COMMERCIAL PRINTING OUTLOOK -- Ambiguity is Certain
BY MARK SMITH
In the realm of economics, there is an important distinction between ambiguity and risk, asserts Andrew Paparozzi, chief economist and vice president of the National Association for Printing Leadership (NAPL) in Paramus, NJ. People can come to terms with risk by first assessing the potential outcomes, then associating probabilities with the most likely results and ultimately deciding if the risk is worth taking. "With ambiguity, or uncertainty, you don't know what is likely to happen so you can't really assign probabilities to the different possible outcomes," Paparozzi explains. "That's a very different, and much more damaging, environment for the economy. Unfortunately, right now we're facing a lot of ambiguity."
"Ambiguous" is a very good adjective to capsulize the outlook for the economy in general and the commercial printing sector in particular. There already were scant few certainties in the printing business before the recent economic, and geopolitical, shocks—9/11, the war on terrorism, confronting Iraq, corporate accounting scandals and even continued fallout from the dotcom boom/bust.
These short-term challenges have diverted attention away from the more fundamental issue of the outlook for print as a communication medium. For that reason, and others lurking below the surface, there's a taint of bad news even in the good news for 2003.
"At this point in time, it looks like the 2003 economy should perform close to the long-term trend of real (or inflation adjusted) GDP growth of around 3 to 3.5 percent," says Ronnie H. Davis, Ph.D., chief economist at Printing Industries of America (PIA) in Alexandria, VA. In support of this positive outlook, Davis cites the generally favorable expectations for inflation, labor markets and interest rates in the coming year.
However, the economist cautions that a "double-dip" recession could materialize if the long anticipated stock market rebound does not take place and consumer and business confidence falls.
For 2003, Davis is projecting print markets to also grow at close to the industry's longer term rate of around 3 percent. "This will mean that printing shipments over the year should reach approximately $165 billion," he adds. The economist again cautions that any market outlook represents just a snapshot in time and is subject to any changes in conditions.
In addition, Davis notes that the sales outlook for individual print market segments is very mixed. "Faster growing sectors should expect sales increases of 3 to 31⁄2 percent, particularly direct marketing (direct mail and newspaper inserts) and books. Magazines/periodicals and catalog printing should grow by 21⁄2 to 3 percent, as advertising markets recover. General commercial and quick printing should grow in the 2 to 3 percent range, and directories by around 1 percent," he says.
Paparozzi has a similar, but perhaps more bearish, take on the market outlook. "For 2003, we're projecting growth in the printing industry of somewhere between 4.7 and 5.2 percent, not adjusted for inflation (or between 1.5 and 2.5 percent real growth)," he reports. "We expect the economy to avoid a double-dip recession and continue to gradually strengthen—especially in the second half of the year—as corporate profits slowly strengthen. NAPL's outlook is based on the consensus projection from the Blue Chip Economic Indicators, which forecasts GDP to grow by 3 percent (adjusted for inflation) in 2003."
The economist sounds two cautionary notes regarding the projections. "It's important to remember that those numbers are not quite as strong as one might think since they are being compared with very weak performance in 2002," he says.
"All the stock market has to do, for example, is rise about 800 points and it will be up 10 percent for the year, but it would still be 3,000 points below its historic high.
"Print sales are going to finish down around 3 percent this year, which follows a decline of 3.8 percent in 2001," Paparozzi continues. "This will mark the first time since the mid-1970s that our industry's sales have declined two years in a row. The recession was much deeper for print, and recovery is going to be much slower."
In fact, the end of a recession doesn't mean the beginning of good times, the NAPL economist points out. "It simply means the economy has stopped retracting. Recoveries can be very slow and not look terribly different from the recession itself," he says.
The second, and perhaps more profound, issue is that even when the recovery hits full speed, it's not going to lift all boats, Paparozzi asserts. "Our industry has been redefined. Companies that have not prepared for the way in which it is changing, the way communications is changing, are not going to share in the growth. It's no longer enough to simply hang on until the economy and ad spending strengthen again."
