COMMERCIAL PRINTING -- Running Lean and Mean
BY MARK SMITH
Optimistic is the one word most often used to describe the outlook for commercial printing in 2004. And yet, as the last strains of "Auld Lang Syne" fade away, it's unlikely many printers will feel like breaking into a rousing chorus of "Happy Days Are Here Again."
The bursting of the "irrational exuberance" bubble has led to a time of lowered expectations. Also, the recent performance of the printing industry means year-to-year comparisons are being made against a very weak base.
If the economy tracks as expected—growing by around 3.5 percent next year—print markets should continue to gain momentum in 2004, says Ronnie H. Davis, Ph.D., chief economist at Printing Industries of America (PIA). Adding to the pull of the growing economy will be media spending related to the presidential elections and summer Olympic games, he points out. Those events alone could add half a point or so to print market growth next year.
"Our forecast calls for overall shipment growth of around 3 percent above 2003 levels for approximately $165 billion in total shipments," the economist reports. Davis says shipments should rise around 2.4 percent (year to year) in the first quarter, then gradually increase each quarter by about 0.2 percent to close out the year up around 3 percent in the fourth quarter.
According to the PIA economist, the 2004 outlook by print sector calls for most of the major industry segments to grow with the economy. Projected sales increases for some specific sectors include:
* Direct Marketing (direct mail, catalogs and inserts)—3 to 4 percent;
* General Commercial/Quick Printing—3 to 3.5 percent;
* Books—2.5 to 3 percent;
* Magazines and Periodicals—2 to 3 percent; and
* Directories—1 to 2 percent.
Barring a setback in the war on terror, the economy—and the printing industry by extension—will continue to accelerate through 2004, agrees Andrew Paparozzi, vice president and chief economist of the National Association for Printing Leadership (NAPL). "We expect industry sales to grow between 3.2 and 4.1 percent next year." It will mark the first year of industry sales growth since 2002, he points out.
Basis of Projection
Paparozzi's industry outlook is based on a Blue Chip Economic Indicators' consensus projection for the overall economy to grow 3.9 percent next year. That rate is up significantly from the projected 2.6 percent growth in 2003 and the actual numbers for 2002 (2.4 percent) and 2001 (0.3 percent).
"Economic recovery had been limited to the consumer and housing sectors, but now has expanded to business activity and exports," the NAPL exec says. "Every sector is contributing." Adding to this will be the boosts in spending associated with an Olympics year and the presidential/federal elections cycle.
Implicit in the numbers are lowered expectations for industry sales potential. "Five or seven years ago, given those positive business factors, we'd be predicting growth in print sales of 6, 7 or 8 percent," Paparozzi points out. "The fundamentals have changed dramatically. Declines in sales are not just cyclical anymore."
Coming out of this downturn, printers continue to experience pressure on pricing and margins "at a level beyond anything I've seen in all my years in the industry," he says. "My forecast for 2003 was too optimistic because I did not anticipate how long this severe pressure on pricing would persist."
According to PIA's Davis, printers' profits actually recovered slightly by the end of 2002, after being severely reduced in 2001 and early 2002. The typical printer participating in the GATF/PIA Ratios survey earned 1.6 percent before-tax profit on sales in their last completed fiscal year, he points out. Cost cutting has been a major factor.
Printers' financial performance should continue to improve markedly, the economist believes. PIA's projections for fiscal year 2003 call for before-tax profits to reach between 2.3 to 2.7 percent of sales. Industry profits as a percent of sales should return to their normal range of 3 to 3.5 percent in 2004, if the economy continues its performance trend, Davis predicts.
Paparozzi's research and experience leads him to believe the industry can expect to see a return to some degree of pricing power by the middle of 2004. Laws against collusion make pricing a touchy subject, but NAPL is able to track some industry trends in this area.
For example, members of the NAPL Printing Business Panel were asked how their pricing through the first three quarters of 2003 compared to the same time period in 2002. According to Paparozzi, 21.3 percent of survey respondents said their prices were down 10 percent or more, and another 20.8 percent reported price declines in the 5 to 8 percent range. Only 10.4 percent said their prices were above year-earlier levels.
