Living Among Giants
Just last year, Print+Promo's State of the Industry report addressed a big overhaul in marketplace realities. Suppliers and distributors alike finally tossed out traditional ink-on-paper models in favor of a service-based approach, creating a path for historic opportunities. Those opportunities, it turns out, came in the form of historic acquisitions.
On Aug. 1, Standard Register rocked the industry with some startling news. The company had acquired Dayton, Ohio-based WorkflowOne in a transaction valued at $218 million. According to the Dayton Business Journal, the acquisition had been touted as creating "one of the largest printing and print management companies in North America."
Not to be outdone by the competition, in late October, Chicago-based RR Donnelley & Sons Company signed a definitive agreement to acquire Consolidated Graphics. A release noted that under the terms of the transaction, Consolidated Graphics shareholders would receive a combination of $34.44 in cash and a fixed exchange ratio of 1.651 RR Donnelley shares for each outstanding share of Consolidated Graphics they owned, or $62 per share based on RR Donnelley's closing share price on Oct. 23. The end result was a transaction valued at approximately $620 million, plus the assumption of Consolidated Graphics' net debt.
The little guys can't seem to catch a break. Now that the recessionary dust has settled, small to mid-size companies are mapping out survival plans for a game ruled by giants. While survivors cut through the corporate chaos, many are left to wonder if the print industry is standing on shaky ground. The answer depends on whom you ask.
Dr. Ronnie H. Davis and his team at the Printing Industries of America (PIA), Sewickley, Pa., remain cautiously optimistic. "I think the biggest misconception about printing is that it is in decline, that sales are shrinking and the industry has a distressing future. This misconception may be more prevalent among outsiders than those in the industry, but even within the industry there are some that hold this negative view," said Davis, PIA's senior vice president and chief economist at the Center for Print Economics and Market Research.
The proof is in the numbers. In addition to almost 50,000 establishments and one million employees, PIA measured more than $150 billion in sales, highlighting the industry's large economic footprint. Davis pointed out that the North American printing industry is generally stable in terms of total shipments compared to last year-a trend that supports PIA's previous forecasts calling for relatively flat sales from 2013 to 2014.
However, a closer look reveals a mixed bag of patterns and sales trends. "Beneath this stable surface, there are significant dynamics. In terms of sales by specific product and service categories and printing processes, sales trends are decidedly mixed," he commented. "Further, there are printers with high sales growth and also printers with rapidly declining sales and printers with high profits and also high losses."
Davis sees the most profitable segments being what he calls print logistics-packaging, labels, wrappers and product user manuals-an area that lacks a digital competitor. On the other hand, print that informs or communicates factual and editorial information, such as magazines, newspapers, books and reports, has suffered the most, due to digital advances. Print that markets and promotes (e.g., catalogs, direct mail and brochures) hangs tough in second place.
Davis explained the process behind these findings. "We divide the print market into 31 product and service categories for our 'demand index' that is calculated by subtracting the proportion of panelists experiencing a drop in demand from the proportion experiencing an increase," he said. "Our 11 hottest markets have a demand index in excess of 50."Interestingly enough, PIA's top 11 markets share a common theme-with a few exceptions, they are web-based, marketing service-focused non-print services. The list includes:
- Web-to-print storefronts
- Web development services
- Signs and signage
- Integrated marketing services
- Fulfillment services
- Database management services
- Media marketing support
- Food and beverage labels
- Specialty printing
- Quick printing
- Mailing services
Will stability win out in the future? Several variables could drive the industry's performance. Of course, the economy carries the most weight. According to Davis, the industry closely follows the direction of the economy. The bad news is it falls harder and declines at a more rapid speed in economic downturns, leading to a protracted recovery.
"The 'sweet spot' for the industry is when the economy is in a mature recover phase," Davis remarked. "Actually, we are in this phase now, although it is an extremely tepid recovery.
