Commentary & Analysis
The long road to recovery: the impact of the Great Recession on print
With the industry suffering from a paralysis invoked by the economic crisis eyes will turn to drupa 2012 to see how the future will shape up.
By William Mitting
Published: March 5, 2012
When French bank BNP Paribas announced the closure of two of its off balance sheet investment vehicles on August 9 2007, few outside the world of high finance took notice. However, that event marked the first lashings of rain on Europe of a storm that over the next three years would devastate the European economy and result in the loss of tens of thousands of printing jobs across the continent.
The technical definition of a recession is two quarters of consecutive contraction of GDP (Gross Domestic Products). In reality a recession is defined by one thing: fear. Just over 12 months after BNP’s closure of its investment vehicles, the Federal Reserve and the US government took the indefensible decision to let Lehman Brothers, an investment bank that had hundreds of billions of dollars of subprime exposure on its books, fail.
Fear paralysed the global economic system. Money markets, on which many European banks relied for funding, ceased up as banks lost trust in their peers to repay the funds; banks collapsed amid the dearth of funding and European taxpayers were forced to intervene to save the global economic system from collapse. A recession like no other in living memory ensued and in its wake thousands of print companies were forced to close their doors.
The perfect storm
Of all sectors, print is perhaps hit the hardest by recessions. On one front, it is reliant on consumer confidence, GDP growth and the subsequent advertising investments made by large companies. On the other it is a manufacturing industry, reliant on bank lending to invest in equipment. For printers, the financial crisis was a perfect storm.
Andrew Brown, public affairs director at the BPIF (British Printing Industries Federation), says: “The recession was a period of exceptional challenge for print companies, as the deepest and longest recession since the Second World War took its toll. The UK economy shrank by more than 6per cent during the recession, and by the end it was some 10 per cent smaller than it would have been had growth continued on its previous trend.
“The rate of consolidation and structural change in our industry has reached a level unprecedented in living memory. Many companies went to the wall as the fall in demand for print impacted on our overcapacity sector. “
Brown adds that the contraction of bank lending was a particularly pertinent issue for print businesses. “Companies found that in order to attract external capital for investment, they had to place renewed emphasis on defining specific objectives for any capital spend, linked to tangible and measurable outcomes,” he says.
“Others had to pare down their investment plans, or to look to finance it from revenues. To some degree this is a healthy discipline, in many instances prompting more careful investment planning and/or a re-examination of how well existing assets are being utilised.”
The impact of the Great Recession was exacerbated by the fact that the print industry was already suffering when the downturn hit. Many companies in the sector had reacted slowly to the advent of the internet and were operating business models better suited to the heyday of print with high overheads and often inefficient machinery and internal processes.
Nick Dixon, a print entrepreneur who built up the Lateral Group over the last eight years before selling it to IOS in August, says that the transformation of the print industry was underway long before the recession hit.
“We saw in the early 2000s that the market was moving towards multimedia communications and bought Howitt out of administration in 2004 as the first building block of the Lateral Group in order to capitalise on that opportunity. We felt we needed to be at the forefront of the move towards integrated multi-channel communications,” he says.
Another trend that was already in full swing before the recession was the consolidation of the industry as traditional printing firms merged to realise the economies of scale required by shrinking margins. However, many were thwarted in their attempts to achieve that. Not least was John Caris, the former chief executive of European printing giant Roto Smeets, who became the champion of the need for industry consolidation.
Attempts by Caris to consolidate the European gravure and web offset industry were thwarted firstly by shareholders in the attempt to acquire Quebecor World and then by the credit crunch when a deal for private equity house Hombergh/De Pundert (HHBV) Group to buy the printing company collapsed due to the investor’s inability to raise the necessary funds.
Caris, however, was under no illusion as to where the blame for the decline of the print industry lay:
"The printing industry is not profitable and companies have created their own problem. It's the fault of printers themselves," he told an industry conference in 2009.
However, not all areas of the print industry have been hit as hard by the recession. Jef Stoffels, director of corporate marketing at EskoArtwork says: “We are mainly active in the packaging printing
world with links to the high end commercial printing and publishing industry.
“We have to say that this segment in the industry does not seem to be much affected by the financial crisis and the impact is not that visible. Trends of consolidation, globalisation and shifting work from one place to the other in the world continue to go on.”
Despite the odd patch of immunity in the industry it is clear that almost all businesses have had to adapt to survive the hard economic times. Business models have evolved to meet the new market reality and printing companies have cut overheads and staffing levels in order to retain sustainability.
Business processes have also had to develop to realise increased efficiencies. “Customers are seeking improvements to their business operations and processes to improve their efficiency, time to market, consistent quality and reduce errors,” says Stoffels.
“People within the packaging and printing supply chain have become more aware of their role and possibilities in the industry. We see traditional segments becoming blurry and players in the industry
are seeking ways to broaden their services with added value activities. This way we see commercial printers moving into packaging printing or packaging producers making inroads in the sign and display business”
Manufacturers were hit hard by the decline in investment and continue to monitor the current market movements. When announcing its first quarter results for 2011/2012 Heidelberg Group CEO Bernhard Schreier said: “We are keeping a close eye on current economic developments across the globe, but it is difficult to predict what will happen. However, given the continuing high demand and strong economic growth on the Chinese market, we are assuming that the regional effects on business development at Heidelberg will be only temporary.” And it will continue to put measures in place to protect recovery. Heidelberg CFO Dirk Kaliebe stated: “We will forge ahead with our successful strategy, particularly through consistent cost and asset management.”
Even print companies that could attract bank funding were unwilling to invest large amounts in new kit due to the uncertain economic outlook while all printers looked at ways to cut costs.
