Defining Major Market Forces. (printing industry outlook)(Industry Overview) Lisa Cross.

Full Text: COPYRIGHT 2001 Cahners Publishing Company

In charting their company's course, business managers must weigh general economic prospects, evolving clients needs, the position of print in the media world, and the success of star performers.

Charting a course that yields profitability begins with identifying the market forces that will have the greatest influence on a printing firm's success or failure. For printers, these forces are many today. The general economy, customer demands, technology competition, and many other factors all exert enormous influence over the business climate.

While keeping a close watch on these industry vital signs has always been important, shifts outside and within the industry at large have made the practice nothing less than essential for survival.

The printing industry's transition from a growth industry into a mature industry--which, by the way, translates into greater intramural competition, plus competition from electronic media--may spell trouble for companies that don't have a clear grasp of the market and a corresponding action plan.

SLOWER BUT STEADY GROWTH

"The bad news is that the industry doesn't grow faster than the overall economy anymore. The good news is that the economy has still been growing at a healthy pace and is expected to pull printing along nicely, so that means a good bottom line," explains Ron H. Davis, Ph.D., chief economist of the Printing Industries of America, Inc., Alexandria, Va.

He says, "The industry will stay in this mature phase for quite awhile and it will continue to grow. We won't be moving to declining industry status anytime soon."

Still, growth in print may slow if the economy falters.

"For business managers, success boils down to understanding what's happening on two counts: the communication needs of printers' clients and the general economy," explains Andrew D. Paparozzi, director of the Printing Economic Research Center, part of the National Association for Printing Leadership, Paramus, NJ.

FOUR POSSIBLE SCENARIOS

Paparozzi lists four ways in which the economy can be shown to exert an major influence on the printing industry:

Scenario 1: The economy continues to grow at its current pace. Paparozzi believes that this scenario is highly unlikely. However, he notes, were the economy to continue growing 5.2% per year and print sales to continue growing 5.7% per year this year and next, total commercial printing sales would reach $94.1 billion in 2001 and $99.4 billion in 2002.

Scenario 2: The soft landing. As the economist notes, "This is the outcome expected by Blue Chip Economic indicators, a consensus forecast of nearly 50 top economists. Specifically, the Blue Chip consensus expects GDP growth to slow from 5.2% in 2000 to 3.4% this year, then fall to 3.3% in 2002.

"Every member of the panel expects the economy to slow in 2001. The most optimistic economists expect growth of 4.4%, and the least optimistic expect growth of 2.4%. If the soft landing happens, we expect print sales growth to slow to 5.0% this year and to 4.7% in 2002."

In this case, PaparozzI projects that print sales would total $93.5 billion in 2001 and $97.9 billion in 2002, a level that's $1.7 billion, or 1.7%, less than the $99.4 billion had the economy kept growing at its current pace.

Scenario 3: The harder landing. If GDP growth slows to 2.5% this year and then to 1.8% in 2002, print sales would grow by 3.5% this year to $92.2 billion, and 2.2% next year to $94.2 billion. That results in $5.2 billion, or 5.2%, less than the $99.4 billion that sales would have reached had the economy kept growing at its current pace.

Scenario 4: Recession. "I don't think that this terribly likely, but you can't rule it out," says Paparozzi.

ECONOMIC LANDING AHEAD

"Whether smooth or rough, the economy is coming in for a landing," explains Paparozzi. "And even a soft landing matters to an industry as intensely compelitive as print Printers need to prepare by asking questions: What if my most important clients cut their print budgets this year because of the economy? How will I protect my cash flow if business slows? How can I maintain my marketing and sales budgets when everyone else is cutting theirs? Handled the right way, the right answers can make even a rough landing the competition's problem."

A small group of printers does know how to answer those questions correctly, says Paparozzi. These firms, he says, consistently grow better than twice the industry rate regardless of how much the business environment changes. NAPL calls this group the Long Run Growth Leaders, and has been studying them carefully for a close to a decade.

"These companies not only grow, but they grow profitably; their pre-tax profitability has averaged 8.1% per year since 1991, better than double the 3.8% average for other companies we surrey," says Paparozzi.

He notes that these top profit-generating companies gauge market trends by establishing and maintaining close relationships with their customers.

REPORT FROM A STAR PERFORMER

Says one profit leader in a recent survey, "We acknowledge to our major clients that our markets are changing and that we must change to continue doing business with them. We then approach our clients and attempt to identify the changes, and agree to the value of the new concepts [non-print] in communication. Our main goal is to continue a valuable relationship with their help, input, and support. The theme of our new marketing program is 'Goodbye to being just a printer and hello to being a communications solutions provider."'

