A Cautionary Tale

OUR BELOVED printing industry is forever wrestling with economic uncertainty, while simultaneously marching in the vanguard of one technological revolution after another. Small wonder, then, that users of so-called “conventional” offset technologies have grown particularly adept at the kind of strategic logrolling that is an essential survival skill in this “pushmi-pullyu” business environment.

In 2008, negative economic variables like the housing glut, the mortgage credit crisis, rising oil prices and a looming recession, along with print-positive developments like election-year spending, will have their respective down and up pressures on the offset sector. With the 2008 edition of the annual Offset and Beyond conference slated to kick off in April, Printing Impressions asked a number of leading experts to comment on the challenges affecting the U.S. offset sector’s short- and long-term growth potential.

Print has been decoupled from the nation’s GDP for a few years now, a trend that probably doesn’t bode well for the industry. “At best, we’re entering a period of slow growth and stagnation. At worst, a recession of some duration. To the extent there’s an association,” predicts independent consultant John Zarwan, “the worst is yet to come.” In the face of an already challenging environment, “this trend will be an additional burden a lot of printers will have to carry,” he adds. “You already have ostensibly well-run companies going out of business.”

As a result, warns Bill McLauchlan, senior technical consultant of web press operations for PIA/GATF, “medium- and large-sized printers will be extremely cautious with their businesses in the coming year. The small-sized printer will find it tough going, due to competition.”

Should the country fall into outright recession, adds Richard Holliday of 3P Inc., offset’s ongoing loss of market share to VDP or masterless digital printing could be further eroded by sheer economics, despite its inherent quality advantages. In the longer term, however, “offset should grow with the economy (in line with) increasing economic freedom and development in overseas markets,” Holliday believes.

At the end of the day, adds Ray Prince, vice president and senior consultant of operations at NAPL, while short-term declines in most print markets are to be expected this year, accompanied by the usual belt-tightening, “the end of a recession always brings a strong ramp-up” to productivity and profitability (with) long-term growth at moderate levels.”

While recession worries threaten to dampen print markets, election year spending provides a ray of sunshine and a welcome bump for many printers. Despite the rise of the Internet (YouTube anyone?), ink-on-paper opportunities should be plentiful between now and November. “There is still a lot of print involved,” Zarwan explains.

“Some public companies break out their election spending separately and it can be significant. It might help some folks get through the downturn.” The downside? “Most of this stuff is not cash-in advance, especially for candidates that lose,” Zarwan points out.

“If there is a slowdown combined with stagnation in the print markets, printers may not have the cash flow to carry these guys. But printers have been there before.”

Yes, printers have been there before, but not every one of them is still around to tell the tale. In a down economy, the long-term, sustainable advantage typically goes to printers with access to low-cost capital. “Unfortunately, the smaller, family owned printer is challenged in buying new equipment, and the reason it’s especially difficult now has to do not just with what interest rate you have to pay, but whether they will they make you a loan at all,” Zarwan continues.

“It’s not just that rates may be higher—the money just isn’t available. Printers are already encountering this issue and it’s being exacerbated by current conditions. How do you buy a $2 million press if you’re a $1 million printer, and the manufacturers are tapped out?”

You could sell your company or merge with another, but these options are not available to everyone. “There are many companies available for sale, but it’s also a buyer’s market,” Zarwan explains. “Companies looking for businesses to acquire can be fairly selective because a lot of properties are up for sale. The number of printing plants is down 15 percent over the past seven years. A lot of companies that fail to be acquired will close.” To help avoid this Hobson’s choice, printers can spread their work over a diversified client base.

The departure of failed printers may permit the best managed enterprises to grow profitably in a down market, Holliday says. “I’ve never known a time that printers did not complain about too many cylinders chasing too little work.

“I’ve also never known a time when aggressive, customer-focused printers weren’t growing profitably at the expense of their less aggressive and less astute competition,” he adds. “Printers are still eating their less savvy competitors’ lunch. They always have and they always will.”

The effect of the Internet has been much more profound on the newspaper, catalog and directory segments, and, by extension, the community of sheetfed and web offset printers that produce them. Zarwan sums up his observations thusly: “Dismal.” The least dismal outlook is for phone directories, whose imminent demise has been predicted—fruitlessly—for years.

“Most small businesses will continue to advertise in the Yellow Pages,” Zarwan contends, although he is careful to point out that ubiquitous cell phone networks don’t utilize printed directories. Catalogs are more negatively affected by their online counterparts in terms of cost, postage and format size, although specialty catalogs continue to multiply in mailboxes across the land.

The damage inflicted by the Internet on cash- and reader-starved newspapers, however, is serious and escalating. The Interactive Advertising Bureau and PricewaterhouseCoopers recently announced that Internet advertising revenues for 2007 were estimated to grow to $21.1 billion, a 25 percent increase over the previous revenue record of nearly $16.9 billion for the full year 2006. As circulations and paginations decline, a number of newspapers have taken on commercial work to absorb the excess capacity of their newspaper webs, aided by the advent of UV capability on those presses.

