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Print Outlook 2003: Slow economic recovery to continue
By C. Clint Bolte
To some, the worst snowstorm to hit the Washington, D.C. area in years that coincided with the start of last month’s annual Print Outlook Conference may have been a harbinger of the message at the conference: the economic forecast for the printing industry will remain stormy in the new year.

The insights offered by a group of industry leaders including two economists coupled with the traditional White House briefing on the narrowing priorities being focused on by the federal government proved valuable to attendees.

Michael K. Evans, PhD
NPES’ long-standing consulting economist Michael K. Evans, PhD, offered an interesting historical perspective on the US economy. While the nation’s Gross Domestic Product is estimated to have grown by 3 percent when the final indicators are in for 2002, the manufacturing sector remains in decline.

The Federal Reserve thinks they know what to do when a recession starts. They made all of the predictable moves with lackluster results. Evans said the first year of recovery was far below the historical average. The tax cut did not seem to help much as consumers spent only 20 to 25 percent of the windfall and saved the rest. The lowest interest rates since 1955 spurred short-lived consumption and housing but spurred no appreciable capital spending.

And net exports continue to decline, which has never happened before in the first year of an economic recovery. With investor’s disgust in the stock market and its continued historic overvaluation, there is an even chance it will go down next year.

The US dollar remains overvalued by 10 to15 percent, but little correction is expected as both Germany and Japan are also overvalued. Japan is in their 12th year of recession while Germany is considered the “sick man of Europe” with a 2003 GDP growth forecast of only 1 percent. The strong work ethic of Germany seems “to have vanished,” according to Evans.

The exodus of US manufacturing jobs to foreign locations has hurt the recovery and is expected to continue. China, for example, is successfully attracting foreign capital by demonstrating an orderly transition of their government as Chinese leaders continue their warm embrace of capitalism, showing an increasing respect for international law, and having a labor cost that is 10 percent of the U.S.

China was reported to have graduated more than 400,000 scientists and engineers this past year from Chinese colleges. India, with a large English-speaking population, has a similar story. Telemarketing jobs have already begun to move to India. While China may not be manufacturing world-class printing presses, they are expected to be purchasing the best from Japan and Germany and exporting printing worldwide. The products will not be time sensitive but rather commodity items, like certain books. Evans does not expect manufacturing to return to the U.S.

He doesn’t expect interest rates to decline further as the last reduction did not result in bond yields or mortgage rates coming down. This is a clear signal the Fed went too far.

“Until the United States can compete in world markets, our economy will not recover,” he said. He suggested the U.S. undertake four initiatives: reduce the value of the dollar; offer tax credits for firms investing and adding jobs in the U.S.; insist on lower tariffs from China and Japan; and retrain U.S. workers who lose their jobs.

The leverage to achieve these initiatives is that the United States continues to be the most favored market into which every nation wants to sell.

White House economic briefing
The White House briefing included four staff members offering a broad perspective on President Bush’s agenda. Dan Keniry from the president’s legislative affairs department remarked that one of the goals for the 108th Congress is to make the tax cuts passed during the 107th Congress permanent. Douglas Holtz-Eakin, PhD, chief economist for the White House Council of Economic Advisors, commented further that making these tax cuts permanent would raise the GDP .2 percent a year. This would mean $1,000 for every man, woman, and child in the country.

Chris Padilla, the assistant U.S. trade representative for inter-governmental affairs and public liaison, said the Bush Administration’s top two trade objectives are for there to be free trade among the 34 NAFTA (North American Free Trade Agreement) countries by 2005 and global free trade within the 144 countries that make up the World Trade Organization by 2015. He said both Canada and Mexico are ahead of the U.S. in achieving these objectives as Mexico already has 34 agreements in place. Currently the United States levies tariffs that average 4 percent while overseas tariffs average 40 percent. In response to questions from the audience, Padilla said that the Bush Administration and Congress have put in place a good structural support for employees affected by job loss. This current support is three times as great as ever available during earlier administrations.

Surveys show diversification by printers continues,
challenges remain
Andrew Paparozzi, chief economist for the National Association of Printing Leadership (NAPL) said surveys conducted by NAPL’s Printing Economic Research Center has confirmed that diversification into other graphic communications value-added services is a universal trend within the industry, but the people issues associated with successful diversification are huge.

“Clients have a narrow perception of our capabilities, which means we must market more effectively to broaden that perception. Internal perspectives are just as difficult as trying to get sales people to change,” he said. “Convincing clients of the value of the additional services, or convincing them to pay for these services is of concern to printers.”

One of the indices of productivity for every industry is annual revenue per employee. Paparozzi’s 13-year chart showed this upward trend clearly topping off and leveling out during the last three years. This can be attributed to lower contribution pricing levels during the recessionary times and the expanded value-added revenue streams that sell for lower margins because most are people-paced production functions as opposed to being capital intensive.

