Thin Profits, Rising Costs Beset Ink Industry

As in the film Groundhog Day, many ink company executives feel that save few minor variations, little changed between 1999 and 2000.

By Theodore Lustig, Ink Columnist -- graphic arts online, 3/1/2001

Last year was to have held promise for the ink industry, but sales were essentially flat and few, if any, of the problems plaguing the business abated. Profit margins remained paper-thin, raw material prices continued their stranglehold on operating costs, and new pressures emerged as a result of higher energy, labor, and transportation costs.

The squeeze on profits has had a ripple effect in important areas such as capital investment and research and development (R&D). Some in the industry complain that, to the detriment of their customers, lack of profitability leaves them with very little money for new production or technical support equipment, or for expanding or improving existing facilities-investments that might afford them a better return.

Except for the largest ink companies, those with established R&D capabilities, many in the industry say they are hard pressed to keep up with customer demands resulting from developments in printing equipment, substrates, and computer-based graphic arts technology.

Lackluster year

In 1999, the ink industry reported domestic sales of $4.5 billion. While it's too soon to see an accurate sales total for 2000, estimates for the year fall far below $4.6 billion-an increase of no more than 1.25%. As a somewhat discouraged ink company executive ruefully states, "We expected 2000 to be a reasonably good year, what with the presidential election, the Olympics, and a good economy. But what we got was nothing to write home about."

Raw materials-of which more than 90% used in ink production are petroleum-based-remain a principal bugaboo as crude oil prices continue at the $30 to $32/barrel level. Even though it will be higher than they would like, ink companies hope that Opec will stabilize the price per barrel so as to avoid the wild fluctuations of recent years.

Stability, at the very least, permits a base from which to realistically calculate manufacturing costs, and provides a basis for establishing prices.

Prices increases stick

Two of the major suppliers of web heatset and packaging inks were able to pass on some of the higher costs of raw materials through a 6% to 7% price rise last year. They met minimal resistance from customers, who were afraid that their own operations might be curtailed if ink supplies were not forthcoming.

Manufacturers of sheetfed inks were not so fortunate; their attempt to raise prices failed principally because there are more ink companies competing in this market, making it possible for customers to shop around.

Dampening any immediate hope for stability in raw material costs is the rapidly rising cost of energy. The processes used in turning crude oil into sophisticated byproducts are energy intensive, and it is no secret that both the costs of natural gas and electricity are skyrocketing.

Obvious, too, is that higher energy prices will be a factor in the manufacturing costs of inks, as will be the higher cost of distribution (a detailed analysis of ink raw materials will appear in the Ink column in GAM's May issue).

Consolidation, e-commerce

One activity affecting the structure and infrastructure within the ink industry in recent years has been consolidation. In almost every year of the last decade, a reshuffling of the top 10 or so domestic manufacturers has occurred as financially troubled or market-limited ink companies of all sizes were acquired by their larger and more economically well-off competitors.

For example, in 2000 the Alper Group, which had been the fifth-largest domestic ink operation, was acquired by number-two Flint Ink while Kromacorp International, a Canada-based firm with extensive U.S. operations, was acquired by SICPA Securink (see sidebar on page 54).

A potential problem for the ink industry that occurred last year was the sale of inks via Internet companies serving the graphic arts industries. This e-commerce threat has failed to materialize, as few ink companies have pursued this particular marketing avenue with enthusiasm, and those sales that continue are limited to a very narrow spectrum of standardized ink products.

One-on-one relationship

As one executive puts it, "Ours is a business based on customizing products to individual customer needs. The major printers, packagers, and publishers require formulations geared to the peculiarities of their operations, and this demands a one-on-one relationship with their ink suppliers. Small commercial printers are about the only ones who can use off-the-shelf inks."

Several of the larger ink companies, however, have established Web sites that have become important links with existing and potential customers. They offer information on product lines and new ink products, provide an avenue for queries, and are useful in facilitating orders and order tracking.

What is surprising, though, is that only a few dozen of the close to 250 domestic ink companies have such sites.

The entry of many ink companies into the production of digital inks may change this situation.

From a segment of the market that was virtually ignored a few years ago, digital ink production has become one of the fastest-growing parts of the product mix for a number of ink companies. Since the customer base for these inks differs appreciably from that for traditional printing inks, the Internet may become an important means for marketing them.

A possible reason for the late entry of ink companies into this market was that, initially, colorants for digital inks were dye-based versus pigment-based (the latter the standard source of color for printing inks). Today, however, the digital process is undergoing rapid change, including the development of equipment able to apply very finely dispersed pigmented digital inks.

Ink companies now see this class of products as a logical extension of current operations and technologies.

Seeing the 'Net effect

Another part of the supposed e-commerce threat to the ink industry was the assumption that Internet advertising would divert money away from more traditional media, specifically print.

Two events have mitigated that threat to some degree. First, a major shakeout among e-retailers last year, with more than 100 going out of business, has freed up advertising dollars that have been reallocated to electronic and print media. One result has been a 10% increase in advertising pages in 2000 over 1999's total, going from 260,700 pages to 286,000, as reported by the Publishers Information Bureau. Obviously, more ad pages mean more ink consumption-a serendipitous development.

Even more interesting is the fact that a very large segment of dot-com retailers, not able to operate profitably solely on Internet sales, is turning to that staple of direct marketing, the printed catalog.

These entities have discovered what veteran catalog marketers like L.L. Bean, Lands' End, and Talbot's and store chains such as Sears, Home Depot, and RadioShack have long known: a well-designed, well-printed catalog has a much longer sales impact than ephemeral e-mail campaigns.

Catalogs also provide the very real added advantage of reaching potential customers in the 50% of the population still not yet hooked up to the Internet, which is a positive circumstance for both catalog printers and their suppliers.

But any real benefit to the future health of the ink industry lies not in relatively minor gains in some ink-consuming markets, but in continued growth of the national economy and in the ink industry gaining control over its costs. How this may be achieved will be addressed in the second half of this article, which will appear in next month's issue of GAM.