But does this change in focus mean that the industry's operating companies should abandon print? No, say Davis and Paparozzi.

Explains Davis, "Printers simply have to recognize and accept that we live in a multimedia world. Having said that, we need to realize that print has a distinct advantage right now over other communication forms because it has a more developed infrastructure in terms of production, delivery, and marketing impact. Nobody has figured out yet how to make money advertising over the Web."

However, both of the industry's chief economists warn that printers cannot afford to ignore alternative media either, a lesson that at least some printers appear to grasp. Printers large and small have begun to redefine the focus of their firms to include a broader range of communications services.

COMMODITIZING PRINT

Printers are becoming more of a commodity, observes Joe La Valla, president of Integrity Graphics, a $12 million Windsor, Conn.-based communications services company that offers prepress, printing, and binding services. The company will add mailing services this year.

La Valla says that printers have to realize that customers can go just about anywhere and get a high-quality printed product. Thus, he says, the key to keep customers is to offer more services. Also, La Valla advises printers to stop competing on price and focus on creating value-added relationships with customers.

Furthermore, he says, "Printers need to be involved in a given communications project from beginning to end. They need to act as a consultant during the sales process."

MOVE IS WELL UNDERWAY

At printing giant R.R. Donnelley & Sons Company, Chicago, the move from being a printer to serving as a communications service provider is well underway. "We've been transforming our company into a being a service provider, with print being just one of the key communications channels," explains Lisa Azzarello, vice president of corporate strategy and planning for Donnelley.

At Donnelley, which booked $5.2 billion in sales in the most recent fiscal year, managers opted to expand the company's focus and product offering based on ongoing market research and analysis, a survey of client demands, and observed changes in their clients' marketplaces.

"Our customers are trying to become multimedia, multi-channel marketers," says Azzarello. "For example, consider Martha Stewart, one of our major customers. She started out on television and now produces books, magazines, catalogs, and a Web site."

In turn, Azzarello says that customers want a provider that can supply an integrated offering of communication products.

DIGITAL CONTENT TO DELIVERY

As she explains, "We can capture digital content and convert that content to deliver a magazine, catalog, book, digital printing, electronic book, e-mail, or Web site. We can also provide delivery of products, whether printed media or parcels, through our logistics business."

Early in 2000, Donnelley's logistics services business unit acquired Minneapolis-based CTC Distribution Direct, which is reported to be the largest mailer of business-to-home parcels in the United States.

The purchase doubled the size of Donnelley Logistics, with the resulting enterprise billing $800 million in gross sales each year.

Azzarello says that effectively serving a customer requires both understanding current needs and anticipating future demands.

"We spend lots of time trying to figure out how we can be the most effective provider of communications solutions to multi-channel marketers, because there are lots of opportunities for print products that improve response rates and decrease waste," says Azzarello.

REVOLUTIONIZING EFFECTIVENESS

She adds that communication effectiveness is a major strategic focus at Donnelley. "We are channeling our resources and energy into finding ways to revolutionize the effectiveness of communications," Azzarello explains. "We have a technology center that employs close to 100 engineers and holds 180 patents, 20 of which are for emerging digital print technology."

Technology has and will continue to influence the course of the industry on many fronts, from keeping up with the competition to improving operational efficiency to changing the very nature of communications itself.

"We've seen digital technology change printing, and it will continue to dominate," says Integrity Graphics's La Valla. "Direct-to-plate systems will remain a hot item, but interest in digital direct-to-press systems will intensify. We think that digital presses capable of imaging variable data will sell big. Vendors still need to work out some of the kinks, but I think we'll see more digital presses installed in 2001 than have been installed so far in the entire marketplace. In about 10 years, I predict that digital presses will be the industry norm."

NO SLOWDOWN EXPECTED

But don't expect the pace of technological innovation to slow any time soon, says PIA's Davis.

"Industry suppliers and manufacturers are still bullish on this industry, and they're continuing to invest in the basic processes," he asserts.

Also, printing industry vendors play a vital role in guiding the industry. NAPL's Paparozzi says that many of the industry's leading companies recognize that their vendors are valuable partners that not only provide technology assistance, but also can report on larger industry market trends.

FOCUS ON EMPLOYEES

Finally, Paparozzi says, printing companies must not forget to focus on employees.

"The cost of staying technologically current doesn't involve just the cost of the hardware and software, but the cost of developing the skills of staff members to use the hardware and software profitably and productively," he explains.

The NAPL economist reports that there is growing recognition in the industry that developing a stable, profitable labor force is just as important as developing state-of-the-art equipment. In fact, he says, the industry's top performers also accommodate the changing needs of employees.