March 14, 2003 -- Recently, we asked print providers several questions about their paper purchases and requirements. Some of these questions were also asked of print customers in yesterday's feature. Role of Print Customer in Specifying Paper Print providers indicated that customers usually specify many of the physical attributes of the paper for their jobs, but often do not specify the brand of paper. Over 63% of print providers indicated their customers usually or always specify the physical attributes of paper, but only 23% of print providers indicated their customers usually specify the brand of paper. This finding was consistent with the feed back from the print customers in the companion study. In general, customers of larger print providers are more likely to specify the attributes and brand of paper. Clearly paper is a critical element to the look and feel of the printed piece as well as the cost. Print providers often play a critical role in helping a customer determine the type of paper and often make the final decision on which brand of a specific grade of paper is used.   Paper Order Frequency and Average Order Size Most printers are ordering paper on a daily basis or several times per week. Only around 17% of print providers order paper weekly or less frequently, and many of these companies tend to be small printers with annual sales of under $1 million. The research indicates that the vast majority of print providers with annual sales of over $1 million order paper daily or several times per week. CAP Ventures believes that larger print providers have tighter inventory management controls and receive more responsive customer service from their paper supplier than smaller printers. A large company does not want to maintain too big an inventory (space, cash flow issues) and can lean on the merchant to provide just-in-time delivery. As might be expected, those respondents that categorized themselves as general commercial printers tend to order paper the most frequently. This type of company often is larger in size, has a wider range of jobs that require different paper, and may have turnaround times that tend to be a bit longer than with digital print specialists and quick printers. They don’t necessarily need to have a grade of paper in stock to meet the customer deadline. General commercial printers also may have shop and inventory management systems and tighter relations with their paper merchant that enable them to run on a more just-in-time basis. While a slight majority of print providers indicated they have not changed their paper order frequency over the last two years, just over 30% of the respondents indicated they are ordering paper more frequently. Only 15% indicated they are ordering less frequently. The upshot is that paper order frequency has been accelerating over the last two years. Most of the increase in frequency of paper orders has been by mid-size and large printers. Around 45% of print providers with annual sales of $10 million or more indicated they are ordering paper more frequently. Many of these larger companies have robust inventory management systems with direct interfaces to their paper suppliers automated order placement and shipping notification. At the other end of the spectrum, the small print providers with annual sales appears to ordering paper a little less frequently. Over 82% of these companies indicated there has been no change or they are ordering paper less frequently than two years ago. The average paper order size seems to have remained about the same over the last two years. 41% of companies indicated their average paper order size is smaller than two years ago, 31% stated it was larger and the remainder indicated no change. Nearly half of printers with annual sales of $10 million or more indicated their average paper order size has declined. This decline is probably related to the increase in order frequency and change in their average job size. It may also be due to the change in the size of their business. Note than many of the largest commercial printer have been hardest hit during the industry recession over the last 18 months. 50% of mid-size printer ($3 million to $9.9 million in annual sales) indicated their average order size has increased. Many of these companies are also experiencing more frequent ordering. CAP Ventures conclusion is that many of these companies are growing in size and printing larger jobs. 59% of the digital print specialists indicated their average paper order sizes has decreased over the last two years. These companies generate the majority of their business from digital production printing and specialize in short run, fast turnaround work. When examining average paper order size by order frequency we find a nearly even split of the printers. 44.4% of printers that order paper more frequently are making smaller average orders, while 48.1% are placing larger average orders. We suspect those companies that are ordering paper more frequently and placing larger average orders than they were two years ago are companies that have been growing. The printers that are ordering more frequently and placing smaller orders are likely to be focused on better inventory management. Of the printers that are placing orders less frequently, 51.9% are placing smaller average order sizes. The research suggests these companies are smaller in size and/or have a different mix of business (e.g. less longer run offset and more digital printing or related services). Nearly 40% of print providers indicated that having paper grades for their digital printing equipment that are comparable with offset grades is very important or critical. Less than 15% of print providers with digital printing equipment indicated that having offset comparable paper grades is not important at all. CAP Ventures believes this high level of importance is due to the fact that many digital print jobs are ones that would have been run on an offset press. Paper Issues With Digital Printing CAP Ventures asked print providers with digital printing equipment to indicate to what extent they are experiencing problems or limitations related to paper. In general, print providers did not