projection is reasonably accurate, Paparozzi expects print sales to decline another 0.4 to 1.6 percent in the first half of 2002. Sales should rebound with the economy after midyear, however, growing in the 3.5 to 4.7 percent range from July through December.

The recovery will gain momentum throughout 2003, bringing a boost in print sales somewhere in the 6.4 to 7.6 percent range, he adds.

Naturally, Paparozzi cautions that forecasting is even trickier than usual at this time, because "we're dealing with something inherently unpredictable: the outcome of a war unlike any America has ever fought."

So what do these numbers mean in practical terms? How should printers respond to the current economic conditions? Printers need to focus on two things at all times, but most especially during a weak economy, contends Harris DeWese, principal at Compass Capital Partners in Radnor, PA. His company provides consulting services in sales and management, as well as mergers and acquisitions.

"First, printers must work with brutal objectivity to carve costs out of their businesses," DeWese advises. "Many CEOs don't motivate workers to seek efficiencies and cost savings so, as a result, employees keep doing things the way they've always been done. The average printing company can easily carve 5 percent out of its costs, and many can cut even more. Cutting 5 percent out of the 'Cost of Goods Sold' has a bigger impact on the bottom line than a 10 percent price increase," he says.

"Second, print shops should work overtime to capitalize on the increasing weakness of their competition during a bad economy," DeWese continues. "To capture more work, they should make more—and better—sales calls, seek to hire competitors' unhappy salespeople and pursue opportunities to buy the sales of weak competitors."

What printers shouldn't do is drown in their sorrows, cut prices in desperation, invest heavily in new equipment without a plan to fill the capacity and hire people who are not proven performers, the management consultant says. "One of the most common short-sighted mistakes made by printers is to accept unprofitable work just to make the payroll. Another is to just sit in one's office and hope things get better. Managers must be in their plants making things better and in the offices of their customers selling things better."

As jobs become scarcer, selling in a downturn can require printers to walk a thin line between maintaining client contact and becoming a pain in the rear end. DeWese says the answer is for salespeople to learn to communicate with customers and prospects in different ways and about different things than just print orders. "Most print salespeople depend solely on the telephone. They need to find ways to also communicate in writing, via letters and e-mail. And they need to become more creative about making personal visits," he explains.

The bottom line is that salespeople need to know more about their prospects and accounts, including their personal interests, and learn to communicate regularly about those subjects, DeWese says.

Theoretically, downturns should be a great time to "buy sales" through mergers and acquisitions, since company evaluations typically are depressed. Of course, that means it's not a good time to sell a company, DeWese points out. "This economy has brought M&A activity to a virtual standstill. There will be fewer than 25 deals done in the entire printing industry in 2001, versus 186 in 1998 and 131 in 1999. It is difficult to finance deals, buyers are dormant and valuations are down significantly," the consultant explains.

Looking a little farther into the future, PRINT 01 offered a session entitled "Survivors: Where will we be by PRINT 05?" Recent events have just put a sharper point on the issues raised at the time, says the leader of the session, Robert Rosen, CEO of R.H. Rosen Associates, a New York City- and San Francisco-based graphic arts consulting firm.

Thrive and Survive
In good times and bad, there are companies that find ways to thrive while others merely survive or don't make it, Rosen notes. One technique for successful company management is to think in terms of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), he advises. "Printers probably need an EBITDA in the 12 percent range just to stay in business and 15 percent or higher to be solid performers that will be around in 2005."

There's no magic formula or secret to being a solid success, Rosen says. It just requires making improvements a little bit everywhere, he adds, which actually is good news because every company can do it. "Management just needs the will to make things happen."

According to Rosen, solidly successful printing companies:

* Do a little bit better job at keeping their shops full with work because even a couple percent more business can make a huge difference in profitability.

* Work hard to get the very best out of their plants because even small differences in productivity can add up to a big difference in profitability.

* Get paid for author alterations and fixing files because they keep good records and have their workflow under control.

* Do a better job of collecting their receivables because they get invoices out sooner.

The other critical component is effectively managing sales, according to Rosen. "Companies that are successful hold their people accountable, including the sales force. Their managers have a mature relationship with the sales staff, enabling them to have meaningful conversations about sales projections and set specific performance objectives," the consultant explains.

Focusing on "share of customer" is a winning strategy for good times and bad, Rosen asserts. "When there is a downturn, the suppliers that are hurt the most are the ones with smaller share of customer. Even getting $100,000 in annual business could mean a shop is still the fifth or sixth supplier for some major print buyers. When spending is cut, they are going to look to take care of their major suppliers first," he says.

Bottom line, it's time for management to be realistic about the amount of business the company is going to do and start aligning its costs and operations with that volume, Rosen stresses. "Managers need to recognize that when things get better, growth is not a huge problem to overcome. It's OK to run some overtime after costs have been aligned with sales. Printers typically don't run enough overtime."

In a different session at PRINT 01, the "Top 10 Undeniable Trends Affecting the Printing Industry" through the year 2010 were outlined by industry researcher and consultant Dr. Joseph W. Webb, of Strategies for Management in Harrisville, RI.

1.) Traditional consumer media are secure, but business-to-business promotional uses of commercial printing are in trouble. Direct mail and database marketing efforts are important niches that need to be developed. They are not for everybody, but this is a place where sharp insight and superior skills can be rewarded.

2.) There are fewer print buyers in today's market, but bigger purchase decisions. Printers need to think about what non-craft benefits they can offer buyers, in order to secure clients' business and be clued in to their overall communications strategies.

3.) The Internet is having a huge impact and it's mainly negative. Cross-media programs, compelling cost structures and innovative uses of print can stem much of the tide.

4.) On-demand looking has become more important than on-demand printing. Printers should be actively involved in supplying formatted content for client Websites and other media.

5.) Even when it's bad, print quality today is still pretty good. Printers need to understand how buyers choose suppliers and evaluate their businesses on that basis.

6.) The continuing consolidation is a sign that costs need to be squeezed out of the industry and that it's more difficult to create unique and compelling sales propositions for print businesses. The demand for print will change, and in what direction we can only speculate, but that's not important. Building businesses that adapt to change is what's important.

7.) Investment in new technologies will remain rapid, and printers will continue to scramble to retool and reshape their businesses.

8.) Repurposing and handling cross-media communications will be growth markets for printers.

9.) Keeping old equipment is costing printers more money than ever. They must become more productive by replacing older, less productive equipment with fewer models of newer, more productive equipment.

10.) To survive, printers have to become more visionary about the needs of their customers.

To put all this another way, Webb says the print shops that are still thriving in the year 2010 will be those that "seek newness and use the newest media and communication technologies personally.

They will know why clients print, what their overall goals are and have an intimate knowledge of how clients think," he explains. "Thrivers know that costs are lowered by having the right people, knowledge and experience, and technology (in that order), and their employees are constantly training and experimenting. Most importantly, these organizations see things in the same way the print buyer does."

As a final thought, keep in mind that the advice of these consultants doesn't require any disclaimer. It's just as applicable in a boom time as it is in a bust.

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