"Over the last few months, our economic outlook for 2014 has been decidedly pessimistic when compared to the consensus. However, over the past few weeks the consensus outlook has been lowered and now matches PIA's," he continued. "Our consistent view is that the U.S. economy will likely grow just slightly more than the 1.9 percent rate achieved in 2013-around 2.2 percent. Our view of 2014 print markets is that shipments will be relatively stable." Other areas to watch are continuing headwinds from weak global economic conditions, Obamacare fallout, low interest rates and inflation, and the USPS saga, Davis cautioned.
Long-term, the forecast is more encouraging. Assuming the economy sees modest growth in the 3 percent range, Davis believes total industry shipments are likely to stabilize or experience slight growth, with some functions, processes and sectors enjoying marked success in the next 10 years.
In an industry where large conglomerates gobble up other big companies and consumer habits evolve, simply "getting by" becomes dangerous. As Davis mentioned, "If printers do not have a plan for 'the right thing to do,' they will not be able to 'do things right' within the plan."
The key is to get noticed by the right people. Distributorsand suppliers have responded to the challenge by spending their creative energy on client relations. Print+Promo wanted to learn more, so we reached out to experts in four major market niches. Read on as they discuss bright spots, problem areas and strategies for growth.
ON PRINTED FORMS
The Participant: Jeff Russell, president, Major Business Systems Inc., Hillsborough, N.C.
Print+Promo (P+P): What are your thoughts on the current state of the forms market?
Jeff Russell (JR): The forms industry has always been a leading economic indicator and it reflects a rather anemic recovery. Unfortunately, even this slight recovery has been impeded with non-economic issues such as the EMR (electronic medical record) mandate. However, there are signs of stabilization in the unit set market and recently we have seen signs of recognition by end-users of the high cost accumulation of toner, maintenance contracts, etc., and that the business form in fact is an economical tool with which to conduct business.
P+P: What do you think the biggest changes will be this year? What will drive them?JR: Mergers and acquisitions (M&A) activity in the manufacturing sector is a sign of the times. We believe the marketplace will put a demand emphasis on service. Our conception of what we deliver now is not that of a product, but a service to conduct business. That is why, as an independent manufacturer, we have positioned ourselves to deliver a "boutique style" of products from under one roof in a much quicker fashion than the large conglomerates that have come to be in our industry.
P+P: Are there any misconceptions about the current state of the forms market?
JR: As I have visited numerous distributors and shown them unique product designs and niche markets that are available, a common comment is, "I would like to get back to my core competencies, which is selling forms and labels, I enjoyed that." They see that there is still a value-added market, not just commodity markets. However, there is a systems sale aspect to this and it may require more collaboration with the manufacturer and end-user. This is a service we offer and we see it embraced more and more in the distributor/manufacturer relationship.
P+P: Based on past trends, what are your expectations for the future of the forms market?
JR: We believe the independent manufacturer and distributor will be able to aptly serve the future of the forms market because we will be flexible enough to change quickly and personable enough to provide a relationship that users still value.
ON LABELS
The Participant: Jeff Salisbury, president, Label Impressions Inc., Orange, Calif.
Print+Promo (P+P): What are your thoughts on the current state of the label market?
Jeff Salisbury (JS): The label market is quite a bit different from what it was 10 or 20 years ago. Labels have taken on a larger role in packaging and print in recent years with the advent of multi-process presses, digital printing, rotary screen and foil, and advances in adhesives and substrates.We're seeing more and more challenging applications and a demand for specialty label products such as tactile finishes, high-opacity whites, multi-layered labels, and multi-sensory products incorporating scent, tactile feel and even taste.With regard to sourcing, our experience is that since the recession buyers and marketing folks are working with fewer resources. Decision-makers are now doing the job of two or more people and as such don't have time to entertain a lot of new vendors. Instead, we see them looking to their trusted partners who in turn bring the work to us, so we're very focused on building relationships with distributors and brokers.
P+P: What do you think the biggest changes will be this year? What will drive them?JS: We're seeing a huge shift in sourcing as Wal-Mart and other companies push the "Made in America" mantra. Sourcing overseas is becoming less of a threat as higher freight costs, delivery concerns and pricing increases from overseas competition are sending people back to the U.S. for their product labels.
P+P: How is your company keeping up with marketplace demands?
