2012 pia planning_guide

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2012 pia planning_guide

  1. 1. Special Report: A Planning Guide for 2012–2013 Printing Industries of America Economic and Market Research Department Dr. Ronnie H. Davis, Senior Vice President and Chief Economist Ed Gleeson, Director, Economics and Market Research
  2. 2. Special Report: A Planning Guide for 2012–2013 January 2012 Printing Industries of America Economic and Market Research Department Dr. Ronnie H. Davis, Senior Vice President and Chief Economist Ed Gleeson, Director, Economics and Market Research
  3. 3. Copyright 2012 Printing Industries of America All Rights Reserved Printing Industries Press Catalog No. 1853 Reproduction in any form by any means without specific written permission is prohibited. Individual trademarks are the property of their respective owners. Product names are mentioned in this book as a matter of information only and do not imply endorsement by Printing Industries of America. Printing Industries Press books are widely used by companies, associations, and schools for training, marketing, and resale. Quantity discounts are available by contacting 800-910-4283. Printing Industries Press Printing Industries of America 200 Deer Run Road Sewickley, PA 15143 Phone: 412-259-1770 Toll Free: 1-800-910-4283 Fax: 412-741-2311 Email: membercentral@printing.org Internet: www.printing.org/store
  4. 4. Contents Where We Are: Review of Current Trends in the Economy and Print Markets .................. 2 What About the Bottom Line: 2011 Financial Overview........................................................ 8 Where We Are Going: The Economy and Print in 2012–2013.............................................. 11 What to Do: Thinking About Strategy and Tactics............................................................... 12 A Longer-Run View: A Review of Our Expectations Through the Next Decade................. 17
  5. 5. Special Report: A Planning Guide for 2012–2013 Welcome to A Planning Guide for 2012–2013. This special report is another in Printing Industries of America’s series of annual economic and market research reports. This series is designed to help members assess the key trends impacting print markets and to design strategies and tactics to take advantage of coming opportunities and address potential challenges. This report provides an all-in-one environmental scan of economic and print market trends over the past year plus our most current outlook for 2012 and beyond. While readers may recognize some of the material from recent Flash reports, Ratios reports, and other articles and publications, it is helpful to consolidate previous information plus new analysis into a one-stop, soup-to-nuts document for review and planning purposes. Report sections include: •  here We Are: Review of Current Economic and Print Market Trends W •  hat About the Bottom Line: 2011 Financial Overview W •  here We Are Going: The Economy and Print in 2012–2013 W •  hat to Do: Thinking About Strategy and Tactics W •  Longer-Run View: A Review of Our Expectations through the Next Decade A Printers and industry suppliers can use this report to: •  Understand the key trends impacting the economy and print markets. •  nderstand how these key trends influence printers’ financial performance. U •  evelop an anticipated economic and print market outlook for 2012 and 2013. D •  evelop strategies and tactics to improve their operations in 2012 and 2013. D
  6. 6. Where We Are: Review of Current Trends in the Economy and Print Markets The first step to planning for 2012 is to assess where we are now and how we got here. In this section we have assembled materials on conditions and trends in the North American economy and print markets through the past 12 months. The economy’s recovery from The Great Recession continues but at a very sluggish pace. In truth, the recovery barely got up to speed after the official end of the downturn in June of 2009 before backsliding. While it looks like we may get by without a double dip, the economy is cruising at just above stall speed and is in danger of slipping into another recession. The pace of economic growth in the first half of 2011 was dismal—0.4 percent in the first quarter and 1.0 percent in the second quarter. In general, the strength of the recovery correlates with the depth of the recession, but not this time. The “recovery gap” between the 2007–2009 and 1981-1982 recession is tremendous—around 2–3 percent of gross domestic product (GDP) or approximately $300–$450 billion in lost output and millions of lost jobs (Figure 1). The pace of recovery picked up in the second half of the year. The preliminary growth rate was estimated at 2.5 percent in the 3rd quarter. Most likely the economy will limp along at a 2.0-percent pace over the course of 2011 and gain momentum for more modest growth in 2012—perhaps slightly more than 3.0 percent (Figure 2). Updating Print’s Economic Footprint Looking back, print’s economic footprint grew in 2010—at least in terms of the value of shipments. According to Printing Industries of America’s print market tracking model, U.S. printing shipments increased by 2.8 percent in 2010 compared to 2009. The growth was the result of the overall economic improvement and gains in advertising and promotion printing—particularly direct mail promotion in the 2010 election cycle. On the downside, in 2010 the number of printing plants and printing employment continued to fall, since these are primarily driven by structural and technology factors rather than economic conditions. In terms of plants, we estimate that around 1,000 plants went out of business last year. This number was less than the last couple years with the recession speeding up the longerrun adjustments. Total printing employment declined as a result of plant closings and productivity enhancements 2 • Special Report: A Planning Guide for 2012–2013 Sluggish Recovery in the U.S. The Great Recession and 1981–1982 10 8 6 4 2 0 1982 2009 0.3 1.7 5.1 3.8 9.3 3.9 8.1 3.8 8.5 2.5 1982 8.0 2.3 7.1 0.4 3.9 1.3 2009 Quarterly GDP Change (Annual Rates) Figure 1 The Economy 2011–2012 3.5 3.0 2.5 2.0 2011 2012 1.5 1.0 0.5 0 Inflation-Adjusted Economic Growth 2011 2012 2.0 3.3 Figure 2 Tracking Quarterly Print Sales Percent change in year-to-date sales 10 5 0 –5 –10 –15 2008 2009 Q4 Q1 Q2 Q3 Q4 Q1 percent change –1.5 –9.4 –4.8 –9.1 –12.7 1.5 Figure 3 2010 Q2 5.1 Q3 4.6 2011 Q4 5.0 Q1 6.4 Q2 4.1
