CATALOG MARKET OUTLOOK --Sales on Back Order

BY MARK SMITH

Judging the strength of the printed catalog market segment used to be a straight-forward proposition. Catalogers merely had to compare the total dollar value of orders placed with the cost of producing and distributing their print programs in order to determine the financial return.

The rise of online shopping is beginning to skew this traditional benchmark. If a shopper initially selects items by perusing a printed catalog, but actually executes the order via a Website and online catalog, which medium gets credit for the sale? Should each get partial credit?

Catalog printers clearly have a vested interest in how this relationship evolves. Current thinking holds that catalog orders typically still originate with a printed reference, but the pressure to defend this view quantitatively will only increase over time. It's still too early to tell if growing experience and comfort with online shopping will wean buyers away from thumbing through the printed catalog first.

The Direct Marketing Association (The DMA) in New York City does some tracking of this trend. According to its 2001 catalog report (the 2002 update was still in process), the percentage of catalogers' net sales derived from print programs has dropped to 68 percent, down from 80 percent the prior year.

Over the same period, the percentage of sales coming from the Internet reportedly climbed to 13 percent, up from two percent in 2000. The DMA report does go on to note that increases in printed catalog circulations did help drive the growth in sales via the Internet. Over the next four years, it is forecasting catalog sales to climb from $126 billion this year to more than $163 billion by 2006.

The unsettled competitive standing of catalogs is reason enough for printers of these products to be on edge, and business conditions have only compounded the uncertainty. A quick poll of chief executives from some of the leading catalog printers found a consensus of opinion on the outlook for 2003: largely flat sales, but with potential for modest improvement in the second half of the year.

"It goes without saying that the catalog industry has been experiencing one of the toughest economies since the early 1990s," says Steven E. Zuccarini, president of Catalog and Retail Solutions at R.R. Donnelley in Chicago.

"In the midst of these challenging economic times, we naturally are seeing the classic measures taken by catalogers to lower expenses—adjusting trim sizes, using lighter paper stocks and limiting some prospecting efforts. But, truthfully, catalogers are always experimenting with formats and sizes—regardless of the economy."

The experimentation hasn't ended there, according to Zuccarini. "We are, in fact, witnessing one of the most creative and innovative periods the catalog industry has seen in some time," he explains. "Catalogers are communicating with consumers according to their shopping preferences, all in an effort to offer more flexibility in when, where and how a consumer shops. In addition to utilizing print catalogs, many catalogers are moving into brick-and-mortar stores, as well as enhancing their Internet sites and experimenting with e-mail marketing."

Paying more than just lip service to the concept of partnering with customers, R.R. Donnelley sponsored a large-scale research project through Shop.org to explore the changing dynamics of the marketplace, reports Zuccarini. "We recognize that the nature of consumer purchasing directly impacts our customers, and us by extension," he says.

"The data showed that shoppers spend more money with and demonstrate an increased loyalty to catalogers with a presence in more than one marketing channel—print catalog, retail store and Internet. Tri-channel merchandisers receive a bigger share of spending than single- or double-channel marketers," the company exec points out.

"To meet the needs of the multi-channel market and stay competitive, we are delivering better content management solutions and streamlined creative production workflows to our customers," Zuccarini continues. "We believe print is still the most cost-effective medium for delivering revenue but, as the research proves, print alone isn't enough. Therefore, our Pre-media Technologies group offers tools that ensure brand and product consistency across all marketing mediums. These solutions are helping our customers compress cycle times, reduce costs and effectively market to their end consumers."

Going forward, Zuccarini says the successful printers will be the ones that most proactively anticipate clients' needs—offering integrated solutions in the right format at the right time.

Spencer Press in Wells, ME, looked to its own customer base in order to get a better sense of business conditions, reports Stephen Spenlinhauer, president. "After reviewing our top 20 mail order customers, we found that 12 are reporting sales up, six say business is flat compared to 2001 and two are down," he reveals. The prevailing trend among those reporting sales growth is to increase their quantity of mailings and not page counts, the company exec adds.

"We are finding the general atmosphere in the mail order sector to be more positive than last year at this time. There is definitely less uncertainty than in 2001," Spenlinhauer continues. "In particular, we have noticed that the lower end catalogs are fairing better and some sale catalogs are doing well. Our overall projection is for the next nine months to be better than last year, with some increase in print quantities and more demand for press time."

Spenlinhauer echoes the contention that it doesn't take an economic turndown for catalogers to look for ways to reduce costs. "They continually review paper prices, weights and grades to see if they can reduce cost while not hurting sales," he says. "Demographic binding is, as always, playing a big role for those catalogers in a position to take advantage of the capability. We are seeing more testing in this area with regard to page counts and cover changes."

