Catalog and Publication Outlook -- Proceed with Caution

SOFTENING SALES. Declining revenues. Cutbacks, layoffs, bankruptcies. Unfortunately, these are the buzz words for 2008—not only for printers, but for most manufacturing segments across the United States. As U.S. printers look straight into the face of one of the worst economic downturns in generations, there is a universal acknowledgement that these are difficult times, indeed. New Year’s celebrations, typically filled with hope and opportunities, are currently clouded with uncertainty.

Forecasts for all printing markets in 2009 are stamped in cold, bold letters: Proceed with caution.

“Clearly, the economic downturn has altered the dynamics and increased the challenges for catalogers and magazine publishers,” says John Coyle, president of Catalog, Direct Marketing and Retail Services at RR Donnelley. “Studies continue to show the consumption and effectiveness of printed catalogs and magazines. Magazines, from the perspective of their significance and efficiency as a medium in the key stages of the purchase funnel. Catalogs, from the perspective of continuing to be a critical component in any multi-channel strategy—from driving direct sales, to driving consumers and prospects to catalogers’ Web pages.”

A Host of Challenges

In general, the economy, raw materials and digital migration have all combined to significantly affect the magazine market, explains Rick Marcoux, president of RR Donnelley’s Magazine and Commercial Services. In 2008, pressures continued from bankruptcies, title closures, declining advertising, and newsstand and subscription revenues. At the same time, consolidation of titles and publishers continued, both from other publishers and private equity, as access to debt and/or equity funding has become more difficult.

“For both consumer and business titles, magazine ad pages and ad revenues have been down year-to-date, in part, due to the health of many advertiser categories,” Marcoux says, noting, however, that new title launches still remain strong.

“At the same time, we have seen publishers discontinuing non-performing titles completely, reducing frequency, reducing run counts or making them Web-based only, and doing so in much shorter windows than in the past,” he explains. “Also, there continues to be downward subscription pressures on weeklies, especially the business weeklies, resulting in publishers reducing circulation and frequency, in addition to organizational restructuring and reductions in work force.”

Marcoux emphasizes that publishers are looking to improve top-line performance through several strategies and tactics. First, is an upward pressure to raise magazine cover prices, which, in the face of the decline in units/pieces of newsstand sales this year, have enabled publishers to improve top-line revenue. In addition, he says, publishers are looking for growth in online advertising revenue models, as well as a focus on local advertising as a new revenue stream.

“In some cases, publishers are also increasing versioning and one-to-one marketing, affording opportunities for printers to utilize their regional and national commercial print network for local production and delivery,” Marcoux states. “Publishers are also looking for new or expanded revenue and content growth in both custom publishing and corporations’ employee communications.”

Additionally, magazine publishers are requesting more cycle-time reductions that allow them to close magazines later, in an effort to aid advertising sales. He notes that publishers have also been adopting more digital technologies to reduce production times and eliminate steps, such as using virtual vs. hard copy proofs.

“We have seen increased interest in innovative print ideas that garner the attention of readers and advertisers, such as foils, gate folds, electronic ink and unique design concepts—balanced with the impact of advertising revenue fall-off, which, in some cases, has resulted in fewer advertising options such as bind-ins, tip-ons and other piece-parts of their core titles,” Marcoux explains. “Publishers are also looking to reduce trim sizes, as well as paper basis weight and grade reductions.”

Retail forecasts will significantly impact the catalog segment in 2009. According to Coyle, even online shopping is showing softened sales. As 2008 draws to a close, catalog printers are already being impacted, as many retailers report strained earnings.

“Due to economic conditions and even the lingering impact of the postal rate increases of May 2007, there are increasing efforts to reduce overall costs within the catalog industry,” Coyle notes. “These are being manifested as a select reduction in pages, select reductions in campaigns and the resulting catalog ‘drops,’ and even some reductions in the total number of base catalogs mailed. In some cases, catalogers have chosen to replace some of their catalog drops with direct mail pieces to engage their customers.”

There has also been some migration to smaller-sized catalogs to reduce postage, including more focus on letter-mail digest and “slim-jim” size catalogs. There continues to be increased focus on co-mailing opportunities as catalogers, working with their printers, successfully realize co-mail postage savings, not only with partner catalogers, but also across their own sister titles and companies.

“USPS postage cost changes are now capped at the level of inflation,” explains Marcoux. “Therefore, the issue becomes mostly regulations and the initiatives that the USPS is taking, and must take, to reduce their costs and comply with the performance standards and service measurements as defined by the new law.”