  7. 7. in 2010. Overall, total printing employment dropped 3.5 percent to 877,400. Sales per plant increased by 6.0 percent for survivors or plants that remained in business from 2009 to 2010. On a more current basis, 2011 print sales increased in both the first and second quarters of 2011 (Figure 3). Preliminary estimates for full-year 2011 are for shipments to increase to $148.9 billion on an annual basis. We estimate the number of printing plants will decline by another 1,000 to around 31,500 and employment will fall by approximately 30,000. Print’s Economic Footprint 2010 and 2011* 2010 2011* $144.6 Billion $148.9 Billion Plants 32,563 31,500 Employment 877,400 847,400 $4.44 Million $4.73 Million 26.9 26.9 Shipments Shipments per Plant Employment per Plant * 2011 Preliminary Estimate Tracking Digital and Conventional Printing Trends also decreased in 2008, while digital toner-based sales continued to increase by 5.3%. On average, total printing shipments increased by 1.0% per year from 2004 to 2010 (Figure 5). What is the source of this relatively high growth in digital toner-based printing? The primary reason is that digital technology is consistent with customer needs for smaller, more flexible printing. Also, digital toner-based printing allows for more personalization and customization. Printing and Other Economic Indicators In general, printing activity is correlated with various economic metrics such as GDP, industrial production, and total employment. As demonstrated in Figure 6, the annual percentage change in total printing, digital printing and conventional (non-digital printing—primarily lithographic) track closely with annual changes in total U.S. employment during the study period. Printing Industries of America survey results also track consistent with trends in nominal or non-inflation adjusted GDP as shown in Figure 7. It has taken almost four years for total U.S. economic output adjusted for inflation to return to pre-recession levels in late 2007. When might printing shipments do the same? U.S. Printing shipments peaked in 2007 at an annual rate of $174.6 billion. They declined to a recession low of $140.7 in 2009 before climbing to $144.6 in 2010— or still 17.2 percent below their 2007 peak. Assuming printing shipments continue to grow at an annual rate of around three percent means that it will likely be around four to six years before they reach their 2007 peak, or sometime between 2014 and 2016. Printers’ shipments of digital toner-based printing in North America increased every year over the 2004–2010 study time frame. The annual percentage increases in digital printing shipments ranged from a high of 10.6% in 2010 to a low of 0.9% in 2009. The overall average rate of increase for this period was 5.7%. (Figure 4). Annual Percent Change in Digital Toner-Based Print Digital toner-based (Sales Weighted by Size of Firm) printing shipments 12.0% 10.6% in-creased significant10.0% ly more than overall printing shipments. 8.0% 7.8% 8.0% Over the 2004–2010 6.6% 6.0% period, the annual 6.0% 5.3% 4.7% change in total print4.1% 4.0% ing shipments ranged from a high of 5.0% 2.0% in 2010 to a low of 0.9% –12.7% in 2009 when 0.0% they were impacted 2004 2005 2006 2007 2008 2009 2010 2011 YTD Average by the recession. Total printing shipments Figure 4 5.7% Average Excluding 2011 Special Report: A Planning Guide for 2012–2013 • 3
  8. 8. Annual Percent Change in Printing Industry Sales (Sales Weighted by Size of Firm) 6.0% 4.0% 3.6% 3.8% 5.0% 3.3% 2.0% 4.1% 2.4% 1.0% 0.6% Average Average Excluding 2011 0.0% –2.0% –1.5% –4.0% –6.0% –8.0% –10.0% –12.0% –14.0% –12.7% 2004 2005 2006 2007 2008 2009 2010 2011 YTD Figure 5 The Evolving Footprint: 1999–2009 Print Sales and U.S. Employment 2004―2010 (Annual Percent Change in Print Shipments Total U.S. Employment) 15% Total Printing Digital Printing Annual Percent Change Now, we take a look back to examEmployment Conventional Print ine changes to the printing indus10% try’s economic footprint from 1999 to 2009. This period is chosen for anal5% ysis because the data is complete 0% enough for analysis by function. From 1999 to 2009 the number of -5% total U.S. printing plants fell from 49,410 to 33,564—a decline of 15,845 -10% (32 percent). In a typical year, more than 1,500 plants ceased operations. -15% Annual printing shipments fell -20% from $155.7 billion to $140.7 billion, 2004 2005 2006 2007 2008 2009 2010 a decrease of almost 10 percent. It Figure 6 should be noted that the ending year of our analysis is the depth of the Print Market Diffusion Index vs. Percent Change in Nominal GDP print recession, so the fall is somewhat exaggerated. If the ending year was 2010 the per- 60% 15% centage decrease would be around 7 percent. Although many print products and ser- 40% 10% vices provide multiple uses we can sort data 20% on shipments and plants by three major in5% 0% tended functions: •  Print intended to inform or communicate -20% 0% factual and editorial information, such Print Market Sales *A Diffusion Index is Diffusion Index (Left Axis) as magazines, newspapers, books, and -40% calculated by taking the percentage of respondents -5% GDP percent change based indicating an increase minus reports. -60% the percentage indicating a on current dollars (Right decrease. Axis) •  Print providing product logistics to man-80% -10% ufactured products—packaging, labels, 2Q00 2Q01 2Q02 2Q03 2Q04 2Q05 2Q06 2Q07 2Q08 2Q09 2Q10 2Q11 wrappers, and product user manuals. Year •  Print intended to market, promote, or sell Figure 7 various products, services, political candidates, positions, or ideas—marketing and promotional print such as catalogs, direct mail, and brochures. 4 • Special Report: A Planning Guide for 2012–2013
