Outlook ’07: Ok to Run

Over the last three years, North American print markets have provided strong growth and profit opportunities for printers and industry suppliers. These good times were driven by a robust economy and expanding advertising and promotion spending. In the latter months of 2006, the economy appeared to be losing steam as growth slowed to less than half of the pace enjoyed earlier in the year. Where do these mixed signals point to for 2007? PIA/GATF has just developed an environmental scan for our members, Navigating 2007-2008 Print Markets. Last year’s scan, Over the Horizon: An Environmental Scan for the Economy and Print Markets in 2006-2007, has proven to be an accurate assessment of economic and print markets trends as they unfolded in 2006. We believe our 2007 projections provide an equally reliable road map. Our baseline forecast is that both the economy and print markets will exhibit a growing but slowing pace in 2007 before making a modest recovery in 2008. Our good news/bad news snapshot says the economy (change in real gross domestic product) should grow but at a slower pace as the lagging impact of a slowing housing market affects manufacturing and other sectors. This scenario calls for economic growth to be cut in half in 2007—to around 1% to 2%. Inflation will remain in check and labor markets will remain relatively tight but loosen slightly as the unemployment rate stabilizes or rises somewhat.

If the economy grows at the projected pace, print markets will also grow slowly with the growth of total printers’ shipments cut to about half of the 2006 rate. Shipments of ink-on-paper print are expected to remain flat for 2007, while toner-based/digital print and printers’ ancillary services should increase modestly. Printer profit rates should stabilize in 2007, after growing the last few years, and should show some limited growth in 2008.

We anticipate five major opportunities and three major threats that printers should be specifically concerned about in 2007, based on our baseline economic and print market outlook. Over the next couple years, pritners will witness five key categories of opportunity:

• Survival of the fittest: Printers with strategic vision and solid business plans can gain market share and achieve strong growth even in a slow-growth environment.

• Digital print: Toner- and inkjet-based print will grow at twice the rate of overall print.

• Ancillaries: Add-on work will grow faster than print overall.

• Key market segments: We’ll see faster growth in sectors such as direct marketing, packaging and labels/wrappers.

• Improved management performance: This will be experienced by printers that focus on cost control, productivity enhancements and training programs for their employees.

Three major threats to printers appear on the horizon:

• Slowing print market growth and higher likelihood of recession that will especially impact printers with weaker competitive positions.

• Continued cost pressures particularly in four cost areas—health insurance, compensation, paper and energy.

• Continued intense competition and pricing pressure driven by customer pressures to reduce cost and an overcrowded print marketplace.

We anticipate that 2007 will be challenging, but also a year when our member printers and suppliers can use PIA/GATF national and local affiliate programming and services to their competitive advantage to capitalize on the opportunities that will unfold.

Taking a high-level view of what’s happening in our industry, some would ask whether a pilot’s license or a parachute is more appropriate. In this new electronic information age, changes are coming fast and furious. But I was attracted to the printing industry because of that pace—and it is still accelerating. As our world continues to change, the role of the printer adapts with it.

By providing consumers with instantaneous, on-demand, 24/7 access to content, the Internet is rapidly and dramatically changing the print landscape, especially media-related businesses. New concepts such as Wikipedia, RSS feeds and Web communities (like MySpace and Facebook) are changing how people get information and how they relate to each other, giving consumers more control over when and where they view content—and make purchases.

While some of this shifting is generational in nature, it nonetheless cannot be denied. Catalogers are seeing the light of how print drives online sales, but will teen magazines such as Elle Girl and Teen People, which closed in 2006, ever again exist as ink on paper?

New technology can even deliver restaurant menus to cell phones. Yet print endures: It offers some unique values—touch, feel, familiarity, portability. And, it is still the only medium that does not violate the consumer’s time and space in the ways that TV, radio and, especially, the Internet do.

