CATALOG & MAGAZINE PRINTING OUTLOOK -- Making Every Page Count

BY MARK SMITH

Technology Editor

When it comes to physical format and production processes, catalogs and magazines have always been more alike than different. The introduction of the "magalog" concept extended the overlap to content and intent, albeit in a limited fashion. Now, as the industry looks forward to 2006, there are a lot of common threads in the business issues facing these two market sectors.

Postal rate increases obviously are a challenge for much of the printing industry, but these two sectors bear the brunt, along with direct mail. Paper issues—including pricing, availability and sustainable manufacturing—also cut equally across both sectors. Their customers have the same basic options when these costs rise—change paper weights, cut pages, and reduce the format size and trim quantities.

In the last couple of years, there's been a trend among the top magazine and catalog printers to launch major investment programs to optimize the efficiency of their production platforms. Standardizing equipment across operations is often part of such schemes to streamline manufacturing.

Also, similar questions are being asked about the ongoing relevance and role of these printed products in the digital age. With a growing percentage of purchases being executed online, marketers need to be kept aware of the role catalogs play in the decision-making process and how to maximize their effectiveness. Similarly, magazine advertisers are demanding more objective proof of the effectiveness of print ads as communication channels proliferate. Innovative measurement and tracking mechanisms are required to achieve both goals.

What will all this mean for the fortunes of catalog and publication printers in the new year? There's reason for optimism, particularly in the catalog sector, but success will take work.

"Healthy" is how Donald Treis, CEO of Arandell Corp., characterizes the outlook for the catalog market in 2006. One reason is because companies that have never used them before are now looking to catalogs as a tool to expand their businesses. Catalogs can help drive both Internet and retail store sales, he notes.

On the supplier side, "the marketplace continues to be most strong for companies that have invested in new technology," Treis continues. Printers that are forward-thinking in their approach to production will continue to grow in 2006.

"You can't compete in today's marketplace with old equipment. A key asset is having the best technology you can afford in order to win new business and maintain current customers," asserts the printing exec.

Strong Expectations

Mark Deterding, president of Banta Catalog Group, says that the marketers within its customer base are generally expecting business to be strong in 2006. Members of this group span a wide variety of both business-to-consumer and business-to-business catalogers.

"There is a lot of optimism about plans to implement new marketing tools, including personalization, market segmentation and increased database management," Deterding explains. "While there is concern about potential cost increases, this seems to be more than offset by the enthusiasm they (catalogers) have for driving new business growth."

Personalization/one-to-one marketing is really taking off now that there is credible data to support the notion that adding personalized messages can help catalogers drive sales and create customer loyalty, reports the company president. "For years, Banta has offered numerous options in personalization and we are continuing to advance our capabilities."

Increased focus on database management goes hand in hand with that trend. "Marketers understand the value of mining their databases, and we believe that our tools and expertise can help them take advantage of the customer data they have," Deterding says. "We are actively developing additional capabilities in this area."

By and large, this market segment as a whole should be relatively stable, suggests George Zengo, president of RR Donnelley's Catalogs and Retail Inserts business.

Zengo's expectation is that the catalog/retail segment will have no significant growth in 2006 due to continued experimentation with the channel mix by customers as they seek to find the right balance between the catalog, retail and Internet channels. "Consolidation among customers will also be a factor that rationalizes growth, especially with the 2005 mergers of Kmart and Sears, as well as May and Federated department stores," he explains.

Zengo echoes the other top execs in citing solutions for cost-effective personalization and growth in specialty/niche catalogs as opportunities in the coming year. Catalogers also are looking for solutions that reduce overall postal costs, including co-mailing and co-binding. RR Donnelley will continue to explore opportunities to increase its platform flexibility through targeted acquisitions, as well, he notes.

Peering at Publications

"Cautious" may be the best word to describe the outlook for publications. The most recent "Business Information Network" (BIN) report from American Business Media says total business-to-business publication ad pages were up 1.7 percent through the third quarter of 2005, compared to 2004. Titles in the "automotive" and "banking, financial and insurance" categories have been leading the way (both up more than 20 percent), with "electronic engineering" (-6.3 percent), "science, research & development" (-6 percent) and, surprisingly, "healthcare" (-5.2 percent) providing the greatest drag.

On the consumer side, the Publishers Information Bureau (PIB) reports total ad pages were up just 0.3 percent through October 2005, compared to the same period of 2004. Leading the way in this sector are "financial, insurance & real estate" (up 13.9 percent) and "food & food products" (9.7 percent) titles, with "technology" (-10 percent) and "home furnishings & supplies" (-8.4 percent) titles accounting for the greatest declines.

Both of these indexes have been reporting more positive trends in terms of ad revenues, but the methodology for calculating these numbers has cast doubt on their relevancy and they don't have direct bearing on print volumes.