  9. 9. Of the three functions, only one—print lo1999–2009 gistics—is not subject to competition and subShipments and Plants stitution by digital media. This stronger competitive position enabled this function to gain sales over the review period—slightly more Establishments than 2.0 percent. In contrast, the inform/ communicate function declined by 27.5 percent and the market/promote function deShipments clined by 4.7 percent. This ranking corresponds to our view that the most threatened function of print is the inform/communicate function. The market/promote function, while 0 20 40 60 80 100 120 140 160 180 Establishments (Thousands) Shipments (Billions $) still threatened by digital media, is stabiliz1999 49.41 155,711 ing as marketers recognize the value of print 2009 33.565 140,674 marketing and promotion. (Figures 8 through Figure 8 10). A similar trend is apparent in tracking 1999–2009 the changing landscape of printing plants by Plants by Shipments function over the same period. The largest percentage decline was for plants specializing in the inform/communicate function—39.6 Inform/communicate percent. The number of plants specializing in producing print for the other two functions declined by around 30 percent. Market/promote As a final step in our analysis, we examine the sales patterns of surviving plants sorted by function through the study period. On a Logistics sales-per-plant basis, as shown in Figures 11 and 12, total surviving plants and surviving 0 10 20 30 40 plants sorted by function experienced sales inThousands creases during the study period. Once again, Inform/communicate Logistics Market/promote 35.105 1999 11.758 2.548 this seemingly contradictory pattern demon24.684 2009 7.101 1.780 strates the power of surviving even in a period Figure 9 of declining sales. Another pattern is also apparent. Print 1999–2009 logistics printers tend to be much larger than Shipments by Function ($Billions) those specializing in the other two functions. In 2009 annual sales of print logistics printers averaged almost $16 million compared to $7.2 Inform/communicate million for inform/communicate printers and $2.5 million for market/promote printers. Overall, the typical surviving printing Market/promote plant experienced sales growth of 33 percent from 1999 to 2009. Average annual per-plant sales increased from $3.15 million to $4.19 Logistics million. Print logistics printers experienced average sales increases of 46 percent; market/promote priners increased 35 percent; 0 10 20 30 40 50 60 70 and inform/communicate printers increased Inform/communicate Logistics Market/promote 64.56 1999 63.82 27.30 33 percent—a ranking similar to the change 61.55 2009 51.24 27.87 in total shipments over the same period. This pattern was on display in 2010. Print- Figure 10 ers specializing in print logistics had an annual sales growth of 3.9 percent; marketing and promotional printers experienced sales 1999 2009 1999 2009 1999 2009 Special Report: A Planning Guide for 2012–2013 • 5
  10. 10. growth of 1.2 percent, and printers specializing in inform/communicate print averaged sales declines of 1.0 percent. Print by Function Percent Change in Shipments 2009–2010 Sales Change by Plant Size –2 0 –1 1 Logistics Market Inform 2 3 4 5 3.9 1.2 –1.0 Figure 11 Credit Availability Improves 2010 Print Sales Change By Size of Plant 0 2 4 1–19 20–49 50–99 100+ 6 8 0.0 0.5 1.7 7.6 Figure 12 Credit Availability Improves Diffusion Index 0 –10 –20 –30 –40 –50 –60 Credit Available Index 2009 Q4 –54 2010 Q1 –36 Q2 –50 2011 Q3 –38 Q4 –36 Figure 13 6 • Special Report: A Planning Guide for 2012–2013 A “bigger the better” pattern prevailed over the course of 2010 in terms of sales change by plant size for printing plants in existence the entire year. The largest plants (100-plus employees) experienced average sales gains of 7.6 percent. In contrast, the smallest plants (less than 20 employees) experienced stable sales compared to 2009. Sales changes for medium-sized plants (20–49 and 50–99 employees) saw average gains of 0.5 percent and 1.7 percent respectively. Q1 –33 Q2 –27 Credit conditions have improved slightly in the second quarter of 2011 compared to the first quarter of 2011. The credit diffusion index has increased from –33 percent in Q1 to –27 percent in Q2, or 5 percent more respondents reported current credit conditions having a positive impact on their business in Q2 compared to Q1. This slow improvement has been a trend in the past few quarters as portrayed in Figure 13. The index is still stubbornly in the negative territory but has steadily improved the past six quarters from a low of –54 percent in Q4 2009 to the current –27 percent. It should be noted that all of these improvements are off an extremely stressed print market situation as a result of the severe downturn in printing shipments from 2007 to 2009. Still, they are a welcome reprieve from previous conditions. Printing Prices vs. Cost Although printing shipments were up last year average printing prices declined by just under one percent. At the same time, the prices printers paid for selected inputs increased (Figure 14). Wages and salaries increased very slightly as they were restrained by loose labor markets. Energy costs increased 2.2 percent last year but have escalated stigmatically since the first of the year. Paper prices were up 5.3 percent and employee health care costs rose 7.4 percent. Sales Change and Business Model In our most recent full year for analysis (2010) printers with specific business model choices outperformed general commercial printers in sales growth. The best performance was accomplished by communication providers and vertical niche printers (Figure 15).