“Conventional logic says that if there is a web press sitting there with nothing to print, the newspaper is losing money,” McLauchlan says. “Owners and managers in the newspaper industry are missing a great opportunity if they don’t at least look into printing new work.” Some papers have expanded their production facilities or gone so far as to build dedicated plants to support their commercial printing activities.

In doing so, counters Holliday, “they also have to overcome impediments that newspaper publishers and printers have always faced in the commercial print market: labor skills, labor cost, production culture, prepress capability, press capability (print quality, stock requirements and the like), bindery/finishing capability and scheduling.”

A more interesting trend, says Zarwan, is the practice of newspapers outsourcing their printing, as evidenced by the 2006 deal struck by Transcontinental Inc. and The San Francisco Chronicle. After all, “newspapers are in the news business and not in the printing business,” he says.

According to Holliday, continued pressure will be brought to bear on the newspaper, catalog and directory segments by converging technological and social trends. “They will, however, survive and serve market requirements longer than a pure technology- based forecast would indicate. Information consumers, even younger, cyber-savvy ones, seem to be clinging to hard copy.”

These are not the only segments under pressure. Burdened by postal rate increases, traditional web work like magazines, periodicals and books is also slumping. It’s helpful, says Holliday, to observe the following test for print market segment vulnerability: “Does the print product carry advertising? If not, it’s more vulnerable. Is the print product subject to rapid obsolescence? If yes, it’s more vulnerable. If the print product generally is read in one location vs. being portable, it is also more vulnerable.”

With respect to magazines and books, Holliday believes their vulnerability to the Internet is closely related to the degree to which readers place a high value on the image quality, handy retention and portability of the printed product. Just as specialty catalogs appear to be resisting the general decline in the overall catalog market, special interest publications that contain high-quality images that might be retained for future reference and sharing are examples of the least vulnerable of the magazine segments.

Postal increases are hardly a new phenomenon, of course, and while magazines and periodicals are hurt every time postage goes up, eventually they bounce back, Prince observes. Books, however, are another issue altogether. “If there is no time demand at all, they go to China. If there is a time demand, they stay here,” he says.

Still, the savviest book printers are growing “by choosing their markets and customers carefully, and by investing in highly productive technology. Those with older technology will die soon, very soon.”

Recent innovations—such as computerized press presetting, automatic quality monitoring and closed-loop color control—have been critical in opening up new opportunities for web and sheetfed printers, as well as in controlling costs and extending offset’s range well down the run length ladder, Holliday says. He adds that computer-to-plate technology also has facilitated the development of presses with very-large format (VLF) configurations capable of high page counts, shorter run lengths, and of boosting VLF offset’s competitiveness against gravure.

On the sheetfed side, “The newest technologies to influence cost are direct drive, improved color management and inking systems, as well as anti-marking systems for plastic, UV and hybrid UV printing—and the list goes on,” according to Prince.

At the same time, gapless blankets, quick-change plate cylinders, automated plate changing systems and CIP4 integration are making a big difference in the handling of short-run work in web pressrooms, and Holliday also reports that in-line finishing on web presses continues to work on its long makeready disadvantage as order quantities and run lengths continue to shrink.

“All printers must continually evaluate their production capabilities to succeed in a world of reduced order quantities, increased print quality and consistency requirements, and shortened order-to-delivery cycles,” Holliday explains. “Too many printers have failed to maintain and equip their presses to reduce labor costs, spoilage and wasted time.”

A glance at the flip side of the same coin reveals that meeting the future needs of the industry has as much to do with skilled labor recruitment and training as with equipment. “We need sharp, well-trained, computer-literate employees to work with the new high-tech, computer-facilitated offset presses,” Prince says. “Although employees like these are well-paid in our industry, they are also difficult to find. The demand for quality prepress and press operators is high.”

Unfortunately, the outlook here is perennially bleak, due partly to the demise of graphic arts programs in many high schools and colleges, as well as to the unearned stigma that has come to be associated with working in an “outmoded” manufacturing environment.

Not only is Internet advertising fueling a long-term downward trend for print, but new and emerging technologies—like digital and digital variable data printing (including transpromo), Web-to-print and distribute-and-print—are also exerting pressure on the markets served by sheetfed and web offset printers. “To the extent that Web-to-print and distribute-and-print models are successful and replace present offset work instead of creating new print volume, offset markets obviously will suffer,” Holliday concedes. He notes, however, that much remains to be seen.

“We have to consider the possibility that the VDP models may also provide the impetus for new longer-run, higher-quality graphics products that fall into the offset range,” he says. “In other words, offset will continually lose market share and shrink unless the economy grows or new print products land beyond VDP’s reach in terms of quality, features or run length categories.”

As for Web-to-print, Zarwan advises, “Everyone thinks Web-to-print implies digital, but it doesn’t necessarily.” Adds McLauchlan, “Faster makereadies, quicker turnaround times and shorter downtimes will continue to build Web-to-print on the positive side.” Prince concludes by pointing out that these “new” models have actually been working well for some time, and that their net effect has been to enhance offset markets. PI