Industry Professionals Confront Change
Manufacturers and distributors report on what's working, what's changing and what's in store for the future.
End-users continue to demand the best for the least, as fast as possible, driving distributors and manufacturers to draw on their creativity and problem-solving skills to make it happen. Meanwhile, dynamics within the independent channel, as well as within the ranks of the major directs, are shifting, creating both opportunities to be explored and obstacles to be surmounted.
Several manufacturers and distributors spoke with BFL&S about their products and services, relationships within the supply chain, the impact of the major directs and their outlook for the future.
Profitable Products And Future Potential
Strategic planning for suppliers is a delicate balance between gearing up to satisfy current market needs and positioning their capabilities in anticipation of future trends. Without a crystal ball, it's tough to do, but successful business owners know how to draw on their strengths and experiences in order to grow.
At Libman Business Forms/Prima Data, Green Bay, Wis., integrated forms/labels represent a significant growth area. President Dennis Dickinson noted, "The Web technology involved fits in well with what traditional forms manufacturers do, and it's relatively inexpensive compared to other diversification options." Dickinson's second-largest growth area is variable digital data printing, including statement processing and direct mail. "We wanted to get into a different technology in a growing area, so we established Prima Data," he said. "I expect that it will eventually generate more revenue than business forms."
Karl Karch, general manager for Fredericksburg, Virginia-based Newtown, reported that unit sets, cut-sheets and value-added products—including integrated labels with high color—are the most profitable product lines. The company recently purchased a six-color Didde press to expand its cut-sheet work and is equipping a five-color Harris press with UV capability to increase its integrated label offerings, as well as four-color process and jobs with heavier ink coverage. Karch added that having a Hunkeler press is advantageous, allowing the company to capitalize on demands for small to medium-sized runs.
According to Peggy Carlson, sales and marketing manager for Kay Toledo Tag/Special Service Partners, Toledo, Ohio, bar-coded tags are hot products utilized in every market from agriculture to warehousing. Noting the tags' promising potential for satisfying warehousing applications, Carlson said that the company is closely monitoring developments with RFID (radio frequency identification) technology, particularly with regard to standardization and costs. "For now, bar-coded tags are providing customers with the same information—it's just a different type of carrier. We are also investing in ink-jet technology that will provide colored bar codes for added value," she said.
At Carol Stream, Illinois-based Team Concept Printing & Thermography, President and CEO Tony Rouse reported that the company is producing approximately 1.5 million business cards a day. "This is our key profit point," he said. "The second is full-color, short-run work."
Labels, plastic cards, tags, coupons and variable imaging top the list for John Shanley, president of Labels West, Woodinville, Wash. He agreed that run sizes will continue to shrink while order frequency increases.
Robert Dillingham, president of Hi-Tech Printing, Fairfield, Ohio, said that his most profitable products are pre-printed, variable-imaged labels, die-cut sheets up to 17x22˝ for static offset or electronic digital printing, and small-diameter rolls that are printed, variable imaged and diecut. "The label market is maturing, excess capacity abounds, and the competitive environment continues to tighten," he observed. "Specialization into niche markets to generate better profit margins is a way out of the commodity market."
Carrollton, Texas-based Goodwin Graphics manufactures multi-part impact mailers and pressure-seal products. "Conventional mailers are still pretty good to us," said President Tim Goodwin. "But, that line is shrinking and is being replaced by pressure-seal, as more and more end-users outsource their statements and invoicing, and impact printers are replaced by ink-jet and laser printers." He added that pressure-seal products used to offer better profit margins but have fallen down to approximately the 30 percent range.
David Swan, sales and marketing manager for Belknap Business Forms, Mayville, N.Y., said that transitioning into specialty niches and proprietary work has been sustaining the company. "Our niche is in using a lot of offline equipment on jobs requiring a series of unusual post-press features, such as unique die cutting, perfing and affixing that are all done under one roof for efficient turn times and overall quality control," he explained. "One medical form requires special paper that only two manufacturers in the United States handle, while with another form for the drug industry, it's the stringent quality and fulfillment services that make it special."
The company draws on the expertise of its engineers and operators to create equipment for special projects by combining different pieces of equipment to perform new functions. "Sometimes, it drives the operators crazy," said Swan, "but it is profitable."