Rick Marcoux, president of RR Donnelley's Magazine business, points out that consumer magazines have registered slightly positive ad page growth overall since July 2002. Trade magazine ad pages, which had been lagging by comparison, began to see revitalization this September, he adds, making it a "cautious recovery" for the magazine segment as a whole.

"As publishers look to focus on, and invest in, their recent launches of new consumer titles, RR Donnelley anticipates that ad pages across the aggregate of all the magazine segments will be relatively stable," Marcoux summarizes. "We also anticipate a continued focus on regional and metropolitan magazines into 2006, as they have been one of the strongest new-title growth segments in 2005."

Co-mailing is a key opportunity for publication printers, as well, he says, with publishers looking to reduce their costs even before the latest postage increase was announced. Marcoux also sees publishers looking to leverage their title and company brands by launching new print vehicles. In addition, he expects printers to continue working with publishers to address the need for a mechanism to effectively measure the ROI of magazine ads.

In his keynote speech at this year's American Magazine Conference, Jack Kilger, president and CEO of Hachette Filipacchi Media US, included that last point among his calls to action. "We need to develop a system . . . to measure our readership in a more timely and comparable way to fully participate in the discussion of advertising effectiveness and ROI," he says.

Postal reform is also on the publishing industry's must-do list, Kilger continues, along with creating new products for a "screen-based" culture. "We are producers of branded content who have mastered one platform and now have the opportunity to transition to others," he says.

Nina Link, president and CEO of the Magazine Publishers of America (the event's sponsor), followed up by noting the association has undertaken an effort to "tackle an issue that costs us over $1 billion a year—the shredding of 65 percent of all issues sent to newsstands."

While cutting newsstand waste is a negative for publication printers, not supporting such efforts poses a bigger threat to their long-term survival. RFID (radio frequency identification) is one of the mechanisms being investigated to address both issues—waste and readership measurement.

Postal rates are a key challenge for the catalog and magazine sectors alike, assert the RR Donnelley group presidents. In response, the printer has invested in co-mailing, co-palletizing and bindery capabilities across the organization to reduce clients distribution costs.

The company execs see January's 5.4 percent increase as relatively good news for mailers, in comparison to what was originally expected. While mailers likely will still look to take out costs as a result of this increase, they don't see the impact as being "significant." The strong possibility that the U.S. Postal Service will propose another rate increase in 2007 means RR Donnelley will continue to actively push for postal reform legislation, however.

Arandell's Treis agrees that techniques such as co-mailing, co-palletizing and drop shipping are important tools to help customers keep postage bills down. "Co-mailing, both in-line and off-line, will most likely become the norm and will be expected by catalogers and publishers looking to take advantage of postage discounts," he says.

Even though catalogers historically have significantly reduced the number of pieces they mail when there is a postage increase, Arandell hasn't been hearing much talk of cuts this time, according to Treis. He attributes this to the longer time span between increases and the relatively small rise in rates.

"Page counts, format and paper weight are things our customers look at on a regular basis, even without a rate case looming," the company exec notes. Some marginal catalogers may be forced to consider these types of cost-saving measures due to this latest postage increase, but if a customer is having success with a certain format and feel, chances are they will not make any major changes, he believes.

Catalogers are testing various formats to improve their bottom lines, but not necessarily through cost reductions, RR Donnelley's Zengo adds. Some may experiment with trim size to reduce paper and postal expenses, but others are looking at the improvements in business as rationale to enlarge their catalogs, he says.

For magazine publishers, ad/edit ratio requirements and ad positioning put practical constraints on page counts, and cost-per-thousand ad rates generally outweigh cost savings from circulation cuts, Marcoux says. "Publishers won't cut page counts, but they may consider lighter paper grades or a size change," he contends.

Costs on the Rise

Postage is just one of the rising costs that Banta's Deterding sees as collectively being the biggest challenge for printers in 2006. He adds ink, labor, fuel and paper to the list.

"It seems that costs are being stretched on all fronts," Deterding remarks. "We do everything we can to keep our costs low by developing and maintaining good relationships with our suppliers and constantly striving for improved productivity and efficiency."

Productivity and efficiency also are critical to meeting clients' demands in terms of cycle time, he adds. "The pace of the world continues to accelerate, and we need to respond by making it easier for our customers to do business with us."

RR Donnelley sees the same challenges on the costs front, with the exception of paper, according to its group presidents. Some good news for 2006 is that paper prices seem to have stabilized after several years of rising prices, they assert, while acknowledging that paper companies will also be facing rising energy and transportation costs.

As a longer term goal, the RR Donnelley execs point out that the papiNet standards for facilitating e-commerce in the paper/print supply chain need to be supported by the printing industry if the potential savings of this initiative are to be realized.