But there is an imbalance: While the Internet captured 6% of ad dollars in 2005, it garnered 13% of media viewing, say researchers at the Jordan Edmiston Group. Despite mounting pressure to re-allocate spending, 40% of all ad dollars still funnel through print media. The Internet is getting less ad dollars than its relatively large and growing audience warrants. (See pie charts on p.20.)

U.S. magazine ad pages are expected to remain flat for the next few years. The increased use of lighter basis-weight paper stocks, a reaction to postal rate hikes, will greatly affect mechanical operations at printers. Catalogs, expected to grow modestly, will also move to lighter stocks.

Technology such as that in cellular telephones, self-service kiosks and Apple iPods continues to encroach on the print landscape. As a result, content creators are changing their value propositions. Products that differentiate brands and engage the end user are becoming ever more popular. All this is occurring in an environment that requires lower costs to remain competitive. Rising energy costs affect all print purchasers and are influenced by external factors, such as the severe weather. As mills consolidate, paper, along with ink and postage prices, rises.

Smart printers need to use technology to lower costs, reduce cycle time and add value to print—not only for our customers, but for our customers’ customers. How can we add to reader experience and engagement in a magazine advertisement? We need to proactively develop better products to sustain print in the information age. Taking and fulfilling orders is a recipe for failure.

In the magazine business, it is becoming more costly to acquire new subscribers; at the same time, advertisers are tempted by alternative electronic media. Content generators (as the newest generation of publishers sees themselves) are pressured to reduce costs while proving measurement of readership and ad responses.

These factors put added pressure on the printer. Our cost of manufacturing is affected by technology, energy, materials and labor, all of which require diligent management. The skill sets to manage this change are another challenge: Young people today are not entering manufacturing industries such as printing—a trend we must reverse.

So if our challenges are great and we have less time to react, how do we move forward with confidence? Knowing our customers and knowing their businesses is more important than ever before. At Quebecor World, we have expanded our customer-survey programs, asking them to rate and rank our performance in more than 100 key areas. And the more we analyze what makes a successful customer relationship, the more we understand that our true value lies in our ability to help customers grow their businesses.

To be sure, the fundamentals are still important—speed, efficiency, flexibility, quality and reducing waste are the foundation of the traditional print-service relationship. To this end, we are moving toward wide-format presses with higher speeds, shorter makereadies and less waste. Presses now routinely use closed-loop color and other automation. Co-mailing technology is added in an integrated process on the back end. We believe these investments are properly addressing the cost pressures we and our customers face.

When we focus on the value side of the equation, much of our attention turns to finishing operations, which represent a great value opportunity for our industry. Magazine advertisers, for example, want new and better ways to differentiate their ads. They want them to literally stand out, or pop out, or shout out to readers.

Consequently, we see demand increasing for tipping, magna stripping, belly-banding, polybagging and all the related insert and onsert capabilities. Advertiser-supplied inserts are up, sleeved DVDs are common, and there is no end to publishers’ questions when it comes to what they can do to offer their advertisers something new, something gimmicky, something to help score that next big ad sale.

Customers want increasingly complex bindery services that traditionally have translated into slower speeds, greater waste and higher costs—exactly the opposite of where we want to be. Solving this dilemma is critical to our industry’s success. Most of the bindery gimmicks requested by advertisers today speak to print’s strengths. If our medium is all about “touching, looking and using,” let’s help customers sample products via efficient tip-ins.

We can’t afford to slow things down too much if we are going to successfully compete with the Internet. Binderies must makeready and run faster, become more automated and cut labor costs—all of this while quickly adapting to specialization, customization and the incorporation of touch, look and use concepts.

Advances in selective binding and gathering continue to enable more segmented publications. In an Internet world where individuals can have their own Website, we need to help publishers deliver even more focused editorial content specific to readers’ interests, as well as their advertisers target audience preferences.