Distributors' Choice
As for distributors, they continue to diversify while focusing on adding value to the products and services that they provide to end-users. Not surprisingly, profitable products among the contributors cover all of the major product groups—forms, labels, direct mail, commercial printing and promotional products. The distributors' responses also bear out the need to transition into unique niche markets in order to sustain growth and profitability.
For John Sanders, president and CEO of St. Louis-based S.W.M. Printing & Promotions, value-added commercial print products—particularly direct mail, plastic card applications and labels—are top products.
Mike King, sales manager at Midwest Single Source, Wichita, Kan., reported that statement and document processing, forms, mailing equipment and labels are in demand. And, fulfillment projects and four-color brochures generate significant revenue for Jon Shubin, president of Galaxy Distributor Resources, White Plains, N.Y., while at Integrated Document Solutions (IDS) in Dallas, President Walt E. Smith said that pressure-sensitive labels, commercial four-color printing, bar coding and peripheral equipment are top sellers. He added that the company will continue its efforts to add contract document management services to national multiple-location organizations. "We will also concentrate on RFID opportunities with our software and hardware alliance partners," said Smith.
Dan Currie, president of Huntsville, Alabama-based Currie Systems, reported that labels and pressure-seal products are among the company's best sellers. "We'll continue to look for other niche product lines, such as direct mail and pressure-seal offerings, or anything related that no one else is providing," he said.
"The label business is growing rapidly," said Gary Dunlap, president of The Venture Corporation, Lewisville, Texas. "We have added two presses to keep up with the growth," he continued. "This year, we're focusing on managed print programs, especially in the area of labels."
Said Bob Cronin, CEO of MAC Graphics Group, Terrace, Ill., "Our most profitable products include commercial printing and direct mail. There is certainly a commoditization effect in all areas of our industry as we deal with overcapacity, the Internet and overseas pricing pressures."
Chip Grayson, president of SBF, Savannah, Ga., said that customizing laser invoices with color and graphics has been successful, and that direct mail accounted for 77 percent of SBF's overall sales last year. Commercial printing and office furniture—including a $500,000 sale of cubicles, conference tables, desks and chairs—have also been strong. He went on to say that hiring a few sales reps with backgrounds in furniture sales and becoming a distributor for two major national furniture brands are paying off.
Continued development of its Web-enabled pick-and-pack service is also a main focus this year for SBF. "We have a huge warehouse where we store a number of products for several national companies that may own 700 to 1,000 retail stores," Grayson explained. "Orders placed on our Web site are electronically transmitted to the warehouse and printed out on a pick-it ticket that is used to fill the order."
For Tricor Print Communications, Portland, Ore., commercial printing and forms generate the bulk of the revenue. Curtis Toops, vice president of marketing and sales, said that promotional products, particularly wearables, is a strong growth area, as it is for many of the contributors.
"Sales of promotional products have opened doors for us, particularly in getting us into new arenas or by adding to what we sell to existing clients," said King. "Some of our clients purchase only promotional products from us, but they are potential customers for our other product lines."
Sanders said that promotional products sales will continue to be part of the industry's overall product mix, as well as a door-opener for most independent distributors. "Although the profit margins on individual orders are higher than other products, the need to develop the necessary volume levels with the presence of online stores and fulfillment programs will continue to be a tough hurdle to overcome for most independents," he noted.
Currie believes that advances in Internet technology make it easier for distributors to sell the items. "Promotional products tend to take longer for the sales cycle, but combining these items with printing is opening new doors for us," he said. "We are able to research the products' Web sites, and some manufacturers also send us electronic product newsletters that we can customize with our company information and e-mail to clients."
Partnerships for Value-Added Service
The independent supply channel has long prided itself on the quality, service and overall pricing it offers. Strong partnerships between suppliers and distributors that include product education, and solid relationships between distributors and their customers—where business needs are fully explored and understood—are foundations for success. "I've noticed that we have many more forms companies' representatives calling than we used to," said Grayson. "We try to form relationships with companies that will help us out during a jam—maybe even move an order up when we need it—and that provide the best overall products and service."
