WEB OFFSET REPORT -- Looking to Offset LossesMay 2003
PI: Do you expect market pressure to spur another round of consolidations in an attempt to build/maintain market share? Or, will printers look inward and focus on "realigning" their existing operations to match demand?
Majerczak: I think you are going to see both done in a very active manner. Companies are going to continue to try to buy market share and solidify their own efforts. Other printers are going to be faced with having to realign their existing operations to match the demand in the market. This will entail a downsizing of capacity, more targeted purchasing of equipment and, in the long run, may bring us into different markets, such as data management.
Keene: We are not looking so much at acquisitions as we are toward building value-added services. Mailing and fulfillment, CD replication and other opportunities of that nature. I think you will see more companies buying those types of businesses rather than another printing company. The value-added is in moving up and down the supply chain for our customers.
Quadracci: While consolidation is likely to continue, history has taught us that this is not always the best strategy. I can think of a number of companies over the years that have focused on industry "rollups" or acquisitions. It is difficult to name one that has been successful with this approach in the long term.
It is certainly true that there are many economies to be gained by merging companies together, but there are also many drawbacks. Money is spent on the acquisition of plants and not on new equipment, technology and innovation. The result typically is a collection of plants with aging equipment, incompatible business systems and disparate cultures. Most of the successes in our industry have come from companies that have focused on their market niche and grown their businesses internally.
PI: Where do you expect web printers to look for sales opportunities? Do you think most will just focus on maximizing their share of available print sales? Are there any market segments you expect to show growth?
Keene: One direction we are going in is to become further ingrained with the customers we already have. It seems like every web printer I talk to is projecting larger growth than what is predicted for the industry. That means they plan on growing by taking work away from other printers.
Quadracci: The greatest opportunities for new sales come from existing clients. Our industry's best printers are more than purveyors of ink on paper; they are solutions providers. And, when a printer-client relationship advances into a true partnership, sales opportunities abound. Printers should be proactive in providing solutions that not only save their customers money, but also improve the client's overall business. Sales opportunities come through knowing your niche. Know what you're good at and exploit the sales potential by offering something no other printer is able to match.
Majerczak: In today's marketplace, trying to maximize your market share is a very dangerous proposition unless you have service-specific niches. In the current climate, incumbent suppliers are strategically fighting to maintain their business, and it will be very difficult to take it away from them. If you can develop specific niche capacities, you will at least be able to open new doors and maintain more stable pricing.
Demographic personalization and more specific utilization of data management will become very big issues. The evolution of digital printing into a higher-speed format and a more commercial type of approach will expand the use of one-to-one personalization. That will be a very significant product in the next few years.
PI: To what extent do you think web offset operations will expand beyond print?
Majerczak: The strongest areas of development in the future will center around data and data management. This allows you to branch off into stronger personalization efforts and actually drill down into a customer base and create continuity-type products. Controlling the data will become a very important issue for the printer.
With the trend toward declining production resources within companies, the onus is falling much more onto the printer to become a complete production-type facility. That will also enhance business opportunities in our industry.
A broad equipment base and production versatility—although not always a strength for highly competitive type work—over a wide customer base can be very useful. The age of the huge order may be passing, with the market becoming more a factor of smaller, more specific, demographically focused orders. I think we can prepare for and change our equipment base over a period of time to be better prepared to address that demand.
Quadracci: Certainly, there are many opportunities beyond print. One of the major web printers is focusing on supply-chain management and has been very successful at it. Again, it's a matter of identifying your niche and exploiting it.
Keene: Packaging could be a good market, but there is a fairly high cost of entry there. It will take a pretty substantial investment—mostly for equipment, but you also need to acquire expertise—in order to become a strong packaging printer.
PI: In which area(s) do you see the greatest opportunity/need for process improvements: prepress, press or bindery? What, if any, investments in new equipment and technology will be needed to achieve greater efficiency?
Keene: This should be a customer-driven issue. We are investing in our mailing and fulfillment services, as well as some finishing capabilities, in response to customer demand.
Printers face a difficult decision in the question of whether to invest in new equipment to take advantage of increased productivity or try to make do with a current system and risk falling even further behind. I don't know if there is a clearly right choice. The decision is even tougher today because many of the advances that speed makeready and reduce waste are only available on new heatset web presses. In the past, systems could be retrofitted to older machines. The bottom line: you can only justify any equipment purchase if you can fill the additional capacity.