Co-mailing, around for almost two decades, has been under-utilized. Today Quebecor World presorts and bundles as many as 30 titles at one time in ZIP-code order, pooling and drop-shipping quantities anywhere between 5,000 and 150,000. This not only reduces postage costs and improves delivery, but greatly reduces the work necessary at the Post Office. The bottom-line is that USPS wants even short-run, special-interest periodicals out of the mail sack, co-palletized and co-mailed to streamline delivery of these targeted magazines (and catalogs) to the ultimate consumer. Quebecor World currently has two co-mailing systems in place and is working on a third. A 30-pocket machine, expected to come on line in the first quarter, will expand the company’s co-mail offering by 50% in the new Bolingbrook, IL facility.

Quebecor World is retooling with new and more automated presses that are increasing productivity while reducing the number of operators. We believe there are still more cost-saving opportunities in the pressroom, but that the binderies will see the next major wave of efficiency improvements. Look for gains in the areas of virtual proofing, JDF, RFID and robotics. Editorial proofs have been virtually eliminated, and advertising proofs are on the road to oblivion as well. JDF is being used to reduce set-up time of bindery machines. RFID is useful not only in warehousing operations, but within the bindery as well. And robotics can reduce the labor required in the bindery.

New CEO Wes Lucas is preparing with his management team to invest almost $1 billion in the retooling and restructuring of a global printing platform, with new presses being installed in all major markets. While it’s true that JDF is being implemented on high-value equipment, the lower end should not be neglected. More work needs to be done on the IT side. With high labor turnover, especially in the bindery, consistent formats are critical.

Continued price erosion has severe negative effects on the entire printing industry. In response to that challenge, several efforts currently are underway at our company to add customer value throughout our platform and service offering. We are committed to creating the highest value of any other alternative for our customers. We are becoming more than just a supplier of print, moving into logistics (via distribution partnerships), Web services and other areas.

Despite some turbulence, I see a bright future on the horizon for this industry. Print’s destination may appear a bit foreign, but it will land with its wheels firmly grounded if we continue to add value.

This article was drawn from a keynote address given in late September 2006 at the NAPL Research & Engineering Council’s Bindery, Finishing & Mailing Conference in Chicago.

Courier is proud to be a part of the book world, which as an industry had posted steady business growth, generating publishers’ revenues in 2005 of $34.59 billion, a 5.9% increase over the prior year, according to the Book Industry Study Group (BISG). Full-year results for 2006 are not yet available, but industry results have been tracking at about the same level as 2005. BISG projects book revenues will top $40.4 billion by 2010, reflecting five-year growth of nearly 17%.

Publishing markets that experienced the greatest growth in 2005 were elementary and high (el-hi) school textbooks (15.5%), juvenile (9.6%) and religious books (8.1%). Adult trade books, which sold $8.8 billion in 2005, grew 3.9%, but over the next few years, BISG predicts a modest decline in growth.

Courier recently completed the best fiscal year in our 182-year history, posting double-digit growth in sales (up 19%) and net income (up 18%). A large part of the success was fueled by strong demand in the education market, which resulted in a 20% sales gain in el-hi books.Overall, book manufacturing sales were $220.1 million in 2006, up 14% from 2005.

A critical success factor for Courier has been continued emphasis on customer service coupled with an aggressive capital investment program tied to customer growth. The company builds relationships at multiple levels in clients’ organizations, visiting customers frequently.

At the request of educational publisher customers, Courier has strategically boosted 4-color printing capacity to meet growth. In recent years, the market has experienced capacity crunches in producing color textbooks, and Courier has since invested in high-output, high-quality print/bind equipment to substantially increase our output.

Publishers are under intense pressure to keep inventories down and are asking print partners to turn jobs in weeks and even days. The ability to turn jobs fast gives a book printer an enormous edge, and Courier has been retooling to accommodate publishers’ needs.