According to Cronin, "The manufacturer/distributor relationship is a matter of finding out who you can trust with your livelihood. In essence, that's what you're doing, and you'd better know and understand those whom you are entrusting with your business." He said that he has taken "some hits" over the years from manufacturers who eliminated his company from the loop. "It hurts, certainly, but you just don't allow yourself to be stung again by those who violate your trust," he said.
For Currie, pricing and late deliveries are big concerns. "We had a problem with a large promotional products supplier last year. They were extremely late on a large order, and at one point, even stopped answering the phones," he said.
For manufacturers, Karch pointed out that the independent distributor channel is an excellent means of penetrating all customer bases, including Fortune 500 companies. "Strong relationships, competitive pricing, on-time delivery and outstanding customer service with a personal touch are keys to our business," he said.
Karch urged ongoing distributor education. "We still have long-term distributors who don't know that we produce certain products because they get into a comfort zone with some suppliers for particular items," he said. "Good communication is extremely important when you are expanding your product line."
As turnaround times continue to shrink, Goodwin noted, some distributors are developing what he calls a "Kinko's attitude"—drop it off at 9:00 and pick it up by 5:00. "However, many distributors do understand that this is not an overnight business and don't have unrealistic expectations of what manufacturers can do," he added. "I am very interested in the 'soft proofing' technology that is coming out, which allows you to send a proof via the Internet and could cut the process down from a week to 10 days to just 48 hours."
Direct Challenge
One peccadillo that many are uncomfortable even mentioning is the fact that some manufacturers who pledge their allegiance to the independent supply chain do, in fact, participate in direct selling to end-users. "We make every attempt to locate a source that does not sell directly to the end-user," Smith said. "Many do, especially if they are taking a new product to market and it is not embraced by the independent distributor network. In that case, who can blame them after they have invested in research, development and roll-out efforts?"
King also said that he would avoid manufacturers who sell direct. "With the exception of commercial printing, this has not been much of a problem for us. But, in our area, there are far too few commercial print manufacturers who only sell through distributors."
Although Sanders and Dunlap are well aware of the practice, like King, they report that manufacturers selling direct doesn't have a huge impact on their businesses. Still, it isn't appreciated. "Manufacturers would be better served by strategically allying with distributors to get out of the sales and marketing arena. Mixed signals are rarely a winning formula for success and profitability," advised Sanders.
But, as Dunlap observed, "The competitiveness of the market is affecting manufacturers going direct and distributors becoming manufacturers."
"If you want to build to $10 million a year or more, you either have to acquire another company or work in both distribution channels," said Dickinson. "Clearly, the vast majority of independent manufacturers have some direct sales—although, I don't know of any who advertise it very loudly." Some manufacturers, he said, might own or invest in distributorships, but he doesn't believe that it's a growth area for most of them. "The issue really doesn't have much of an impact on guys like me who only sell through distributors," he said.
According to Shanley, all manufacturers sell direct in one way or another. "Some are just more open about it than others," he said. "I don't think it matters if a company sells direct. As a distributor, if you don't trust a manufacturer to stay out of your accounts, then don't use it. If I trust a supplier to not back door my accounts, I have no reason to be concerned that he happens to pay an in-house sales person to sell the same types of products I sell."
Swan commented that most manufacturers who sell direct to end-users handle it appropriately. "They only have a few house accounts that, because of volume, don't want to deal with a middle man," he explained. "And, end-users' loyalty to local distributors who can be at their doorstep if needed and who offer a stable relationship is much greater than one would imagine. Sure, they may be playing one distributor against another in the neighborhood, but they still keep it in the neighborhood."
Perhaps Toops summed it up best. "It's really no different than working in a marketplace with other distributors. Competition is competition," he said.
Bigger and Better?
Many distributors are forming what appear to be super-distributorships that are strong enough, in some cases, to dethrone the major directs when it comes to servicing national accounts. What does this mean for the independent supply chain? Will it force smaller distributors out of the picture?
Smith doesn't foresee larger manufacturers abandoning the business from small to medium-sized distributorships. "With the pricing pressures that the larger distributorships will demand and the potential fee contributions they require from manufacturers, the bottom line will suffer. Even though they could generate more volume, it will be a marginal gain in the long run," he said.
