COMMERCIAL PRINTING - A Soft Landing

BY MARK SMITH

This New Year's Eve can't help but be a letdown. Even though purists will note that it marks the true new millennium, there is no celebration fever or Y2K bug this time around. The muted celebration is expected to set the tone for the economy in the new year, resulting in a "soft landing" from the recent record-breaking pace of growth.

"This year we expect printing sales, not adjusted for inflation, to grow at right around 5.5 percent," notes Andrew Papparozzi, vice president and chief economist at the National Association for Printing Leadership (NAPL), Paramus, NJ. "The economy will grow by 5.2 percent, which will be the strongest rate of growth in 16 years, and a continuation of what has been the strongest five-year performance since the mid-1960s.

"NAPL doesn't forecast the economy, but the consensus of most forecasters is that the economy will be slowing. The question is, how much and how fast?" Papparozzi says.

"Right now, the feeling is that the Greenspan-led Fed is going to achieve a soft landing. That is, a gradual, orderly slowing of GDP (Gross Domestic Product) growth from the 5.2 percent pace we're seeing this year to around 3.3 percent in 2001. The reason people are forecasting a soft landing is because Greenspan started to attack inflation early, before it could become imbedded in the economy, and he is operating on a relatively healthy economy."

If the soft landing is achieved as expected, the NAPL economist expects commercial printing sales growth to slow to between 3.5 percent and 4.5 percent in 2001. If the landing is rougher than anticipated, print sales will be in the lower end of that range, he reveals.

The forecast coming out of the Printing Industries of America (PIA) is a little more optimistic, at least in the case of its recent "Vision 21" study. Conducted in association with Standard & Poor's/DRI, the study predicts industry revenues to grow by 4.7 percent per year through 2003. The difference in the numbers possibly could be explained by the fact that the study's figure is a projected compound annual growth rate over a multi-year period, which involves some averaging. Papparozzi's projection is just for 2001.

There is much closer agreement when it comes to projections for the general economy. The study's findings also call for a slowing in GDP growth, in this case to 3.4 percent. (This, again, is a projected compound annual growth rate for the years 2000 to 2003.)

NAPL's Papparozzi cautions that it is very important to keep in mind that this type of effort to fine-tune the economy is inherently risky. That's because no one knows exactly how large of an increase in interest rates is just right to achieve the target GDP growth rate and, unfortunately, interest rates work with a very long lag, he says.

"Add to that the relatively recent developments of turmoil in the Middle East and substantial increase in oil prices. What happens in the Middle East is beyond Alan Greenspan's control, and oil prices, like interest rates, work with a lag so it's unclear how much of a bite the price increases will take out of the economy," Papparozzi adds.

"While the consensus of opinion is that Greenspan will pull off the soft landing, these two issues may work to make the slowdown more dramatic. We just have to watch these developments very closely and, as an industry, be aware that after enjoying five years of a remarkably favorable economic environment, things are going to be slowing. We would be wise to begin preparing for the slowdown."

No Longer Mirror Images
In the past, the growth rate of printing revenues closely tracked GDP growth. In recent years, there has been a divergence in the two numbers, which the market outlooks agree will continue because of structural changes that are reshaping the industry.

"Over the coming decade, the growing economy will continue to lift the entire printing industry, although the growth in printing will be slower than the overall growth in the economy," notes the "Vision 21" report. It cites several reasons for the divergence:

• The introduction of electronic substitutes for business and consumer communications.
• Shorter print runs as a result of the adoption of on-demand printing and target marketing.
• Higher paper prices reducing print's competitive position.
• Further technological developments will enable more in-house reproduction by businesses of all types and sizes.
• Rising postal costs will impact print's competitive position relative to electronic alternatives.
• Basic printing services becoming a commodity due to the expansion of chain store and Internet-based reproduction centers.

"Changes in the structure of the industry, rather than product demand, pose the greatest challenges to today's small commercial and quick printers," the study says.

Papparozzi believes the structural changes will be even more far reaching and fundamental. He says that the structural changes are the result of the profound redefining of how people communicate, and how they use print to support that communication. Contributing factors include the Internet, e-commerce and digital printing/print-on-demand, which are still in their infancy.

"While our industry already has been wrestling with these structural changes, in 2001 and 2002 their impact will be felt in a less-favorable economic environment. While its growth no longer mirrors that of the GDP, the printing market still has a strong dependence on the performance of the general economy. The structural changes have made it a more complex relationship, though," the NAPL economist explains.

The complexity of the relationship extends to the business conditions in a given market segment, Papparozzi says. The correlation between a market's revenue growth and its demand for print still holds in broad terms, he explains, but it is impacted by the degree to which different industries are embracing alternative methods of communication.

"One of the most important types of research NAPL does is tracking the demand for print. We ask printers to pick an industry they serve and tell us everything they can about trends in print demand in that market, such as autos, healthcare, education, etc.," Papparozzi says.