A key part of the recent investment was three MAN Roland Lithoman IV, 48-page wide-roll presses—the third press went into production in December. Courier invested $50 million in the past several years to expand 4-color operations at our plant in Kendallville, IN. We recently completed two additions totaling 115,000-sq.ft. to accommodate the three new presses, a new binding line, casing-in equipment and large-format CTP imagesetters.

Education will continue to be a big growth area for book publishing. Enrollment demographics and a rising tide of statewide mandates for new textbook adoptions continue to fuel demand for el-hi textbooks. Sizable book adoptions are planned through 2009 for many states, among them California, Florida, Georgia and Texas. The estimated market for new educational materials related to state book adoptions in 2007 is $750 million to $800 million.

Higher education markets also offer textbook growth, but at more modest rates than el-hi. There are 53 million students in the U.S. in grades kindergarten through 12, versus 17 million students enrolled in higher education institutions.

Courier’s biggest growth area continues to be educational publishing, and the company serves this market cover to cover, thanks to the acquisition a year ago of book cover and component printer Moore Langen and the installation last spring of several McCain sewing systems. (El-hi textbook buyers specify McCain side-sewing to ensure that bindings will stand up to years of hard use.) Moore Langen book covers accommodate a variety of special effects to capture the interest of students, teachers and school districts.

El-hi publishers have also increased customization of textbooks in the form of “versioning:” publishing texts with state-specific content. These different versions often require shorter print runs, so print and bind equipment must run efficiently.

The adult trade book world has been optimistic about a strong fall ’06 selling season, with a bumper crop of new titles from big name authors—Michael Crichton, James Patterson, Dean Koontz, Stephen King and John Grisham—whose new book titles traditionally help drive consumers into bookstores. 2007 may be a year of blockbuster books, as many industry watchers are predicting that the seventh and final book in the Harry Potter series may be released this summer. Also, Dan Brown may surprise us with the much anticipated Da Vinci Code sequel.

On the down side, mass-market paperbacks have been losing ground. To revitalize the market, some publishers have resized the books (same width to fit in store racks, but increased the length by 2´´ inches, allowing them to use a bigger typeface to appeal to middle-aged eyes) and increased the price to $9.99 from $7.99.

Another growing trend in book manufacturing has been publishers outsourcing print work to plants in Asia as a means to reduce costs. This started with juvenile books, but now extends to other markets as well. This is a niche market that Courier is pursuing. The company is building relationships with certain manufacturers there to outsource work for clients when it makes sense. Overall, demand for fast turnaround has limited the opportunities for off-shore book manufacturing.

For many of our members, the past several years have been challenging, mirroring those of many others in the printing industry: increasing competition, decreasing sales and narrowing margins, rapidly changing technology, shortfall of qualified workers.

Last November, the National Assn. of Quick Printers (NAQP) officially became part of the NAPL network. Like NAPL, NAQP has long been known for offering relevant and industry-specific information—from valuable studies and information conferences to negotiated discounts from leading suppliers and consultants.

As often occurs in a maturing, challenging industry, the process of natural selection in the marketplace eliminates a few of the weaker players. During those years, many NAQP members honed their business management skills and wisely spent their time reducing overhead, streamlining processes and workflow, eliminating unnecessary staff members and finding new sources of revenue resulting in even higher profitability in spite of decreased sales.

As borne out in our 2006-2007 Operating Ratio Study, for the first time in many years, the payroll costs as a percentage of sales are lower than in the previous period. This has resulted in an increase in profitability, which we measure as “net owner’s compensation” in our study.

In 2006, quick and small commercial printers, and NAQP members in particular, were in a very good position when the sales growth returned along with even higher profit margins. They approached 2006 prepared to make wise investments into new equipment and software in their prepress, pressroom and post-press operations that allowed them to take advantage of the upturn in the economy.

The year 2007 looks to be an even stronger year for our sector as printers continue flexing their entrepreneurial muscle and wisely using their management skills in offering the high- quality, quick-turn products with the highest level of service that customers have grown accustomed to and continue to expect.