  11. 11. Sales Focus Over the last decade or so printers have gradually increased the geographic focus for their sales efforts. This increase has come as a result of both competitive pressures and digital technology. Even so, almost four out of ten printers remain focused on sales within 100 miles. At the other extreme, 35 percent of printers focus on the entire national print market. Printers’ Sales Focus Distance Percent of Printers Local: Up to 100 miles 39 Sub-regional: 101–250 miles 8 Regional: 251–500 miles 18 National 35 Print’s Performance in a Bad Decade for US Manufacturing The 2000–2009 decade was definitely not a good one for U.S. manufacturing industries as the 2001 and 2007–2009 recessions took their toll. Indeed, according to a recent Bloomberg Business Week report (May 9–May 15, 2011), 14 out of 19 U.S. manufacturing sectors declined in inflation-adjusted shipments over the decade. Print was ranked number 10 out of the 19—right in the middle. Interestingly, print’s performance was significantly better than the paper industry which declined at about twice the rate of printing. Print also performed better than motor vehicles (Figure 16). Employment and the Recession For the most part, print remains a domestic industry in the United States. Most print that is produced here is consumed here, and most print consumed here is produced here. However, many printers do export a portion of their output to foreign countries. According to our surveys, almost one in four printers sells to foreign customers. On average, exports comprise just over 7.0 percent of sales for these firms. Now let’s examine pre and post recession employment levels for printing compared to other benchmarks—total U.S. employment, and government employment—federal, state, and local—and total private employment (non-government). It may come as no surprise that all levels of government and the overall economy held on to jobs at 2010 Print Markets Price and Cost Changes Export Products/Services Export: Yes or No Percent of Printers Average Percent of Sales Median Percent of Sales Yes 23.5 7.3 2.0 No 76.5 –2 0 2 Printing prices Wages/salaries Paper prices Health care Energy Source of Competitive Pressures Competition from printers that have traditionally been active in their market space remains the primary source of competitive pressures for most printers today. The next most significant source of competitive pressure comes from digital displacement of print followed by competition from printers entering their market space. Sources of Competitive Pressure 4 6 8 –0.9 0.5 5.3 7.4 2.2 Figure 14 2010 Percent Change in Sales by Business Model 6.0% 5.7% 5.0% 4.4% 4.0% 2.8% 3.0% 2.0% Source Highest Middle Lowest 1.0% Traditional Competition 68.9 23.6 7.4 0.0% New Market Entrants 11.5 24.5 63.3 Digital Displacement 27.7 41.8 30.5 0.3% General Commercial Printer Communications Provider Niche by Product Niche by Vertical Market Segment Figure 15 Special Report: A Planning Guide for 2012–2013 • 7
  12. 12. a higher level than printing over the course of The Great Recession. The big outlier is the Federal government, which actually increased employment by 4.8 percent. State and local government employment levels remained virtually stable from before the recession (2007) until 2009. Total U.S. nonfarm employment, meanwhile, decreased by 7.6 percent, and total printing employment fell by 13.4 percent. All private sector employment fell by 9.6 percent (Figure 17). What About the Bottom Line: 2011 Financial Overview The printing industry incurred an average profit for 2010 of 1.4 percent for all printers participating in the 2011–12 Ratios Survey. This is an increase of 2.8 percent from last year’s average loss of 1.4 percent and ends a three-year trend of consecutive decreases. Looking back over the 90-year history of the Ratios, an astute business person might predict the reversal of the industry’s recessionary trends, as it has always happened. But with the ever-changing environment, even veteran industry leaders have expressed concern over the recovery. This report should alleviate some concerns. The industry showed approximately $2.1 billion in total profits over the course of the year, quite the opposite from 2009’s approximate $1.9 billion in total losses. Of the printers participating in the Ratios Study 38 percent posted a financial loss for the year, down from the 55 percent who reported losses in 2009. The industry’s profit leaders, printers in the top 25 percent of profitability, saw their profits rise significantly over the year, increasing to 9.5 percent from 7.0 percent the previous year. Considering the conditions of the economy and the overall industry results, these top performers should consider themselves fortunate (Figure 18). Not So Bad 14 of 19 Manufacturing Sectors Shrunk from 2000 to 2009 Textiles Furniture Apparel Plastics Non-metallic minerals Paper Fabricated metals Motor vehicles Wood products Printing –50 –30 –20 –10 0 Figure 16 Jobs and the Recession 5 Percent change from 2007 to 2009 0 –5 –10 –15 Printing Federal State Local Private –13.4 4.8 –0.1 –0.2 –9.6 –7.6 Total Figure 17 Profits and Firm Size Profit (loss) rates generally vary considerably by the size of the firm with larger firms typically earning higher profits as a percent of sales than smaller firms. Looking at profit (loss) by company size, firms with sales up to $10 million earned lower than average rates of profit (loss) as measured by income (loss) before taxes on sales with each sales category averaging profits of less than 8 • Special Report: A Planning Guide for 2012–2013 –40 Percent decline in shipments from 2000 to 2009 1.4 percent. In the next segment, $10–18 million printers, profits were above the 1.4 percent industry average, as they reported a profit percentage of 2.5. Printers with sales of more than $18 million averaged 3.3 percent return on sales. The pattern for profit leaders was similar in undulation. However, printers under $3 million in sales averaging an overall return of 9.6 percent out-performed printers with sales from $6–10 million and $10–$18 million with returns of 6.0 and 9.2 percent, respectively. With each size category, the threshold for attaining profit leader status changes, and the variance between categories can be significant. For example, a printer with a