JS: Overseas sales of U.S. products (requiring multilingual labeling) and increased regulations here in the U.S., as well as smaller packages and reduced packaging, are the biggest drivers of the increase in extended text label demands we're seeing and we've made a million-dollar investment in coupon label and extended text label production technology to help us drive cost out of the multi-part label as a result. We've also invested heavily in cold foil technologies in order to help reduce the cost of higher value decorating effects on labels and flexible film. It seems everybody wants a product with a million-dollar look, but with a budget of just a few pennies. With our cold foil, rotary screen and other special effects technologies we're able to help clients achieve this.
P+P: Are there any misconceptions about the current state of the label market?
JS: There is a huge misconception among print brokers and other label buyers that digital is the way to go for labels, but we see those customers eventually migrate back to flexo as they see the limitations of digital-specifically color consistency, which is a growing problem with digital, CMYK label printing.While we see digital as a fast-growing area of label printing, it is not a panacea for the typical concern of setup costs and certainly not a one-size-fits-all solution. With high-definition flexo and advanced screening processes, flexo has not only maintained its position as the lowest cost/highest quality option for labels, but now also rivals offset and rotogravure at a fraction of the cost. And with in-house digital platemaking and magnetic dies, savvy label printers are able to keep setup costs low enough to justify the move to higher quality, lower cost, flexo label printing.
P+P: What is the best type of advice you can offer to novice distributors leery of entering the label sector?
JS: My advice is to not be afraid of saying "yes" to your label customers, take the time to get educated and, most importantly, to pick the right partner. The more you know, the better a partner you'll be to your clients. It's important to fully vet your label printer. Tour the plant, ask about his or her process-are plates made in house, are they high-definition? What testing equipment and processes does your printer have, what equipment is used and what is the age of that equipment? Then ask for a formal education. We like to come in and stage various "Lunch and Learn" sessions where we bring in lunch, product samples and even plates and tooling for an interactive education session. It's amazing how much distributors learn after just one lunch.
ON PROMOTIONAL PRODUCTS
The Participant: Marc S. Simon, chief executive officer, HALO Branded Solutions, Sterling, Ill.
Print+Promo (P+P): What are your thoughts on the current state of the promotional products industry?
Marc S. Simon (MSS): The current state of the promotional industry is excellent. The industry has enjoyed growth for each of the past 40 years with the only exceptions being 2000 to 2001 and 2008 to 2009. Further, of the 14 major advertising and marketing segments in our economy, the promotional products industry is the eighth largest and fourth fastest growing. If the pace of growth and shrinkage of each of the 14 segments in 2012 is repeated when 2013 numbers are announced, we would be the sixth largest advertising and marketing segment. Our growth is driven by the simple fact that promotional products work. [...] As our world changes, promotional products are flexible to change as well. Where buggy whips could have been decorated when they were a great sales meeting giveaway, flash drives and smartphone and tablet accessories are now being decorated with marketing messages and brand logos.
P+P: How is your company keeping up with marketplace demands?
MSS: Our clients face tough competition in their industries. We must be effective and efficient as we deliver unique and creative solutions to meet their needs. As a result, the robust functionality and broad product selections of HALO.com allow our clients to interact with us when and in the manner they want. Our online fulfillment programs allow our clients to control different levels of password access, real-time inventory and same-day service. Our suppliers value receiving our orders electronically and production ready, recognize the large volumes of business we place and appreciate being paid on strict 30-day terms. As a result, we are able to source products at the most attractive cost and offer the most attractive pricing to our clients.
P+P: Are there any misconceptions about the current state of the promotional products industry?
MSS: The notion of "swag" and promotional product purchases as wastes of government money is something we need to continue to combat. We remind those same politicians that they turn to promotional products for their election campaigns. Our product can be inexpensive and narrowly targeted to the specific voters they wish to reach, and can convey themes to differentiate the candidate.
P+P: What corporate social responsibility issues face the industry, and has your company taken any measures to address them?