Across the board, printing markets are being redefined by shorter runs, increasing use of color, personalization and growing demand for value-added services such as database management, fulfillment and mailing, Paparozzi says. "Printers that are digitally prepared have a historic opportunity to get involved in their clients' jobs earlier, stay involved longer and elevate themselves to a provider of communication solutions that satisfy a far broader range of clients' communication needs than ever before. That includes taking digital files to CD or the Web."
According to Davis, PIA's "2002 Ratios" study found that the average printer participating in the survey earned just 1 percent before tax profit on sales. Profit leaders—printers in the top 25 percent—saw their profits fall to 8 percent, which is even below the 8.9 percent achieved by profit leaders in the 1990-91 recession, he adds.
The profit leaders in PIA's Ratios database typically have a more focused and specific business strategy than lower profit firms, the economist reports. He says they can be broadly categorized as following one of two business strategies:
* Commodity shops serve customers whose choice of printer is driven mostly by cost/price considerations. To be successful, these printers need to be super-efficient and knowledgeable about the entire cost chain.
* Differentiation printers pursue customers who are seeking customized service offerings. This approach requires detailed knowledge of a customer's business (and that of the customer's customers) so the printer can deliver extra services that a client needs most at prices it is willing to pay.
Companies employing either profit strategy also need a market focus or specialization to maximize performance, Davis adds. "There is strong evidence that industry profitability increases with the degree of specialization," he says.
The importance of having in-depth knowledge of print customers also was raised during the "Growth Opportunities for Print" general session at the recent Graph Expo and Converting Expo 02 in Chicago. As part of his presentation, Dr. Joe Webb, president of Strategies for Management in Harrisville, RI, advised printers to know why clients print and why they don't. This effort should also involve learning the overall goals of customers and seeing things from their perspectives, he says.
Cost reduction is key to the success of all printers, Webb asserts. To truly make this a competitive advantage, however, he recommends starting with development of a "right-skilled" staff since everything else—such as technology—can be duplicated by others.
Webb also addressed the blunt question—"Will print survive?" He says the findings from his industry research indicate that:
* Mass market advertisers have few alternatives to print.
* Traditional consumer media are more secure than business-to-business vehicles.
* Direct mail is still a major growth area.
* Print must solidify its position in the media mix, chiefly by reducing its relative total cost.
According to NAPL's Paparozzi, a growing number of the printers surveyed by his association recognize the need to diversify. "The prevailing mindset still is to try to bring everything in-house," he says. "However, more printers are recognizing that the fastest way to profitable diversification may be through a partnership, whether it be an informal partnership, merger or acquisition."
Getting back to the shorter term, the PIA and NAPL economists agree there are a variety of other developments that will shape the outlook for the coming year.
There's good news and bad news concerning the outlook for printers' operating costs in 2003, Davis says. "On the positive side, the loose print labor markets should keep wage and salary costs in check. Also, consumables—such as ink, film and plates—shouldn't escalate too much. Two potential areas of concern are paper prices and employee health care costs," he explains.
Paparozzi points out that since consumer spending has been the only engine driving the economy of late, the outlook for 2003 really depends on whether or not consumers can continue to keep the economy growing until help arrives from business investment or Washington.
"No one knows the answer, but my feeling is that it comes down to employment. If the economy can continue to create jobs, we are going to be OK," he says. "Underneath the legitimate concerns, we are starting to see some improvement in the business fundamentals."
Then again, all bets could be off if there's any setback in the war on terrorism, Paparozzi cautions.
"The American economy is founded on confidence, so anything that undermines that confidence is going to push the economy back into recession," he says."Any effort, whether it is diplomatic or military, that removes the ambiguity and results in a favorable outcome for us will help the economy."
There's that dreaded word again.
Top 10 Critical Trends in Print
In a special session at Graph Expo, Frank Romano, industry pundit and professor at the Rochester (NY) Institute of Technology, identified what he says are the top 10 developments that will affect the printing industry over the next five years:
1 -- Digital links to customers
2 -- Wide-format digital imaging
3 -- Waterless printing
4 -- Practical e-commerce
5 -- Computer-to-plate adoption, on-and off-press
6 -- Workflow, from digits to dots and out the dock
7 -- Technology integration for hybrid printing solutions
8 -- Cross-media production
9 -- Variable-data printing/mass customization
10 -- Distributed printing