"Still, at this point, I don't feel that I can judge the super-distributorships and the effect that they will eventually have on the industry," Smith continued. "Proforma and American Solutions for Business have proven that they have a business model that works for them. Regarding IBSA's [International Business Solutions Alliance] contract with Novation, the company has not yet had time to demonstrate that it can make the contract work."
While King reported that he sees little presence of the super-distributors in his market areas, he noted that IBSA is definitely having an effect on manufacturer/distributor relations. "The lure of large national account business is compelling many distributors to move business from manufacturers that they have long-standing relationships with that are not IBSA-affiliated to manufacturers that are, even if the manufacturer is not well-known by that distributor," he said. "As a larger distributor, we do use our volume with certain manufacturers to leverage additional benefits, such as larger prompt-pay discounts and free delivery to our warehouse."
Given the fierce competition within the very fickle marketplace, Dillingham and Shanley stressed that manufacturers will continue to value any business partner who helps to keep their presses running. "Our marketing philosophy is based on relationships, and we will go the extra mile for those whom we know will be working with us over the long haul," Dillingham said.
According to Carlson, "The customer comes first, regardless of size. It is all about people, relationships and service, and this is what sends the message of our value proposition to the industry. Everyone is equal, and everyone is fighting for the business." She pointed out that bigger may not always be better, and that smaller companies can seek out opportunities that larger companies tend to overlook. "The key isn't size," she continued, "it is the effort an individual distributor puts into servicing a customer. Repeat business is so important, and it only takes seconds to lose someone's trust and confidence—it can never be won back."
Shanley strongly agreed. "Distributors who provide quality products and services at a fair price, and who do what they say, will be successful no matter what size their company is," he said.
"We have enjoyed a fairly stable distributor base over the years, mostly with smaller companies," offered Dickinson. "We occasionally deal with American Solutions for Business and IBSA sales reps, but don't see the large distributor groups having much of an impact on us yet. Furthermore, Proforma and American Solutions for Business seem to let their reps independently decide how to source their products."
Still, affiliations with large distributorships offer obvious benefits. For Rouse, it can serve as an effective marketing tool. "The formation of large super-distributorships is helpful in getting our name passed quicker through these groups," he observed.
"We see opportunities for strategic alliances with some of the larger distributorships, particularly those focusing on national accounts," said Karch. "We have a strong regional presence, and we feel that our product offerings and services can be very beneficial in particular locations. Distributors who align themselves with national manufacturers, as well as multiple regional manufacturers, can become formidable opponents."
As an IBSA preferred vendor, Belknap Business Solutions has clearly seen a resulting increase in activity. Swan said that such affiliations will be particularly beneficial to manufacturers who get in on the ground level and become established in their niche. On that note, he's concerned that distributors may be reluctant to use the IBSA online quote system for the more unusual jobs—Belknap's specialty. "It may be difficult to explain very involved, unique pieces in an e-mail, so they may call vendors directly. We need to increase marketing so that we are one of the sources that IBSA distributors think of to call for those jobs," he said.
"It's a changing market," continued Swan. "Some of these changes, including preferred vendor alliances, have manufacturers and distributors working together—not just distributors beating up on manufacturers to get the most competitive price out to market."
Although their numbers are diminishing, Swan pointed out that there is definitely a need for smaller distributors to service smaller companies not looking for forms management or e-commerce offerings. "Make no mistake, there are still plenty of one-man shows working out of their own homes who are making a good living and driving expensive cars," he noted.
Major Developments
Ramifications of the shake-up within the ranks of the major directs—and the acquisition of Moore Wallace by RR Donnelly—are being felt within the independent supply channel.
"The demise of the large directs is a natural evolution," said Sanders. "Sales reps coming from those environments have expertise, are more comfortable in large, contract-based environments, and will seek strength in size, numbers and capabilities in order to compete in these markets. In addition, manufacturers fighting for a shrinking traditional business forms market are in a good position to pick up much of this available volume."
Goodwin Graphics, for example, has gotten a lot of work running hot-spot carbonization on 14˝ repeat jobs since a few Moore Wallace plants closed following the acquisition.
