McIlroy--Are We in Worse Shape Than Anyone Thinks?
Print sales have been strong throughout the '90s, in keeping with a robust economy. While sales have been strong, profitability has remained constant for the last decade and continues to average about 3 percent of sales—not a healthy margin (the 1999 record was only 3.36 percent).
As the printing industry moves into the next decade, printers face overcapacity, but an ongoing need to invest in new capital equipment to improve efficiency and quality is only likely to increase overcapacity along with pricing and profit pressures.
According to NAPL's Printing Manager magazine, only 5 percent of the $80 billion U.S. commercial printing industry is estimated to be consolidated. "When Wall Street analysts consider the consolidation of a fragmented industry," the report states, "they talk about the 'Rule of Three,' a business theory stating that, in most competitive markets, three large companies will continue to evolve to control 70 percent to 90 percent of the market, while all the other companies remain small niche players. If this were to take place in commercial printing, three large firms with annual sales of $20 billion to $25 billion would dominate the industry—a very different industry than we have today."
Commercial printing ranks third of 20 industries on the "Montgomery Securities' List of Selected Consolidating Service Industries." And Montgomery ranks commercial printing No. 1 in degree of market fragmentation: More than 80 percent of commercial printers have sales of less than $2 million.
Despite the apparent under-consolidation of the printing industry, this year the capital markets are not attaching the same value to print consolidation as they were in previous years. The Printing Impressions/Advest index of 30 printing industry stocks has declined by more than 30 percent since June 1998, relative to the S&P 500 Composite Index.
"Because of the quick and pervasive adaptation to the Internet and new technology in the Silicon Valley area, printers here feel the pinch more than the rest of the nation. E-mail and faxes have replaced letters; Websites have supplanted promotional brochures and fliers; even annual reports find their way online," says Dan Nelson, executive director of the Printing Industries of Northern California, during a newspaper interview.