Within the last decade, more than 60% of printers have played with the idea of diversifying their print business especially into non-print related ventures and sadly, more than 80% of this group have gotten their fingers burnt in the process. In the process, one has seen the total extinct of a promising business venture. In this part one of our serialised cover story from Wayne Lynn white paper on how to survive in today’s chaotic environment, Wayne exposes printers to practical and strategic opportunities for them to survive and thrive.
PREAMBLE – THE CHALLENGE
These times are challenging. Businesses are being threatened with tighter margins, increased competition and financial limitations. Suppliers, customers, and regulators are demanding more as they grapple with the uncertainty that global events are creating.
Leaders in business are accountable to effectively and efficiently deal with the external world, attract and retain top talent, and deliver bottom line results to all stakeholders. This white paper deals with some of the most immediately beneficial strategies that leaders can pursue in increasing their opportunities to survive and thrive. We show how to make an immediate impact and how to improve your long-term business fundamentals.
BUSINESS ENVIRONMENT
The structure of the printing industry is evolving into what economists call the oligopoly market structure. Some call it the “barbell” structure. At one end of the barbell are a few but very large firms and, at the other end, over 25,000 others. Such is the end result of 3-4 decades of industry consolidation. At this point in time, if memory serves me, total industry revenues are split about 50-50 between the two ends of the barbell.
The latest Printing Industries of America (PIA) data, however, suggest that the larger firms (and, by the way, there are about 2,500 or so if you use a dividing line of 100 employees and $10 million in sales) are growing again and almost no one else is. There are numerous reasons for this that include the fact that larger firms are starting to do “tuck in” acquisitions of smaller failing companies where the owner(s) have decided they need to get out before it is too late. The larger companies also, typically, have better sales forces and pricing power and can “cherry pick” a shrinking firm’s customer base with better offerings and operational capabilities.
This is an important statement about our industry and where it’s going. Here’s why. Think Lowe’s, Home Depot, and who? Think Wal-Mart, Sears/Kmart, Target and who? Three to four decades ago both the home improvement and discount department store retail categories were crowded with many more well established large players.
What happened? The market dynamics of an oligopoly took over. Total category growth slowed down. The big players were public, subjected to the pressures of continual growth and improving profits. In a slowing market they started buying growth through acquisition of the smaller players. Where there was no suitable acquisition candidate, they simply used their economies of scale and squeezed out the local “mom and pop” stores who couldn’t compete with their everyday low prices. Sound familiar?
The wave of consolidation in our industry that started as early as the 70’s in some segments is not over. The general commercial segment, the industry’s largest, is nowhere near done with this process. The companies on the small end of the barbell (less than 100 employees) are struggling to compete and survive. Most are suffering long-term sales declines (since 2008) and still have debt on the books that was incurred when they were larger and still expected the market to grow. Total industry sales have declined by, at least, 25-30% in the past 4 years and offset lithography as a process has been shown to be in permanent decline.
The total count of fi rms in the industry is now around 27,000. The overwhelming majority of those companies that have left the market are those with employee counts less than 50. Internet and satellite based communication channels are eroding print’s traditional media share and, since the advent of social media beginning in 2009, print volumes are shrinking even faster. Based on PIA and other sources, digital print and some ancillary services are the only parts of the industry growing now. Digital print volume has grown steadily for the past decade. Rising paper and postal costs have forced marketers to become more targeted with their mailings. Digital print’s ability to produce variable content has helped with the push toward better targeting.
A recent edition of the quarterly PIA magazine had an article by Bill Lamparter with several predictions about some of the things discussed here. In that article, Bill makes the following predictions that, sometime in the next 3-5 years:
• The total market share of the offset process will shrink another 25%;
• The total market share of all digital printing will grow by 50%;
• As the two trend lines cross the two processes will have equal market share and, afterward, digital share will be larger than offset.
While Bill’s numbers and timing may be off one way or the other, it is hard to argue that he is directionally wrong. I think company owners should consider this trending and their likely continuation as an important part of the decisions being made today to keep their companies viable and relevant in the market. If what has happened in the discount department store, grocery store, drug store, and home improvement store retail segments is any indication, we will see continued shrinkage of total company counts in the industry. Due to the impacts of trends discussed above, the overall output of the traditional printing industry will continue to drop for another decade or so. More will be said about these trends in a later section.
Profitability distribution of the industry For a long time, PIA ratio study data has painted a picture of typical profits in the industry that suggests two groupings similar to the one above. About 25% of the participating firms have, in most years enjoyed pre-tax margins of 8% and above. The remaining 75% have typically not shown profits and the combined industry average is usually in the 2-3% range. This has held true across all of the company size groupings in the industry. The ratios of the profit leaders and profit laggards, respectively, are significantly different. However, from year to year the ratios of each have maintained a very consistent relationship with each other. If you totalled the impact of the differences in the profit leaders and laggards and mathematically reduced it to the average sales volume for each size category you saw millions of dollars of performance differential between the leaders and laggards on an industry wide basis.
This has been true for a long time and speaks to a tale of two industries, not to be literary but to make the point. Since the beginning of the Great Recession in late 2008, these trends have worsened and the performance of the laggards has dropped into territory that, at best, is characterized as perilous from a survival standpoint. Making matters worse, margins in the smallest sized groups are significantly lower than the margins in the largest couple of groups.
This may explain why fi rms from these groups are leaving the industry at a rate much higher than the largest ones.The characteristics of the profit leaders have helped many of them weather the storm of the economic woes of the US and, specifically, the printing industry. These companies tend to not only be more profitable but, also, more productive, less indebted, less asset intensive which allows higher asset velocity, and, probably more important than anything, have had market traction the laggards don’t have and have come through these tough times with less impact on their top lines. Not only do the profit leaders operate more viable businesses they appear to be more relevant in the market and to their customers. They display better adaptiveness in terms of their ability to change with the market and the environment. They have built into their DNA an ability to endure hardships, perform at consistently high levels, and keep on going…to be continued Next Edition.