  13. 13. Profit  Trends  2000  to  2011   12.0%   Profit  As  A  Percent  of  Sales   10.0%   8.0%   6.0%   4.0%   2.0%   0.0%   -­‐2.0%   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010   3.1%   1.0%   1.6%   1.7%   2.5%   2.7%   3.4%   3.1%   1.5%   -­‐1.4%   1.4%   2.3%   Profit  Leaders   10.5%   8.0%   8.4%   8.7%   9.4%   10.3%   10.1%   9.7%   9.4%   7.0%   9.5%   10.0%   All  Printers   2011*   *  2011  is  forecasted  profitability  based  off  of  quarterly  survey  results.   Figure 18 profit of only 2.8 percent (or greater) was considered a profit leader in the $6 to $10 million category, where profit leaders averaged 6.0 percent returns. Yet, printers with sales greater than $18 million had a higher threshold and needed a profit of 7.0 percent or greater to be considered a profit leader, where the average return was 11.3 percent. Profit (Losses) and Firm Size (Before Tax Profit (Loss) As a Percent of Sales) Annual Sales All Firms Less than $3 million Profit Leaders –0.3% 9.6% $3–$6 million 1.3% 10.9% $6–$10 million 0.1% 6.0% $10–$18 million 2.5% 9.2% More than $18 million 3.3% Major Cost Items In 2010 (2011’s report), printers’ factory cost of product was 78.1 percent of total sales, down 2.0 percent from the year before. Total materials costs (paper, plates, ink, other chargeable materials, and outside services) accounted for 35.2 percent of total sales. Nearly 43 percent of printing sales dollars were used to pay factory payroll and factory expenses. Administrative and selling expenses comprised 19.4 cents of every sales dollar. The cost factors decreased in this reporting period compared to a year earlier and compare closely to the 2008 (2009’s report) data. Over the five-year period, the largest increases were from factory expenses and the combined administrative and selling expenses, increasing 1.2 percent and 1.1 percent, respectively. 11.3% A Look at Major Cost Items (Percent of Sales Revenue) Major Cost Items 2010 2009 2008 2007 2006 Paper 22.1% 22.0% 21.9% 21.8% 22.3% Total materials 35.2% 35.0% 35.1% 35.0% 35.4% Factory payroll 24.9% 26.3% 25.3% 25.1% 25.0% Factory expenses 18.0% 18.8% 17.6% 17.0% 16.8% Total factory cost of product 78.1% 80.1% 78.0% 77.1% 77.2% Administrative and selling expenses 19.4% 19.9% 19.4% 18.6% 18.3% Special Report: A Planning Guide for 2012–2013 • 9
  14. 14. Productivity Trends 2010 2009 Productivity Measures All Firms Profit Leaders All Firms Profit Leaders Sales per employee $147,436 $160,873 $137,326 $145,438 Sales per factory employee $198,122 $222,480 $186,513 $202,147 Value added per employee $95,986 $103,386 $90,319 $98,924 $128,343 $148,482 $120,792 $133,784 Value added per factory employee Productivity Trends Productivity (as measured by sales per employee) for all printers, rose to $147,436 in sales per employee. This shows a significant increase from the previous year’s average of $137,326. In fact, sales per factory employee, value added per employee, and value added per factory employee all increased appreciably over the year. Profit leaders, as always, had significantly higher productivity rates than all printers, and they too experienced increases in productivity. Overall, both the “all firms” group and the “profit leaders” subgroup reported significant increases in output as measured by all four productivity metrics compared to the numbers for the year earlier. Profits by Product Segments Profit rates always vary significantly by product specialty. Of the ten printing product specialties covered in the survey, the top profit producing segment was book manufacturers for the fifth consecutive year, with profits at 6.64 percent of sales. Newspaper printers followed at 5.93 percent profitability. Packagers, quick printers, and label printers all achieved above-industry-average profit. Direct mail, commercial and advertising and magazine/periodicals segments did not reach industry average profit. Commercial and advertising printers, which are the bulk of the printers reporting, averaged a profit of 0.63 percent. Sales Revenue and Services The proportion of printers’ sales revenues derived from printing and prepress decreased to 71.18% of sales, the lowest level reported over the fiveyear period and continuing the general pattern of decline. In contrast, the proportion of sales from binding/finishing increased from 15.69 percent to 15.83 percent. In total, ancillary services revenue increased from 11.33 percent of sales to 12.99 percent, continuing its general pattern of increases. Profits (Losses) by Product Specialty Profit (Loss) Rates by Year Percent of Sales Product Specialty 2010 2009 2008 2007 2006 Books 6.64% 4.73% 7.47% 5.78% 7.60% Newspapers 5.93% N/A 4.53% 3.17% 4.15% Packaging 4.88% 2.40% 5.03% 4.42% 4.81% Quick Printing 3.46% N/A 7.45% 5.10% 1.57% Labels 3.26% 0.56% 1.45% 2.16% 3.59% Direct Mail 1.26% 0.10% 7.05% 3.64% 3.46% Commercial/Advertising 0.63% –2.24% 0.69% 2.73% 3.03% –0.03% 0.46% 1.18% 2.67% 3.66% Forms/Documents N/A 1.09% 1.32% 3.85% 3.03% Inserts N/A N/A N/A 2.33% 3.27% 1.15% –1.88% 0.44% 3.11% 4.54% Printing Magazines/Periodicals Non-printing Binding 10 • Special Report: A Planning Guide for 2012–2013