"Let's take the auto industry as an example. The printers we survey who serve that industry say demand for everything is up. Clients are buying more print alternatives, but also more multicolor lithography and digital printing.

"Printers in the healthcare market tell us a different story, though," he continues. "They report that a lot of the directories they used to print are going online. It is more efficient for healthcare companies to communicate with their customers via the Web, since things like physician rosters can be updated quickly and easily. These clients also are demanding more digital printing because they want more targeted, shorter runs of the pieces they do still print."

The bottom line is printers must recognize they now are in the broader communications business, and the nature of communication is changing radically, the economist says. The most successful printers in NAPL's survey sample report that they are beginning to think in terms of being a communication solutions provider, not a printer, he adds. "That means being able to support a broader range of their clients' communication needs than in the past."

While a labor crunch has been a chronic problem in the industry, Papparozzi contends that it, too, represents a structural change today. Labor is a critical issue in the industry right now because of the 3.9 percent unemployment, and that is going to change, he admits. "However, it is very important for the industry to realize that the current shortage of labor is not simply a cyclical issue. The shortages have become a structural issue, since our industry now requires skill levels that its operations didn't need before.

"We are not just competing within our own market, but rather economy-wide for people with computer, sales and management skills. Those skills will remain in short supply even after the economy slows and the unemployment rate trends back up."

These same themes, and more, also can be found in the Forecast 2001 released by industry research firm TrendWatch, of Harrisville, RI. It expects the economic slowdown to really hit in the second half of the year, with the financial impact starting to affect printers in 2002. The forecast also looks at the longer-range picture, out to the year 2010, and says print will be a good business if you're a big shop, have little employee turnover, have a well-trained workforce, have an up-to-date digital infrastructure and know why your customers use print.

"Over the next 25 years, the printing industry will be structured more like the packaging industry, which produces nearly the same volume with about 20 percent of the establishments," the forecast says.

Among the key industry trends noted by TrendWatch for the coming year are:

• The Internet doesn't have to do everything that print does; it just has to take communications budget dollars and creatives' time to reshape what, where and how things are printed.
• Increasing energy and paper costs will change the value of print compared to other media, especially if advertising and communications budgets are constrained by the economic slowdown, as expected.

Theory into Practice
Since James Schultz, president and CEO of Great Lakes Companies in Cleveland, has been tapped to be a co-presenter of the 2001 Forecast at the Tech Alert conference, he seemed like an ideal person to provide a perspective from the frontlines. Great Lakes is a general commercial printer primarily, but it also is a good case study for diversification.

"As printers, we can't just go into customers with a pad under our arms and ask if they have any print work," Schultz says. "Our goal today should be to look for value-added solutions we can bring to our customers, so we don't end up just competing in the commodity arena. That would be my fear if all I had to offer was printing."

There currently are three groups under the "Great Lakes Companies" umbrella. Great Lakes Litho is a 70-year-old firm that does sheetfed and webfed commercial printing. GL Direct is a standalone fulfillment and database marketing company with an on-demand printing center. Its offerings include a custom-written program that gives customers online access to the warehouse, including placing orders.

The recently launched third group—called Aksess—is an application service provider. Its current offerings include online tools such as a custom-written digital asset management solution, VDI (visual document interface) for managing/searching native application files, and CAM (collateral asset management) driver for searching and ordering warehoused assets.

If there turn out to be any big business trends in 2001, Schultz expects acceptance of the Internet to be among them. "Unfortunately, when we talk e-commerce or the Internet in our industry, everyone's focus automatically goes to Noosh, Collabria, Impresse and that arena," he says. "Our approach at Great Lakes is different, because the print side of our company is still a regional, relationship-based business."

The Internet's real potential lies in enabling new services such as those his company has developed, Schultz believes. The opportunities are within reach of any company, regardless of size, if management searches out solutions to repackage, he adds.

"Even at Great Lakes we have two choices: build or buy. We are not going to reinvent everything. If it meets our needs, we'll buy a service and plug it into our system. To our clients, though, we are providing a complete solution.

"Print is a very mature industry, with customer/supplier relationships that typically have been established for years. Because of that, it can be hard for other print salespeople to even get in the door. If you have a solution to offer that a current supplier doesn't, you can get an audience at a high level of management. These services will come back around and fill your printing presses. We've already seen that in our operation," notes the company president.

Schultz agrees with Papparozzi that a consequence of redefining the print business is a worsening of the labor picture. "The printing industry vendors have done a good job of giving us new, more productive technology, so we haven't had to increase our employment on the print side to keep up with growth. But, some of the other services we are trying to get into present challenges. Programmers are like gold right now. Our fulfillment center deals with a lot of casual labor, so we are competing with Burger King and McDonald's for people."

To put all this another way, the consensus outlook for commercial printing is: new opportunities with some new and some old challenges. For printers, there will still be reasons to celebrate and toast the New Year, but that morning-after headache may well persist throughout the year.