indicate any severe problems. There tend to be more problems with high-speed digital black and white printers than with digital color printers. The most commonly cited problem is “cracking of toner when the sheet is folded or finished”. Over 36% of companies with a high-speed black and white printer indicated this issue is a “significant problem that often prohibits running a job”. Just under 25% of the companies with high-speed color printers indicated this issue is a significant problem. The next biggest problem for high-speed digital black and white printer users is the ability to print on glossy stocks. This problem is related to the high fusing temperature that can blister the coating on the paper. The toner can also have a matted look on glossy stocks that is not appealing. This problem is much less prevalent with high-speed digital color printers with just over 8% of these users indicating the issue is a significant problem. Many of the equipment manufacturers have designed their high-speed black and white devices from a copier heritage where printing on glossy stocks was not a requirement. Conversely, most high-speed digital color printers were designed to capture jobs that would have been run on an offset press and typically require some type of coated stock. Related to the glossy stock issue, is the ability to print on heavy weight papers. Over 30% of black and white printer users cited this issue as a significant problem, while only 12% of digital color users indicated it was a significant problem. The ability to handle heavy weight paper is related to the paper path through the machine, fusing process, toner technology and paper characteristics. Many black and white printers were designed to handle traditional office papers (24 lb. text, uncoated) and not traditional offset grades (e.g. cover and coated stocks). Companies like Xerox, Indigo and Nexpress have especially focused on improving the substrate compatibility for their high-speed digital printers. For digital printers to capture more offset jobs, they will not only need to be competitive on quality and price, but also on the ability to print on the desired stock. CAP Ventures anticipates seeing some of these technology enhancements show up in future generations of production digital black and white printers. In general users of digital printing equipment did not cite availability of paper with the desired characteristics or price of paper compared with offset grades as significant problems. Many of the paper companies have developed a line of products targeted at the digital printing market. Print providers usually have a choice of several brands and suppliers for any given type of paper they require. Number of Paper Suppliers and Concentration of Purchases Nearly 90% of print providers are working with two to five paper merchants or suppliers. There is a direct correlation between the number of paper suppliers and the size of the print provider, with larger printers working with more suppliers. Clearly, larger print providers have a wider range of requirements, are being called on by more paper merchants, and are more likely to compare price and service than smaller companies. There is also a correlation between the percentage of business the primary paper supplier receives and the size of print provider. As might be expected smaller printers buy a larger portion of their paper from their primary supplier. Larger companies, which typically work with more suppliers, tend to buy a smaller percentage of their paper from their primary supplier. Note that once a printer reaches about $3 million in annual sales the percentage of paper purchased from their primary supplier drops from nearly 70% to around 50%. Uncoated and Coated Paper Brand Share The final area we inquired about was brands of coated and uncoated paper that printers regularly purchase. The results show the brand share for around ten of the leading brands. This data is not market share, which factors in the total tonnage or volume that each brand has. Instead, the research measures the extent to which a brand has penetrated the market. In some cases, a large percentage of the market may be purchasing a specific brand, but only buy a small amount of paper. The result would be a high brand share and a low market share. In both the uncoated and coated paper markets, International Paper was the brand share leader. IP is the world’s largest paper manufacturer and has a strong presence throughout the US market. They particularly focus on uncoated cut size grades, many of which are run on high speed digital printers and copiers. The company has broad distribution that reaches virtually all US geographic regions and market segments (e.g. commercial printers, quick printers, in-plant shops). CAP Ventures was a bit surprised to see IP and Georgia-Pacific emerge as brand share leaders in the coated paper category. IP and GP do not have as extensive a product line for the coated grades as they do for the uncoated grades. Keep in mind this data reflects brand share (not market share), and given these companies’ strong presence in the uncoated market they may be benefiting from a slight halo effect in the coated market. Note that Xerox had a relatively low brand share in the uncoated paper category. Xerox is a leading reseller of uncoated paper, but a large portion of their business comes from the in-plant, central reproduction department, and general office areas of non-print for pay companies. Although Xerox has a very strong presence in the digital printing equipment market among print for pay companies, this presence does not appear to be helping their paper brand share. Companies such as Smart Papers and Stora Enso showed up among the uncoated brand share leaders. Both of these companies have focused on the digital printing market which may be increasing their brand share. In other words, a fairly large number of customers are purchasing these brands of paper, but not a very large amount of the paper. Smart Papers may also be benefiting in the uncoated market from a halo effect of its KromeCote brand of coated paper.   ------------------------------------------------------------------------