  15. 15. Sales Breakdown From Services Percentage of Sales Revenue Services Rendered 2010 2009 2008 2007 2006 Printing and Prepress 71.18% 72.98% 72.27% 75.03% 73.94% Binding and Finishing 15.83% 15.69% 16.16% 14.49% 15.29% Mailing Services 5.45% 4.21% 4.83% 4.34% 4.39% Fulfillment Services 3.25% 3.13% 3.20% 2.57% 2.81% Database Management Services 0.75% 0.44% 0.78% 0.75% 0.84% Other Non-Print Ancillary Services 3.54% 3.55% 2.76% 2.82% 2.73% Total Services 100.00% 100.00% 100.00% 100.00% 100.00% Prices and Profits Printing Prices and Profits Quarterly Pattern from 2008 to 2011 Over the last few years, both printing prices and printers’ profits have weakened with the recession. As demonstrated in Figure 19, percent changes in printers’ prices and profit levels, on average, follow a similar pattern. When printers experience declining prices they also tend to report declining profit levels. However, over the past few quarters, both the price printers can charge for their services and margin has been improving gradually. 6 4 2 0 –2 –4 –6 –8 2008 2009 2010 2011 Printing Prices Where We Are Going: The Economy and Print in 2012–2013 Q4 –1.1 Q1 –3.6 Q2 –4.9 Q3 –6.0 Q4 –6.5 Q1 –2.8 Q2 –3.0 Q3 –2.3 Q4 –0.9 Q1 0.2 Q2 –0.8 Profit 2.7 0.9 2.9 2.1 1.8 4.4 4.0 4.7 3.3 3.4 4.2 Quarterly profit before taxes as a percent of sales and price change over the past 12 quarters Figure 19 Now, let’s focus on where the economy and print markets are projected to go over the next year. The 2012–2013 Economy At the current time, the economy is forecasted to continue the slow recovery from the recession. While, a return to recession is always possible, especially since the recovery has been slow, the most likely scenario is for economic growth of more than 3 percent over the next two years (Figure 20). The largest unknown, of course, is the outcome of the national elections of 2012 and their impact on federal tax and spending policies both over the short and long term. 2012–2013 Print Markets If the economy trends as projected, print markets should continue to grow. The 2012 national elections will provide an additional boost. All in all, our projection is for 3.0 percent growth in 2012 and 3.3 percent growth in 2013 on a nominal or non-inflation adjusted basis. The Economy 4.0 2012–2013 3.5 3.0 2.5 2.0 2012 2013 1.5 1.0 0.5 0 2012 2013 Inflation-Adjusted Economic Growth 3.3 3.4 Figure 20 In terms of print function, the national elections should give a particular boost to marketing/ promotional print, which means that this function would grow at above-average rates. In contrast, print intended to inform/communicate will likely grow at a less-than-average pace. Print logistics will likely be in between these two. Special Report: A Planning Guide for 2012–2013 • 11
  16. 16. What to Do: Thinking About Strategy and Tactics Now let’s focus on what to do—a discussion of strategies and tactics for the coming environment through the next couple years. Here’s the list of topics that are relevant to this subject: •  First, keep your eye on the economy and print’s place in the economic cycle as they play out during the next year. •  Next, know the specific life cycle and competitive situation of your print segment and what these mean to your firm. •  Understand the relative importance of prices, sales change, and costs. •  Think about the strategies and tactics in relation to the functionality of the printed products and services and your business model. •  Finally, think about people and attitude. Print and the Economic Cycle What is the typical pattern of recession and recovery for the economy and print? While no two business cycles look exactly alike, we can draw a composite picture. As shown in Figure 21, print sales closely follow the economic cycles. To calculate our Print Market Sales Diffusion Index we take the number of printers reporting sales increasing in Q2 2011 minus decreasing sales to arrive at an index number of 22.7 percent. We graph the Print Market Sales Diffusion Index against percent change in Nominal GDP to see how print is tracking compared to changes in the overall economy. Print sales have steadily improved during the past few quarters in line with changes in GDP. The industry growth rate declined YTD in the second quarter survey from 6.4 percent to 4.1 percent. This can also be seen in a drop in the Diffusion Index from 30.2 percent to 22.7 percent. Nominal GDP started increasing in the Q3 of 2009, but it wasn’t until the Q2 2010 that growth showed up in our Diffusion Index. Looking deeper we conclude that the key differences between print and the economy over a complete economic cycle are: Figure 21 12 • Special Report: A Planning Guide for 2012–2013 •  Although, we project overall printing shipments adjusted for inflation to continue to grow, on average, for the next decade they will likely grow less than the economy—perhaps around 1.0–1.5 percent less. For comparison purposes we project the economy growing by around 2.5 percent and print by 1.5 percent for our composite cycle. •  Print generally leads recessions and lags recoveries so that printing shipments turn down earlier as the recession begins and turn up slower once the economy recovers (Figure 22). •  Print does best when the economy reaches a mature recovery phase. In this sweet spot print actually can outgrow the economy for a few quarters. While printers and suppliers can’t do anything about the business cycle and these overall macroeconomic trends, they can help themselves by understanding this pattern as they manage: •  First, be aware of not only the current health of the economy and print markets but also their respective positions in the cycle. Just as importantly, consider the emerging directions of both. Make sure to take account of this before making any major business decisions such as investment in new equipment or exploring a new business segment. •  Second, many operational decisions must be adjusted concurrent with the cycle. In particular, a focus on reducing fixed costs and making more costs variable with the business cycle is imperative. Don’t get caught with high fixed costs just as the cycle turns down.  