Further, one of the survey questions for the "2003-2004 NAPL State-of-the-Industry Report" asked respondents to identify and rank the factors most responsible for the extreme price competition. Everyone cited either the recession or excess capacity, which is effectively a byproduct of the recession, as a leading cause. "What is most important, though, is what else they said," he contends.
Respondents were asked to rank sources of competition (as many as applied) for their companies on a scale of one to five, with five indicating the greatest contribution. The following is a breakdown of the percentage of people giving each source a ranking of five or four:
* electronic alternatives to print—33.5 percent;
* client consolidation—25.2 percent;
* domestic competition from outside our area—22.2 percent;
* reverse auctions—12.2 percent;
* international competition—10.2 percent; and
* Internet auctions—8.3 percent.
Analyzing the numbers another way, Paparozzi points out that 75 percent of respondents cited at least one of these "structural" factors as contributing significantly to pricing pressure. "It shows that both the nature and source of competition in our industry is changing," he asserts. "Digitization and the Internet are transforming our industry from a local, regional industry into a national/international industry. At the same time, printers are facing new, outside sources of competition."
Both survey samples include a cross-section of the industry, including printers—both NAPL members and non-members—with around $2 million in sales up to some of the biggest publicly held companies and representing every major product market and process.
Activity Heats Up
NAPL's business indicators started showing an acceleration in activity starting in July 2003, or even late June, Paparozzi says. One needs to look beyond industry sales to get a true feel for the market outlook, he argues, since this simple measure continues to be depressed by the extreme pressure on prices.
The association's broadest measure of print activity—the NAPL Printing Business Index (PBI)—in July went over 50 for the first time this year, after hitting a 15-month low (44.4) in March. By October, it stood at 56.7 (a reading above 50 means more printers report activity is picking up than say it is slowing down).
NAPL's survey also asks printers if business generally is picking up, slowing down or basically steady. October 2003 marked the fourth consecutive month in which significantly more printers reported overall activity was picking up compared to the number who said activity was declining. It also was the third straight month in which more survey respondents reported work on hand (corrected for seasonal variation) was rising than said it was declining, he adds.
Printers who participated in NAPL's "State-of-the-Industry" survey collectively offered a rosier outlook than Paparozzi. They expect their sales to grow, on average, 5.9 percent next year. "Some expect very substantial growth, with 36.9 percent forecasting growth of at least 10 percent and 14.2 percent expecting growth of at least 15 percent."
Paparozzi contends that the more telling data for the industry as a whole can be found in the responses to a question that asked, "Where do you expect to find that growth?" Not surprisingly, 80 percent said they expect to get some help from the economy.
"But, 74.9 percent said we are going to grow by gaining market share from competitors, 22.8 percent said by getting work from competitors who have gone out of business, and 9.2 percent said they are going to grow from mergers and acquisitions," the economist reveals. "While those three approaches are perfectly legitimate, sound ways to grow a business, they represent a redistribution of market share, not growth in the market."
For that reason and others, not everyone is going to participate equally—or at all—in the upturn, Paparozzi says. Printers have to position their businesses for growth, he argues. "The upturn is not going to look much different from the recession for companies that are not prepared for growth."
According to the NAPL economist, every printer—regardless of size or market—needs to address four questions:
1) How do I gain share in markets that are not growing fast enough for everyone to benefit?
2) How do I protect share in markets that are becoming a lot more competitive in a variety of ways, and from new sources of competition?
3) How do I evaluate the cost, challenges and realities of diversification beyond print?
4) How do I insulate my company from the commodity market that will always be subject to the vagaries of the economy?
How effective printers are at addressing those four questions will determine who participates fully in and who misses out on what's likely to be a very strong upturn, Paparozzi concludes.
Other Unknown Factors
Davis agrees with Paparozzi's assessment that terrorism is the major unknown for the economy. Businesses of all types do face some known challenges, as well, he adds. Health insurance costs are still rising at double-digit rates, and so are property and casualty insurance premiums. In addition, energy prices have been on the rise.
The PIA economist also agrees that some printers will benefit more than others from the economic turnaround. He says the association's latest ratios study provides dramatic evidence of the continuing gulf between profit leaders and profit challengers in the printing industry.
"Profit leaders (those firms in the top 25 percentile of profitability) typically earn 10 to 20 times as much profit per dollar of sales as profit challengers (the other 75 percent of printers)," Davis points out.