Quadracci: The greatest area of opportunity is seamless integration of all print-production processes, across individual plants and across a network of plants. The ultimate goal is a continuous workflow, which will minimize errors and reduce cycle time. That time can be returned to the client for use in extending ad close dates, updating editorial, revising product offerings or price points, and more. Of course, those printers that choose to invest in new technology will have a decided advantage with regard to internal efficiencies.
Majerczak: The greatest need for production improvement is in the bindery. The bindery is cost-intensive, especially in commercial work. This is an area that needs new technological advancement. Bindery equipment has remained relatively stagnant for many years. Prepress is an ongoing situation and, today, the majority of printers have moved into direct-to-plate production and are on a digital path that will undergo continuous change. From the customer side, Web-enabled transfer of real-time data will quickly become a significant need.
Investments in material handling and ways of packing and finishing products will be very strong in the future. Robotics, from press to bindery and out the door, also have a bright future in this industry. The trend will be to move away from intense labor situations with a more technically oriented equipment base.
PI: Are you still finding labor to be a concern in your operations? If so, why is this problem so persistent? What more could the industry do to address this concern?
Majerczak: Labor is absolutely a problem today, especially lower skilled or unskilled labor. Given our bindery operations, this group represents a significant portion of our operation. We have gone to outsourcing, training, differential bonuses and other means to bring people into our bindery operations. The ability to maintain labor in our industry is even affecting us in the pressroom, with layoffs raising concerns about the long-term future. As an industry, we need to direct our efforts to changing that perspective.
Keene: With the economy as it is, it's not difficult to get people to fill spots. What is still difficult is attracting bright, young students into the printing industry as a career. We need to reach out to the entrepreneurial and management types.
Quadracci: We, as individual printers and as an industry, need to address the need for skilled labor. Printing is becoming increasingly technical. Long ago, Quad/Graphics made the commitment to train the next generation of printers through on-the-job and in-classroom education sponsored by the company. One program—called "Operators-in-Training"—is a comprehensive two-year training course, designed to immerse participants in print production.
Another way in which Quad/Graphics is preparing the next generation of highly skilled printers is through the Harry V. Quadracci Printing and Graphics Center, located on the campus of Waukesha County Technical College in Pewaukee, WI. The building of the center was a collaborative effort among representatives from the printing industry, education and government who joined forces to fill a void for skilled graphic arts labor in today's highly technical printing industry.
Students will enter the work force ready to be immediate, constructive contributors to the printing industry. This type of effort is an example of how our industry can work together to create a skilled work force.
Postal Service Move Will Spare Print Sales
Web offset printers stand to be among the big beneficiaries of legislation designed to correct overpayments to the Civil Service Retirement System (CSRS) by the U.S. Postal Service (USPS). There's an important caveat, however. Its effect would be to give the USPS retirement fund payment credits that should push back the need for any postage rate increases until at least 2006. Unfortunately, projections of a multi-billion-dollar impact on industry sales represents business that otherwise would have been lost, and not new printing sales.
"Based on historical relationships between postal rate increases and corresponding decreases in direct mail advertising volumes, these actions could easily save $2 billion in direct mail printing alone through 2006," asserts Dr. Ron Davis, chief economist at Printing Industries of America (PIA) in Alexandria, VA. "Additional benefits would accrue to other print sectors that rely on mail delivery, such as magazine printing and envelope printing."
Davis says his calculation is based on the assumption that, without this legislation, a postal rate increase—in the range of the last one, or some 6 percent—would be passed. A commensurate cut in mailings typically follows.
"Generally, the biggest sales impact is seen in the first 12 months after a new postage rate goes into effect; then mail volume slowly recovers. However, the mail and printing business lost in the meantime is never recovered," the economist points out. "Currently, around $30 billion in annual printer revenues comes from direct mail printing."
According to Benjamin Cooper, executive vice president of Public Policy at PIA, the roots of the retirement funding issue go all the way back to the founding of the modern USPS in 1970. "It was not, as some believe, privatized," he explains. "It was created as a quasi-government entity. Employees were provided many of the same rights as federal employees, including participation in the CSRS."
About 15 years ago, the USPS began to suspect it was overpaying into the CSRS, Cooper says. "Since there was no real crisis at the time, it really didn't pursue any corrective action," he adds.
The situation changed when outside groups—PIA and others—began to raise this retirement issue, the public policy exec notes. "We made the point that, if the USPS is overpaying into the system, it is the rate payers that are picking up the tab. In response, the treasury finally did a study of the issue last year. It found that, by using the existing formula, the USPS not only was overpaying now, but would overpay some $78 billion over the next 30 years," Cooper concludes.