  17. 17. Profiling Economic Cycles Typical Pattern: The Economy and Print Highest Relative Growth Greeting Cards Direct Marketing Packaging 5 4 Recession 3 Modest Relative Growth Recovery Labels and Wrappers General Commercial 2 1 Mature Recovery Mature Recovery Less Relative Growth 0 Magazine Printing -1 Book Printing Trade Services Newspapers -2 Least Relative Growth -3 -4 Economy Business Forms Printing Annual % change in inflation adjusted GDP and printing shipments Figure 22 •  Third, print’s performance in bad economic times is in line with manufacturing as a whole and is actually not that bad compared to other manufacturing sectors. This does not make it any easier to cope, but at least there are plenty of industries and firms out there suffering as much or even more than print. •  Finally, remember to manage forward and not backward. While you have to be aware of past trends and manage for today, always remember that the cycle pattern will continue and the next up phase is coming. Know Your Life Cycle and Competitive Position Beyond the general business cycle are life cycle patterns in print. During the past few decades, print has moved from a growth to mature to declining industry life cycle position overall, but there are differences by process and product. By process, digital toner and inkjet processes are in the growth phase. By print market segment and print function, ancillary services, packaging, labels and wrappers, and direct marketing are mature but growing. A simple key indicator of life cycle position is the relative sales change by print sector compared to total printing shipments. Figure 23 shows the relative growth trends of the past decade. Another indicator of the opportunities by print sector is competitive intensity, a measure of the total sales in a print sector compared to the number of printing firms in the sector. In general, the larger the sector sales and the less the number of firms, then the more attractive the sector. Through the last decade competitive intensity rankings are shown in Figure 24. Financial Legal Figure 23 Most Attractive Magazine Printing Book Printing Attractive Greeting Cards Packaging Printing Less Attractive Newspaper Printing Labels Wrappers Financial/Legal Business Forms Least Attractive Direct Marketing General Commercial Trade Services Figure 24 In summary, printers should examine their segment life cycles and competitive intensity measures. In doing so, remain aware of these key points: •  Print’s overall life cycle has moved from growth, to mature, to possibly a declining position. •  However, a truer picture emerges when life cycles are examined by process, product, and function. While some processes, products, and functions of print are mature or declining, many remain in the growth phase. •  While all print sectors could be characterized as competitive, some sectors score significantly higher or lower in competitive intensity. •  both a life cycle and competitive intensity On measure, there is still plenty of opportunity left in the printing industry. •  Even in mature and declining sectors, there are management strategies and techniques for firms to improve their performance and do very well for a long period of time. Special Report: A Planning Guide for 2012–2013 • 13
  18. 18. The Profit Box Profits = f (Sales, Prices, Cost) Higher Cost Lower Higher Higher Prices Profits Lower Lower Lower Sales Higher Figure 25 Prices, Sales and Cost Another useful tool to aid in planning for next year and beyond is the profit box (Figure 25). In the most basic sense, the only way to increase profitability is to decrease cost, increase sales (at the same prices), or raise prices. While this is obvious, what is often overlooked is the relative ranking of each of these paths to higher profits. Our analysis of Ratios profit leaders and simulations from the Ratios database demonstrates that pricing power generally trumps increasing sales at the same price or cutting costs. Increasing sales at the same price generally raises profits more than cutting specific cost items such as payroll or material costs. However, a typical firm does not usually have pricing power. This is the reason that virtually every U.S. industry is an industry of haves and have-nots, profit leaders and profit challengers, firms with and without pricing power. Pricing power is a result of strong demand for a unique product or service without good substitutes or competition. Pricing power results from recognizing that pricing involves these outside or external factors and not just internal or cost factors that too many firms focus on with their pricing models. Tactics to create pricing power include: •  Specialization by industry product niches or vertical customer segments that focus on reducing competition and creating a unique product and service offering that allows pricing leverage. •  Deep and intimate knowledge of a customer’s needs and a business model to service them that binds the customer to you. •  Diversification to value-added services within the specialization so that the printer is providing a varied mix of services that creates a barrier to exit, so the customer can’t easily move to another supplier. 14 • Special Report: A Planning Guide for 2012–2013 •  Creation of a robust and healthy customer relationship with an understanding of the customer’s needs to the extent that a “win/win” supply chain management system exits. •  Strong branding of the firm and its capabilities through customer recognition of high quality, dependability, excellent services, and other positive attributes depending on the particular product and service. •  Developing a sales compensation policy with incentives for sales personnel to sell at higher prices rather than lower prices such as paying compensation on a job’s profit rather than sales or value added. •  Finally, a recognition not to over depend on cost estimates as a substitute for effective pricing. Pricing should be more demand driven and less cost driven, although firms obviously need to know the cost of a given product, service, or job. Strategy Check Another planning priority for 2012–2013 is a strategy check. For years now we have written and spoken of the advantage of specialization and diversification as a combined strategy in the printing industry. If you have not yet developed a plan to increase both your specialization and diversification, now is the time, because specialization decreases cost and diversification increases price with a resulting boost to profits (Figure 26). As you focus on diversification, keep in mind that the path to the printing firm of the future is to move from producing printed products to ancillary services to communication solutions to print management services. Wherever your firm is in this spectrum at the present time, you should be thinking ahead to the next step. The Advantage of Strategy Diversified Specialization Lowers Cost and Increases Price 120 100 80 Total cost 60 Profit 40 20 0 1 2 3 4 1 = general commercial; 2 = specialized; 3 = diversified; 4 = diversified specialization Figure 26