On the other hand, the same acquisition had a negative impact on Belknap Business Forms. "Whenever Moore Wallace had a unique project or one that needed to be turned around quickly, we were one of the few manufacturers that it outsourced to," explained Swan. "Since the merger, some of the plants that provided that work have been closed, and we lost approximately a half a million dollars—a significant amount for a company of our size with $7.5 million in sales."
Smith, Currie and Shanley pointed out that while the majors remain formidable competitors, they fall short in a number of important areas, particularly customer service. "The major directs have some severe weaknesses. They are often slow and inflexible," said Shanley, "and this really hasn't changed over the years."
Karch observed that the majors are facing their own unique challenges right now. "The major directs are very focused on their infrastructures as a result of acquisitions. It is easy to lose sight of the core business and customers while trying to assimilate various cultures and organizational issues," he explained. "We don't feel that the majors are impacting the small to medium-sized manufacturer that's committed to the independent distributor and smaller customers. Certainly, the larger national distributors are taking advantage of the opportunities to compete against the directs for national contracts."
King agreed. "We do not view the major directs as serious competition, especially in the mid-sized accounts that we target," he said. "When we do compete against them, however, we find them to be easier to overcome than other distributors since they usually don't do a great job on service."
Said Dunlap, "The majors will always be tough to beat in large accounts, such as Frito-Lay or JCPenney's. But, they are not very big competitors in the middle market, which is more profitable and less traumatic if a company loses the account."
Grayson explained that SBF is by far the largest forms distributorship in his area within a 160-mile radius. "We haven't experienced the kind of competition that is prevalent in major cities. I would almost rather see a major move to the area than have to compete against some of the smaller distributors here," he said. "The majors generally don't have the flexibility that smaller distributors have, their prices are structured and, in general, they are a bit higher on smaller orders."
New Blood
Changes within the major directs have resulted in a multitude of displaced but well-trained sales professionals looking for new career opportunities. Dickinson welcomed the influx. "With the majors cutting out the small to medium-sized jobs, many of their former reps are either going to work for existing distributorships or are starting businesses of their own," he said. "Having more people selling through the independent channel rather than through the direct channel is a plus for us."
While Sanders shared Dickinson's sentiments, he said that there is no guarantee that these professionals will succeed in their new roles. "There is a professionally trained and experienced talent pool of sales and marketing specialists looking for an opportunity to continue their industry careers," he pointed out. "However, the price is high for most independent distributors, and there are no guarantees that these professionals can or will continue to be successful in a very different environment."
For Sanders, the dismantling of the major directs gives independent distributors a chance to spread their wings. "Without the presence of real brands in the market, independent distributors can profit from increasing their brand awareness with advertising and marketing efforts designed to establish or re-establish their companies' brands and capabilities," he said.
The View from Here
According to Shanley, "The economy is slowly improving, and activity is more robust now than in the first quarter of 2004." That's the good news. The bad news is that manufacturers and distributors must now contend with increases in paper, ink, postage and fuel costs.
"Paper is 50 percent of the cost of a form, and given our size, we need to pass the increases on," Dickinson said. "Plus, there is an overcapacity in the basic forms industry, and there are companies that don't pass cost increases along—or pass along just a portion of them—which makes it harder to deal with in situations where we are competing against those companies."
"I'm hoping that paper manufacturers will realize that increased paper costs are driving people out of business and will stabilize prices," Goodwin said. At one point last year, his company saw an 8 percent increase in paper and was able to absorb about half of that cost. "Then, a couple of months later, a second increase was announced, and we had no choice but to increase the cost of materials to our customers," he said. "Postage also continues to concern me."
Swan said that the larger conglomerates, such as Ennis and Cenveo, are even bigger threats to independent manufacturers than the major directs. "These companies can buy paper at significantly lower costs than we can because of sheer volume, so we are immediately at a 10 percent disadvantage," he said. "It makes it tough for smaller companies when a big manufacturing conglomerate has plants all around them and is producing similar products at better pricing, in addition to offering golf trips, new cars and other attractive promotions."
Others, such as Smith, reported that cost increases have had no adverse effect. "Paper pricing increases only add to the overall sales of our organization," he said. "Although we can increase revenue without adding additional business, it is difficult to explain the amount of the increase to educated buyers when they can go online and see that pulp prices aren't increasing as much as our paper manufacturers are quoting."