“Clients who geared up for survival did what we expected them to do, and started to implement cost reduction measures and every expenditure, however small it may be, was analysed before approval,” says Fabian Prudhomme, vice president of Enfocus.
“In general, I think it’s safe to say that during the recession we just had (and are still living today by the way), clients are very cost conscious. When they invest or make a budgetary expense decision, it almost exclusively relates to necessary costs. The ‘nice to have’ products and solutions are definitely gone from the horizon.”
Manufacturers too have had to adapt to the economic reality by cutting overheads and shelving new product development to reduce costs.
Prudhomme says: “When the crisis hit late 2008, early 2009, we acted quickly and based on an internal analysis, we were forced to go through a reorganisation just like many other companies. It forced us to refocus on our core services and eliminate non-revenue driving initiatives as much as possible.
A new approach
Manufacturers have also adopted a new approach to help their clients through the recession. Previously a company would simply sell a piece of kit and offer a service or warranty contract. Nowadays manufacturers are becoming consultants to their clients offering business training and support in implementing new business models that can be enabled by their investments.
Mark Lawn, European marketing manager, Professional Print, Canon Europe, says that suppliers must also be partners and consultants to their clients to help secure the future of their businesses.
That is a trend that a number of manufacturers including Presstek, Ricoh, Kodak and Fuji have identified and they now offer business advice services to their clients.
Trade Associations, too, have had to work harder to meet the demands of their members and navigate them through the stormy waters. The BPIF’s Andrew Brown says: “While the BPIF’s regular activities in support of members’ businesses continued unabated throughout the recession, this period was a real test of the capabilities and resourcefulness of the BPIF team, and one that they met in spades.
“In a recession the focus is inevitably on cost reduction and enhancing existing operating capability, and the bulk of the thousands of phone calls received and visits made by staff over this period reflected this.”
In Germany the trade association has been adapting to the new world order. In the most recent annual report from BVDM (Bundesverband Druck & Medien EV) Rolf Schwarz and Thomas Mayer talked of the “shift to sustainability” in the print industry. “The crisis intensified and accelerated structural change in the print industry. The turnover, the number of enterprises and employees in the industry declined. New concepts are required to identify the companies in the highly competitive environment,” they said.
The BVDM has been pushing these new concepts holding technical forums of topics such as media publishing and web-to-print as well as creating functioning networks of printers and lobbying against legislation such as bans on certain forms of advertising.
Survival of the most innovative
Recessions are a tough but essential part of the economic cycle. During good economic times, companies become inefficient, markets are distorted by an unsustainable influx of funds and new company launches create overcapacity that only becomes apparent when the tide of prosperity ebbs.
Companies that innovate to survive emerge from recessions much stronger and more efficient than when the downturn hit. Print companies coming out of this are no exception.
“The print industry has had to re-invent itself in a very short timeframe,” says Prudhomme, “The print industry has probably seen more changes in the past five to 10 years than in the past 80 and I believe this spiral will only keep accelerating.
“Printing companies can no longer solely rely on paper, but must look for creative ways to combine paper (which I don’t believe will disappear any time soon) with cross-media delivery mechanisms. I believe that we have only started to scratch the surface of what is possible using today’s technology.”
Indeed, the move to cross media communications has been a key opportunity that successful companies have harnessed. Nick Dixon says: “When companies stick to producing one product competing on price you get a downward spiral and that is what we saw before and during the recession.
“During the recession, clients had their advertising budgets cut and they were even more driven by finding efficiencies while maintaining effectiveness. We saw the pendulum swing in favour of e-mail and SMS communications due to the need to cut costs. That was a fundamental shift and had a dramatic knock on effect on communications.”
Brown says that the BPIF has been helping its members adapt to the ‘fundamental structural changes sweeping across our industry’.
“More and more print suppliers are taking advantage of the digital revolution to add to their portfolio of client services in areas such as managing mailing lists and customer data, handling stock and fulfilment, designing and managing customers’ websites, and running campaigns that integrate all media, new and old,” he says.
“The traditional print business model, price-driven and product-focused, is no longer fit for purpose. With the industry’s customers now looking for cost-effective campaigns rather than just cut-price commodity print, printers can no longer rely solely on manufactured products and low prices to differentiate themselves: print must adapt if it is to survive.”
Indeed, the commoditisation of print that was already in effect before the recession, gathered pace during the downturn as companies cut costs in an attempt to replace lost business. What ensued was a ’race to the bottom‘ in terms of pricing with some companies offering work at cost simply to maintain cashflow during the depths of the recession. It only takes a handful of companies to embark on a suicidal pricing policy to affect the whole sector and that is what we saw in the recession, the impact of which is still being felt by many.
Print companies without specific niches or value added services that were competing on price floundered as prices fell below costs.
Consolidation, however, has enabled some progress. The UK web offset sector was among the biggest casualties of the recession in the print industry. Long plagued by overcapacity the recession has seen the collapse of a number of the largest companies and the closure of numerous sites.
The sector has consolidation with Walstead Investments leading the charge by acquiring Wyndeham, Southernprint and St Ives’ web division among other companies. The impact of the recession on the UK magazine printing sector may therefore ultimately be positive although it took a lot of pain to get there.
Although it may not yet feel like it, the worst of the last recession is probably beyond us. However, we have passed through one storm only to face another. The spectre of the European sovereign debt crisis is weighing heavily on markets and consumer confidence continues to bump along the depths experienced during the Great Recession.
We are not out of the woods yet and it may well be that things will get worse before they recover. For the print industry this means that the consolidation will continue and the need to focus on value adding services, with print just one part of a company’s offering will not go away.
But the companies that have emerged in business from the last recession have done so stronger and wiser and are competing in a smaller industry. As and when the economy recovers, these businesses will be well placed to reap the rewards of their determination.