  19. 19. Aligning Strategy, Tactics, and Business Model by Print Function The significance of functionality in printing was discussed earlier in this report. As the primary determinant of both short and longer term market performance, functionality must be taken into consideration in designing strategy and tactics. The print logistics function, although mature, should continue to grow in shipments at a pace about equal to the overall economy. This is true as long as manufacturing activity in the U.S. remains fairly healthy and there is no significant change in outsourcing of manufacturing to other countries. Additionally, there is a threat of disintermediation of retailing with the growth of online marketing and distribution of consumer and business products. A major increase in this activity could, theoretically, change the packaging and labeling requirements to a more “brown paper” characteristic which could reduce the value added in packaging. At the present time we do not foresee any major shifts in these areas, although the changes may be more gradual. The key strategy issues in a mature but still growing industry environment are: •  Since this sector is still growing, you can still focus on increased sales of current products and services from existing customers. Additional sales growth can come from sales of existing products and services to new customers (increased market share) and sales of new products and services to existing and new customers. •  Innovation can pay off big in mature but growing industries. Both process (manufacturing and distribution) and product or service (product differentiation, new service, and ancillary options) should be pursued. •  Pricing power can be achieved in a mature but growing industry by focusing on demand and not cost. •  Finally, cost control and productivity enhancement remain important, even in growing sectors. The inform/communicate function of print is a classic case of a declining industry—sales (both nominal and inflation-adjusted) are in secular or long-term decline. On a year-to-year basis, there may be a scattering of total sector sales growth in years when the economy grows at a particularly high pace. Also, not all firms in this sector will experience declining sales, since some will gain market share at the expense of others. However, there are no paths to easy sales growth and, in most cases, firms must aggressively compete for a higher share of existing and declining industry sales. Firms can grow in this sector through increasing their market share (possibly through mergers and acquisitions). Another source of sales growth for a firm in this sector would be if the proportion of firms closing or exiting the industry exceeds the overall percentage of sales decline (which has often happened in the printing industry). The key strategy issues in a declining industry situation are: •  Play a market share game through cost control and productivity increases to become a sales leader in a declining market. •  Gain share through mergers and acquisitions. •  Become more and more of a niche printer by finding a niche within this sector that is either growing or declining at a less than average pace. •  Accept a harvest strategy of gradual and controlled disinvestment and liquidation over a long period. •  Liquidate the firm or sell the business to a rival. The last functional sector, market/promote, is somewhere between the above two sectors—in the late stages of maturity but not yet in decline. Shipments of print designed to market and promote will likely increase, but at a pace less than the economy. Many of the strategy options for this sector are similar to those for print logistics: •  Since this sector is projected to grow, you can still focus on increased sales of current products and services from existing customers. Additional sales growth can come from sales of existing products and services to new customers (increased market share) and sales of new products and services to existing and new customers. •  Innovation can pay off big in mature but growing industries. Both process (manufacturing and distribution) and product or service (product differentiation, new service and ancillary options) should be pursued. •  Pricing power can be achieved in a mature but growing industry by focusing on demand and not cost. •  Finally, cost control and productivity enhancement remain important, even in growing sectors. Special Report: A Planning Guide for 2012–2013 • 15
  20. 20. Future  Unemployment  Rate   *Past  Recessions   How  Fast  a  Recovery?   12.0%   *Recent  Recessions   Government  Forecast   Unemployment  Rate   10.0%   2007-­‐2009  Recession/Crisis     Our  Forecast   8.0%   6.0%   4.0%   2.0%       2* r  1  1 ea /  Y 18 20 17 /Y e ar  1 Year  During  Current  Cycle/Year  Corresponding  to  Past  Recessions*   20 16 /Y e ar ar 20 /Y e 1*   0* *    9 *   15 20 /Y e ar  8 *   14 20 /Y e ar  7 *   13 20 /Y e ar  6 *   20 12 /Y e ar  5 *   11 20 10 /Y e ar  4 *    3 /Y e 09 20 20 ar ar /Y e 08 20 20 07 /Y e ar  1 2* *     0.0%   Figure 27 Finally, remember that, above all, a positive attitude is important. Whatever your print market segment, equipment status, customer base, or other situation, your attitude and the collective attitudes of your management team and employees matter. While you can’t hide from the very difficult reality of the economy and print markets, a positive can-do outlook can be very beneficial. Demonstrate this attitude to your management team and employees on a constant basis even as you address the difficult road ahead in 2012 and 2013. People and Attitude Don’t forget the softer sides of planning—people and attitude. Even with the projected path of the recovery, labor markets will remain in an oversupply situation for a long while. A standard rule of thumb is that the economy has to grow at around five percent for a full year to lower the unemployment rate by a full percentage point, so it will take considerable time to soak up the large pool of unemployed and discouraged workers that have accumulated over the last three years of economic turmoil (Figure 27). The bottom line is that both 2012 and 2013 offer attractive opAnnual Printing Shipments portunities for employers looking By Function in $Billions: Likely Scenario to either upgrade their personnel 180 ranks or to staff new positions with qualified candidates at relatively 160 bargain wages and salaries. Also, 140 while you need to keep costs under 120 control, don’t be penny wise and pound foolish and under spend on 100 employee education and training. 80 Our studies show that profit leaders typically outspend profit chal60 lengers by a two-to-one margin in 40 terms of education and training cost as a proportion of payroll. 20 0 2011 2016 Note: Inflation and cycle adjusted projection Figure 28 16 • Special Report: A Planning Guide for 2012–2013 Marketing (+2%) Inform/Communicate (−2%) Logistics (+3%) Total 2021
  21. 21. A Longer-Run View: A Review of Our Expectations through the Next Decade Shipments per Plant ($ Millions) By Function 2009−2021 (Likely Scenario) What about the longer-run future 2009 of print? We have created some possible scenarios ten years into Marketing (+116%) Inform/Communicate (−16%) the future based on trends of the Logistics (+99%) past ten years. Our first scenario projects real or inflation-adjusted 2021 shipments to decline by 4 percent per year for the inform function, increase by 2 percent per year for 0 5 10 15 20 25 30 35 the marketing function, and in2009 2021 crease by 3 percent per year for the Marketing (+2%) 2.49 5.40 logistics function. In this scenario Inform/Communicate (−2%) 7.22 6.08 Logistics (+3%) 15.66 31.20 total printing shipments grow over the next ten years. Adjusting for an expected con- Figure 29 tinuing reduction in the number of printing plants specializing in each function provides a scenario for future shipments per plant in Percent of Total Shipments 2021 (Likely Scenario) 2021. As can be seen in Figures 29 and 30, surMarket/promote viving plants in the marketing and logistics func59.0% tion enjoy substantial growth in shipments while surviving plants specializing in the information experience sales declines. Looking deeper we see that the percentage composition of total shipments at the end of our ten-year projection shows significant decline in the share for the inform function and growth for the logistics and marketing functions. Logisitcs Of course, this scenario is only for examination 25.0% Inform/communicate purposes and is not necessarily a forecast of print’s 16.0% future. However, it does offer a possible glimpse of the direction of current trends and an environmenFigure 30 tal scan for discussion and planning purposes. The bottom-line implication is that print and surviving printers can have a thriving future. The key imperative for today’s printers is to implement the strategies and operating tactics for survival as the industry continues to restructure. The key conclusion from this analysis is that there can be a very positive long term future for print and printers. Today’s printers that are aware of the emerging industry environment and crucial business strategies and tactics have a very bright future. Print by Function Special Report: A Planning Guide for 2012–2013 • 17

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