The major challenges facing catalog printers are to realize ongoing cost controls and reductions while boosting efficiency and achieving greater utilization of capacity, Spenlinhauer says. One effort under way at Spencer Press is to achieve improved penetration into the postal system. "By partnering with a logistics supplier to the mail order industry, we are able to track and control distribution at a much higher level and give our customers more accurate reports as to unload and in-homes dates," he explains.

Based on the observations of John Paloian, COO of Quebecor World North America in Greenwich, CT, it would seem that the National Weather Service might be a valuable aid in forecasting the catalog market. The often fickle buying behavior of consumers apparently can be influenced by factors far beyond anyone's control.

"The colder than normal weather experienced by much of the country at the start of the fourth quarter led to somewhat increased optimism for a stronger than anticipated finish to 2002," Paloian notes. "This, in turn, has led some catalogers to marginally increase their circulations in an attempt to capture more sales. However, looking forward to 2003, many catalogers are planning reduced circulations for the spring, but will finalize their plans based upon actual performance levels for the entire fourth quarter."

If the expected stability in postal rates projected for the next several years becomes a reality, it should have a positive impact on the catalog market, Paloian says. At press time, Postmaster General John E. Potter was saying the higher than expected funding of future retirement obligations for USPS employees had the potential to stabilize rates until 2006.

Even so, Paloian says he doesn't expect to see any significant growth in the total volume of the catalog market in 2003. However, performance will vary among the categories of catalogs. "Quebecor World's business strategy has been to carefully manage our client portfolio so as to minimize our dependency on any one market segment," he notes.

The major challenges facing the catalog industry are the general strength of the economy and the resulting impact on the willingness of consumers and businesses alike to continue to purchase new goods and services, Paloian says. "In addition, threats of or actual global instability and terrorism have the ability to negatively affect the economy and spending, and therefore are potential major challenges. From a more conventional perspective, increases in paper or postal costs, while not expected, would also have a significantly negative impact."

Printers can play a meaningful role in their catalog clients' efforts to boost sales, Paloian asserts. "Opportunities exist for differentiating the overall look of the catalog itself, as well as how the cataloger markets to its customers and prospects," he explains. "For example, some catalogers have been very effective at implementing direct mail or Internet campaigns that are tied to their catalog offerings. Sophisticated personalization continues to deliver positive results to those catalogers with sufficient data to implement programs.

"Quebecor World, specifically, offers such unique products as 'e-Drives' and 'Power wraps,' which are innovative means of driving traffic to a cataloger's Website or retail outlet, or enhancing the sales from the catalog itself," Paloian continues. "Our long-standing experience and expertise in direct mail allows us to provide catalogers with additional products and services to complement their catalogs and to drive new revenue. On the production side, use of 'Catalog Magician'—Quebecor World's automated publishing system designed to streamline catalog layout and design—continues to gain momentum in the marketplace. This represents the 'next step' in evolving digital workflows."

Perry Judd's Inc. has seen its catalog customers reacting in several ways to the economic climate, reports Craig Hutchison, president and CEO of the Waterloo, WI-based printer. "For one, they are reducing page counts by culling marginally performing products from their offerings to customers. Typical reductions in page counts might be in the 10 to 20 percent range of the historic base number of pages for any given production," he says. "In addition, we are seeing adjustments in the level of prospecting done—down as much as 50 percent from 2001 levels (pre- 9/11)—by some catalog clients as a means of reducing costs.

Customer Behavior

"In contrast, other customers are prospecting at close to historical levels, marking a slight rise from fourth quarter 2001 circulations," Hutchison continues. "Additionally, we are seeing some of our customers reinvest savings from moderated prospecting activities and page count reductions by mailing more frequently to their best customers with catalogs featuring their best-performing products. Repaginations of previous catalogs, special wraps or promotions are frequently used to encourage response."

Like the other catalog printers, Perry Judd's has witnessed customers carefully scrutinizing their substrate choices. "We have seen a renewed interest in lighter basis weight stocks, which usually reflects a change in the range of two to six pounds in weight. Customers are also embracing changes in the quality of the paper stocks, moving down one grade," Hutchison notes.

The printer's response to these market dynamics also is in line with the actions of its peers. "We are striving with our customers to achieve continual unit cost reductions," Hutchison points out. "This effort encompasses analysis of the entire workflow and focused process improvement involving both our own and our customers' operations."

Technology may well prove to be the savior of printed catalogs by enabling production efficiencies and more sophisticated marketing initiatives. It also offers the opportunity to close the ordering loop. Leveraging the growing installed base of scanners and digital cameras, or maybe using some kind of digital wand, orders could be placed on line by reading a printed catalog number, embedded watermark in a product shot, or new SKU bar code added to the page. That would remove any potential doubt regarding the value of print to catalogers.