Coping with these regulations and initiatives will require mail preparation changes, system changes and mail strategy changes across all of the major classes of mail. According to Marcoux, these changes, which are coming at a very fast pace, will introduce extra cost to catalog/publications printers just to maintain pace. In addition, he says, it will also require printers to develop and invest in additional technologies to reduce mailing costs through a variety of in-line and off-line finishing capabilities, transportation synergies, routing efficiencies and list enhancement techniques.

Website and e-catalog competition are other influencing factors in the 2009 outlook. Marcoux points out that publisher Websites and e-catalogs continue to be complementary to their print counterparts, as publishers and catalogers become more adept at multi-channel marketing to drive revenue across their platform.

Specifically for catalogers, Coyle maintains that the multi-channel model continues to be fine-tuned, where Web sales continue to grow, as printed catalogs remain their primary sales channel. “The key is to use the catalog to inform and provide a call to action,” he says, “which, in turn, helps drive online (and, in some cases, retail) sales.”

“Successful catalogers and magazine publishers will continue to find ways to be relevant, to grow their top line and to manage their bottom line, in light of slowing consumer and business spend,” Coyle says. “Return on investment, while always critical, will be even more so, as catalogers determine the most cost-effective ways to promote without negatively impacting revenue opportunities, while magazine publishers look to continue to most effectively connect with readers and advertisers.”

Being Adaptable Is Key

Much like RR Donnelley, no one at Quebecor World is wearing rose-colored glasses. Sean Twomey, executive vice president of market development at Quebecor World, admits that these are troubling times, indeed. “We believe that 2009 is going to be a very difficult year for printers, as is the case with all manufacturing industries.”

“We’ve seen decreasing magazine ad sales, canceled titles, wholesale layoffs and production departments rationalizing capacity,” adds Kevin J. Clarke, Quebecor World’s president of publishing services. “And, there are the traditional issues—like rising paper, postage and distribution costs—as well as competition with the Internet, which could be more problematic than ever before, due to the severity of the present recession.”

Both agree that weakening magazine ad sales will be the most significant challenge heading into 2009. Some publishers are changing the formats of their publications, like Rolling Stone’s recent switch from tabloid to traditional format (which Quebecor facilitated seamlessly, says Twomey). Or, US Weekly’s transition to more regionalized news coverage to drive value (which Quebecor was instrumental in orchestrating, according to Clarke).

There’s also a shift in what types of magazines are finding/maintaining success. There is certainly a decline in mass-market publications that appeal to a broad range of people. Some of those titles are being challenged because the editorial content isn’t as timely or, because it’s so general, it loses its appeal to readers who want fresher, more insightful information.

Having spent $330+ million on its North American network, Clarke claims that Quebecor World is now better positioned to handle the economic instability that lies ahead.

The company aligned its six operations into three, which has provided great synergy, and its traditional printed products are aligned with other options, such as direct mail, co-mailing, co-stitching, etc. As a result, Clarke points out that the company is poised to handle challenges in 2009 in three major ways: its market strategy, pooling corporate resources and leveraging the benefits of sustainability.

“As part of our market strategy, we’ve channeled our business to fit the publishing community; 40 percent of our top 25 customers depend on us for their total graphic communication needs. Another way that we are able to deal with economic challenges is our ability to use the strength of all of our assets,” Clarke continues. “We have 100 facilities that can be used to pool our resources and employ our entire network to provide solutions for customers. For example, when paper costs are up, we can run magazines as multiple-ups and can offer clients long to short cutoffs.”

Third, since Quebecor is a green operation, it has the ability to reduce the carbon footprint of its printing processes and, ultimately, its customers’ products. “We have minimized our ink usage and have changed our ink formulation to be more eco-friendly. We’re using recycled content paper and are reducing our paper waste. And, we have a green supply chain. Together, these enable us to offer clients smart, green solutions,” Clarke says.

To confront rising postage costs, Quebecor World has the resources to go deep into the mail stream to cut expenses, Twomey explains. On the distribution front, with so many facilities across North America, Quebecor World has the ability to speed up distribution, while keeping costs down, by shipping products less distance.

“Across the board, Quebecor World is retooling and gaining momentum,” adds Clarke. “We’re getting back to our traditionally strong DNA. We are winning new customers and expanding business with our existing clients by offering them the flexibility and power that comes with our size and scope.

“It’s not the strongest or the most intelligent of the species that survives,” he concludes, quoting Darwin. “It’s the one that’s the most adaptable to change.” PI