While productivity gains are expected to continue, most will be the result of management proficiency that must be measured by different criteria.

Advertising outlook for 2003
David Peeler, media analyst and chief executive officer of CMR, a division of TNS Media Intelligence, said automotive, entertainment, pharmaceutical, and packaged goods industries have led the 2002 advertising expenditures for a solid 2.5 to 3 percent gain. Movie releases are now on a 52-week roll out rather than the old holiday season cycle, which will keep movie advertising revenues much stronger going forward over the next 12 months.

The biggest media winner was Spanish language network TV with a 25 percent increase for the year. The two most significant media losers were the Internet (down 18 percent and B2B magazines (down 17 percent).

One of the key drivers of growth is audience fragmentation that leads to more localized media spending, particularly by cable networks. As cable operators find it harder to raise their rates, they will choose to become better marketers. Printers, who link in with these cable marketing efforts and programs by means of direct mail and fulfillment offerings, as examples, may be delighted at the growth opportunity available.

Next year should see overall ads spending up 3 to 3.5 percent as the political issue spending cycles are being initiated earlier. The real recovery will emerge in 2004 as both the Olympics and presidential campaigns kick in to give this “even year” traditional boost in overall advertising spending.

The state of consolidation activity
Harris DeWese, chief executive officer of Compass Capital Partners, Ltd., said following the peak years of 1998 and 1999, the number of mergers and acquisition for 2002 will come in at less than 20 percent of those earlier, over-exuberant years. While there continues to be an ample supply of motivated sellers, even at substantially lower valuations, buyers are bankrupt, ailing, or dormant. Independents are suffering from over capacity in a weak economy.

He said it is difficult to get the transaction details on deals below $5 million and these continue to represent probably 80 to 90 percent of all activity, however, there continues to be reported a rise in the asset/accounts transactions, referred to as “tuck-ins.” These are paid for on a back-loaded royalty basis.

DeWese expects to see a few new buyers to emerge over the next couple of years as well as a few “mega deals.” Specialty players are still desirable as well.

Printer panel discussion
In the printer panel presentation, Chris Colville, executive vice president and chief financial officer of Consolidated Graphics, said his firm’s priorities in 2003 are to focus on market share and margin improvement. Capital expenditures will be modest, relative to the past half decade, at about 3 percent of the anticipated $700 million in revenues. Half of those moneys will be spent on converting the final third of their 66 companies to computer-to-plate workflows.

Joe Metzger, president of Holland, Ohio Metzgers, gave his second-generation family firm’s evolution from a typesetter to a full service, half-sized sheetfed printer. Expansion into fulfillment services, direct mail, and digital printing over the past four years helped annual 2002 sales climb 8.3 percent to their historical peak. He has seven kitting customers, 400 skids in finished goods warehousing, and a fulfillment workforce of two dozen part-time employees comprising his “Mom squad.”

Frank Romano, of the School of Print Media at the Rochester Institute of Technology, said the average printer’s revenue streams is comprised 45.5 percent of prepress, press, finishing (and paper) with the balance coming from up to 11 other value-added services. That proportion is highest for small printers at 49.9 percent and goes down to 42.2 percent for the larger printers.

In looking at the print procurement decision path, the most significant initiator of projects at 61 percent of the total is sales and marketing, though it is very difficult to get to see these decision makers.

Purchasing is involved in two-thirds of all procurements while the originating/publishing department “buys direct” in about 35 percent of the orders. Similarly designers are involved in 71 percent of the projects. He shows conclusively that advertising drives print volume by illustrating that 65 percent of the total 2001 print volume of $151 billion was specifically advertising related. Another chart showed that print buyers are choosing to deal with fewer and fewer print suppliers. The chart showed 16 categories of print buyers broken down by their annual volume of print procured.

Those buying under $10,000 a year average five print vendors. As the volume grows, the number of vendors logically increases as well to 11.5 for those buying over $100,000 a year. The overall average is 7.3 print vendors with Romano’s projection falling to around five in the next few years.

Conclusion
The United States economy continues to emerge tenuously from a difficult two years with any number of possible global events capable of body slamming it back to the frozen turf of a double-dip recession. Printers, who think they are one good salesman away from getting back to their familiar growth track, could be in for a humbling period in their existence. The printing business is not expected to be like the good old days again.

Those printers, who concentrate their key resources on understanding and servicing the present and evolving needs of their largest, most profitable clients, will have their sights on the right priority. In the meantime they may find that downsizing or rationalizing overall capacity is a reality in the next few years. Professional management, frugal investing, and creative marketing will continue to offer exciting opportunities to the surviving and thriving graphic communications and marketing support specialists.

About the Author: C. Clint Bolte is owner of C. Clint Bolte Associates. He consults to the commercial printing industry on topics such as strategic technology assessment, product development, in-plant printing studies, fulfillment, warehousing and other industrial engineering disciplines. He can be reached at 717-263-5768 or by e-mail at .