Even as print sales have finally started growing again following two years of decline (2001 and 2002), the industry remains very competitive. The number of plants going out of business in a typical year creates a perpetual "going out of business" selling environment for competitors, creating tremendous pricing pressures, Davis explains. He contends that printers need to focus on the bottom line and commit to the "six secrets of success" exploited by the industry's profit leaders:
1) Have a well thought out strategy and specialize by customers/products.
2) Focus on manufacturing efficiency to produce the printed product cheaper than competitors. (Typically, profit leaders are around 3 percent more efficient than profit challengers in producing the actual printed product, Davis says.) The sources of manufacturing efficiency include use of appropriate technology, emphasis on workflow efficiency, right-sizing operations, seasonal sales patterns and benchmarking against industry leaders.
3) Focus on support efficiency to cut down on administrative costs. (Profit leaders are 12 percent more efficient in this area.)
4) Be a learning organization. (Profit leaders spend more than twice the percentage of payroll on training and education.)
5) Have a share-the-wealth strategy. (Offering bonus and profit sharing plans to all employees will create a culture of teamwork.)
6) Look to ancillary services for additional revenue. (Ancillary services account for more than 7 percent of total industry revenues and are projected to account for a larger share in the coming years, Davis asserts. It has been estimated that there is five dollars in ancillary services associated with every marketing dollar spent on print.)
Further analysis is provided in a new PIA report—"Keys to Profitability: Lessons from Ratios Profit Leaders"—available through the "Bookstore and Products" section of the association's Website (www.gain.net).
Along with being chairman and CEO of Branch-Smith Inc., David Branch brings to this discussion the added perspective of serving as NAPL chairman. Speaking as a printer, Branch says he has seen indications that business is firming up. "We're looking for business to be better in 2004 than it has been the last couple of years . . .thankfully," he remarks.
"Our sense is that business has been creeping toward getting better for some time. Our sales didn't really fall through the floor like they did for many other companies. The pricing has been abysmal, though."
Boom in Business
In fact, Branch-Smith was able to continue growing its sales during the downturn, doubling in size since 1998, its chief executive notes. "Our business has always been a value play," he adds.
The company has strived to build efficiencies into its process, with adoption of CTP-based production making a "tremendous difference," and has expanded the range of solutions it offers. The goal is to provide turnkey service on par with web-based publication printing operations, but using all sheetfed equipment to support shorter runs, he explains.
Developing turnkey solutions that truly solve problems for customers should help printers avoid suffering quite the same price resistance in the future, Branch advises. "In order for this approach to work, you've got to really know who your customer is," he adds.
The printing exec sees potential in offering design services, mailing and fulfillment, but believes there will be a new wave of innovation centered around on-demand, digital production. Since they are not bogged down by the same paradigms as many traditional print providers, Branch thinks standalone, smaller organizations that can start from "a fresh sheet of paper" may be in a better position to capitalize on this opportunity.
Speaking as chairman of a leading industry association, Branch asserts that "learning is everything. Printers need to get their organizations and people equipped to be learners." They need cultures that include everybody in what's going on, and to capitalize on the diverse ideas employees have while empowering them to solve customer problems, he says.
Michael Marcian Sr. recently completed a year of service as PIA/GATF's board chairman, in addition to being president of Corporate Press. Marcian says his company has been busy since the middle of 2003, and he currently is budgeting for 3 percent growth in 2004. One bright spot has been variable data, digital color printing, which has been showing phenomenal growth, he reports.
Since complaining about pricing accomplishes nothing, Corporate Press' management team has concentrated on coming to terms with the new market realities. "We're working harder than ever to take costs out of the process of putting ink on paper. Our profits are now higher than ever," he reveals.
"In traveling around the country as chairman of PIA, I've been amazed to see so many printers still expecting business to come back, prices to go up and for their companies to be more successful in the future, even though they are equipped the same way they were three years ago," Marcian continues. "The traditional commercial printer putting ink on paper with older equipment is not able to cut costs as much as shops that have invested in new technology. They are going to continue to hurt."
Less efficient shops had been able to get by because the industry's pricing structures, by and large, were still based on old equipment, he suggests. Technology is only part of the cost-cutting equation, but the new pricing structure is clearly built on fast, efficient equipment.