And, it's not just stock, as Carlson pointed out, but increases in everything from eyelets to fasteners that Kay Toledo Tag/Special Service Partners is grappling with. She said that the company just keeps tightening its belt to avoid passing extra costs on to distributors. "In some cases, maybe we don't make the profit that we used to, but we are lean, and we are going to stay lean," she said. "Distributors can't sell something for $1 one day and then sell the same product for $20 the next. This would be a huge shock to customers, and it simply won't fly."
Karch believes that pricing increases will spawn other technological alternatives to traditional, paper-based forms. "However, with all of the suppliers increasing prices to all printers within days of one another, we don't see price increases having an adverse effect on Newtown's sales," he said.
King and Toops shared Karch's sentiments. "As costs rise on paper and postage, more end-users are looking for ways to reduce expenditures through the implementation of e-forms, e-marketing, and electronic billing and payment methods," said King. "Over time, the adoption of these new technologies will continue to negatively affect the industry." Toops added that increases in material costs work as an incentive for end-users who are considering a switch to electronic technology.
However, Grayson noted that disappointments in online advertising have brought many customers back to traditional direct mail. "For a while, there was a trend toward e-mail advertising, but now that it is more difficult to get messages to prospects with spam-blocking software, there is a strong turn back toward direct mail," he said. "When I go to ad specialty trade shows, I look for creative products that could be included in a direct mail package. Then, I try to match the products with the customers that I think would like to have them included in the mailing."
Grayson added that being honest with customers when it comes to pricing goes a long way. "I never tell my customers that they're getting the best price because another distributor could always sell it for less," he explained. "But, I do emphasize that I know their business and that they are already satisfied with our services."
Sanders simply put a positive spin on handling the challenges of rising costs. "If increases in health and business insurance, technology, taxes, and employee payroll and benefits are anticipated and addressed in a proactive, planned manner, it will lift the distributor above the competition," he said.
Thoughts for the Day
Commenting on the industry in general, most contributors observed that end-users are more focused and are becoming better at managing their inventories, which is driving smaller run sizes. "The trend is definitely moving toward smaller run sizes, competitive pricing and shorter delivery cycles," said Karch. "Because Newtown is oriented toward medium runs, we're well positioned for this market."
Said Dillingham, "Most customers today are making the 'just-in-time' theory work by demanding quicker turnarounds, lower inventories and less travel time." He pointed out that industry consolidation is thriving, giving the larger consolidators greater buying and marketing power. "In addition, difficulty in attracting quality employees for manufacturing positions is the main factor that drives more automation."
According to Swan, "Distributorships exist in a buyer's market, while there is a saturation of manufacturers such that we have to sell at dirt-cheap pricing and often barely get by. Distributors are looking at gross margins of more than 20 percent, and we are at approximately 4 percent. Of course, it depends upon your debt structure, but it's an industry where manufacturing is taking a beating."
Swan said that many manufacturers don't have millions of dollars to dedicate to the research, development and marketing of new products. "Sure, there are RFID tags and other people right on the cutting edge of technology. But, while forms manufacturers can find profitable niche markets to serve, it's not necessarily going to be based around some fantastic product that just came out and is revolutionizing the world."
"It is very difficult for someone to take a customer away anymore," noted Grayson. "But, I do think that retailers, such as Kinko's, that sell directly and offer a host of services—including print-on-demand—will begin to pose a serious threat to distributors in the future."
Currie said that his business has already been affected by large retailers, such as Office Depot and Staples. "We have approximately five large distributors in our area," he added. "But, most of their business is out of town, so we haven't felt the pinch of reduced sales."
Currie also stressed that educating customers is key to retaining business. "When people shop through the Internet or at other retail locations, they usually base their decision on price and not on quality," he said. "We try to educate our customers on the benefits of buying locally and supporting the local economy."
Despite challenges and setbacks, industry professionals know that a positive, solution-oriented approach is the path to profitability. Product lines will evolve through diversification, and relationships between manufacturers and distributors will strengthen through communication. Everyone in the supply chain is working toward the same goal—meeting end-users' needs with the best in quality and service to maintain a competitive edge.
By Maggie DeWitt and Cynthia T. Graham