MSS: The Consumer Product Safety Commission enforces federal law designed to foster safety. Our industry's trade association has taken a number of steps to educate industry participants as to their responsibilities under law. HALO has been one of the industry companies that have taken the lead in fostering industry awareness and compliance. Our rigorous testing and screening processes make us industry leaders in protecting our clients' brands from the risks associated with unscrupulous manufacturers.
P+P: How has the global economy affected the promotional products sector? What kind of plan or growth strategy have you implemented to stay relevant and profitable?
MSS: The global economy has had profound impact on our industry. Products can be sourced much more economically. Overseas communication and travel opens more markets to the most cost-efficient manufacturers despite shorter and shorter lead-time requirements and [shrinking] minimum quantity purchases. However, the lack of direct access to many of these overseas suppliers increases product safety compliance risks. At the same time, U.S.-based companies compete in markets around the globe and require global solutions to allow for uniform branding consistency in making product available to their outlets anywhere in the world. All of this has served to limit the ability of smaller industry participants to meet the increasingly sophisticated needs of the largest purchasers of promotional products.
ON DIRECT MAIL
The Participant: Summer Gould, president, Eye/Comm Inc., Santee, Calif.
Print+Promo (P+P): What are your thoughts on the current state of the direct mail sector?
Summer Gould (SG): The biggest problem area in direct mail right now is the state of the USPS. The Postmaster General has been trying to get Congress to pass legislation that will allow them to make changes so that they become profitable again. However, with the current state of Congress, this does not seem likely this year. So the USPS not only raised postage rates like they usually do, but they also added on to the increase with an exigent rate case, in order to help raise revenue. What this means for the industry is much higher postage rates and an uneasy feeling about what is to come.
P+P: Can you expand on this a bit? Specifically, how will marketers be affected by issues such as "No Saturday Mail," exigent rate increases, etc.?
SG: Most of the mailing community feels that ending Saturday delivery will not be that big of a deal. We can adjust mail schedules to accommodate that. The exigent rate increase, while expected based on PRC comments, was an unpleasant add-on. The extra postage that now needs to be paid per piece will have an effect on volume. The more it costs per piece the fewer pieces will be mailed. Budgets have not increased for marketing departments, so they are faced with this new challenge. I expect to see customer mailing size go down to offset the increased postage. The Postmaster General stated last year that if Congress passed legislation to help them they would not need the exigent rate case, but that did not happen. It would be most advantageous for Congress to pass legislation that allows the post office to make the necessary changes so that they can stop losing money. I am not holding my breath about that though.
P+P: In your opinion, what will be the biggest changes this year? What will drive them?
SG: The biggest changes this year will involve direct mail incorporating augmented reality and near-field communication. Both of these technologies help bring direct mail to life. They tie mobile technology into direct mail and make it really cool. Recipients of these mailers are truly impressed and they show it off to others. The driver of this technology use is the public. They want to be able to do everything from their phone. This means that mailers need to have mobile response options for them, and what better way to showcase that than with the latest and greatest technology?
P+P: Where will direct mailers excel? How can marketers stand out in this visual media?
SG: Direct mail excels at targeting. It allows companies the opportunity to go after people who are interested in what they have to offer. Direct mail can be very malleable. You can create so many different looks and feels that it can easily be tailored to any message. The best part is that it can be kept for later use in a special file or just up on the fridge.The best way to stand out is with images, color, size, easy-to-read limited copy and multiple response methods, including mobile. Direct mail can be a great way to tap into the senses of not only sight, but also smell, sound and texture. I have even seen some with taste, but that is pretty tricky and would not work with all industries.
P+P: What is the best type of advice you can offer to novice distributors leery of entering the direct mail sector?
SG: Direct mail can really pay off if done correctly. So, first of all, find a good source to discuss postal regulations. The best design in the world will not work for you if the USPS won't accept it. Once you know the design guidelines, plan out who the best recipients will be. Do not blanket mail. Use a list to target who your best recipients will be. You may need to find a source to help you get the best mailing list. Your No. 1 element is list, followed by design, followed by offer. All three of these elements need to be focused-on and well thought-out. It would be best to team up with a company that is familiar with direct mail to help you get the best results.