After more than 40 years as an executive manager and financial strategist in printing-related businesses, Thomas J. Williams isn't one to soft-pedal facts or sugar-coat advice. As a founding partner in New Direction Partners (NDP), Williams specializes in straight talk to printing firms that have come-whether they realize it or not-to make-or-break points in their histories as business concerns.
In sessions with clients and in presentations to industry groups, Williams emphasizes that industry conditions have brought nearly every printing company to an unavoidable fork in the road. In one direction lies staying in business with a realistic plan for survival and growth. In the other lies making an orderly exit from the business. Resisting the choice, warns Williams, can lead to consequences that no printing firm wants to contemplate.
According to Williams, the "perfect storm" of economic forces behind this either-or proposition has been brewing for almost 20 years. The outcome, he believes, will be the emergence of an "oligopoly" in which a relatively small number of printing firms generate most of the revenue and reap the most substantial profits. There isn't much time, Williams says, for existing businesses to gauge their survivability in this scenario and to plan accordingly for it.
Roots of the Big O
Oligopoly is the offspring of consolidation, a trend that gained momentum in the 1990s with "roll-ups" of commercial printing firms nationwide. These deals, funded by easy money from a then-aggressive lending community, began to come apart in the early 2000s when the synergies pitched by some consolidators to lenders and stakeholders failed to materialize.
Defaults and bankruptcies followed, causing some firms acquired by the consolidators to be closed, sold, liquidated, returned to former owners, or handed over to lenders. Many survivors, hobbled by debt, business contraction, or poor management, were especially vulnerable when the events of 9-11 pushed the fragile economy into recession.
By the mid-2000s, the stage had been set for what Williams calls an unprecedented transformation of the graphic communications industry. Traditional printing operations saw sales decline by 30%. Overcapacity created extreme pricing pressure, worsened by budget cuts on the customer side.
Today, the rise of non-print media has pushed the storm to its full fury as clients pursue alternative channels for advertising and promotion. The explosive growth of smart phones, e-readers, and tablets as delivery systems for digital content has driven print volumes down in many categories. Clients paying for cross-channel customer communication programs demand accountability for cost and ROI-a demand that traditional print operations often find difficult to satisfy.
The numbers that Williams cites paint a stark picture of the confluence of these trends. A base of more than 52,000 printing companies in 1997 has shrunk to the much smaller contingent of 27,000 that remain in business today. For the last 12 years, 75% of the survivors have operated at an average of break-even profitability. In six of those years, the firms averaged negative profitability.
Small Firms Rush the Exits
Hardest hit have been small printing companies. In 2010, says Williams, the average firm with less than $10 million in sales operated in the red. Last year, only firms in the $3 million to $6 million range managed to average a slight profit. Although their digital print business is growing, it is not growing fast enough to mitigate the decline in conventional offset. Unable to raise the capital they need to reinvent themselves, the smallest firms predictably are leaving a shrinking industry at a faster rate than larger ones.
According to Williams, an oligopoly market structure arises when a small number of players control pricing and account for 70% to 80% of all sales in the market. Over time, the number of players shrinks to an equilibrium point. Williams sees the process taking place in the printing industry as it restructures into an oligopoly of its own, with the base expected to consist of about 15,000 firms in 2020.
The "oligarchs" will come from a core of about 2,500 firms that, on average, currently employ more than 100 employees and log an average of $23 million in annual sales. Enjoying huge economies of scale over small printers, these companies can grow sales in the present economic environment in ways that small shops can't.
What Williams foresees as a result in 2020 is a market-dominating group of 1,500 to 2,000 large firms averaging $27 million to $30 million in sales-enough to let them generate about 80% of all industry revenue. Divvying up the other 20% will be 13,000 to 14,000 small firms averaging just $1.1 million in sales. With oligopoly looming, says Williams, all print company owners-but particularly owners of small companies-need a strategy either for long-term survival or for a timely exit.
Taking Leave Gracefully
If the answer to the question, "Do I want to get out?" is yes, the owner must think about the price he or she wants for the business and the likelihood of obtaining it. If the business is not a profit leader, says Williams, everything will depend on whether the owner can grow sales fast enough to get the desired price in the time frame that has been identified. If this is not possible, the owner will have to consider being acquired either as a tuck-in or in a merger of equals. Last resorts are selling the account base to another printer and liquidating remaining assets.
Owners determined to stay in the game also need to think about growth, but on a continuously evolving basis. Even if the company is a profit leader that can achieve organic growth within a specialty or a niche, says Williams, it must also be open to strategies for growth by acquisition. This means assessing whether the company has the skills, resources, values, and adaptive culture needed to sustain the effort over the long haul.
Williams says that one way or the other-stay in, or get out-owners must chart a course and follow where it leads. Owners in denial about their situations or those whose optimism is misplaced are unlikely to survive. For owners struggling with intractable cash flow problems or facing up to the loss of desire to go on "fighting the fight," the development of a timely exit strategy is imperative.
The Art of the Possible
Successful sellers, notes Williams, understand that the sooner assets are converted to cash, the greater the return will be. Managers with the vision, strategic planning, and financial resources to grow revenue and diversify their service offerings leverage these assets by becoming buyers. Both groups realize that in today's economic climate, generic growth generally is not a viable option for business recovery or expansion.
Williams is convinced that however devastating the "perfect storm" has been, it has created genuine opportunities both for sellers and for buyers. Owners who embrace the right exit strategies can maximize their chances of leaving the business on the terms they want. Those determined to grow generically or by acquisition can take heart from knowing that the industry-even as it shrinks-remains a source of great possibility for companies that serve their customers in unique and valuable ways.
The dynamics of the marketplace and consumer preferences will drive these firms to become providers of a broad range of technology solutions, says Williams. But, in addition to management skills and investment capital, a company charting this course will need professional guidance in order to make the transition work. The time to obtain that guidance, says Williams, has arrived for everyone.
Discussion
By Clint Bolte on Sep 18, 2012
The dynamics of the in-plant market will not impact the oligarchs at all as few corporations housing in-plants want to partner with a huge oligarch should they decide to outsource.
The established trends of working with $1-3 million dollar sized commercial printers would be expected to continue. And this market segment is not small by any estimates.
By Paul Gardner on Sep 18, 2012
If Mr. Williams was talking only about traditional, analog printers, I would agree whole-heartedly.
If he were talking only about printers that see themselves as being only in the communications business, I could still probably agree.
But when I look across the printing landscape in the US, I see tremendous growth and incredible diversity. New technologies, applications, processes, and machines are being adopted by the most innovative printers.
But more importantly, they are being adopted by people and organizations that didn't consider themselves as part of the printing industry a year or two ago.
And the very threats that Mr. WIlliams cites, are creating a bewildering range of new demand for print - primarily digital, data-driven print.
Digital printing - on devices ranging from Indigo's to Objet's are - is the only conduit through which digital information can enter the physical world. Demand for this new era of printing is just beginning to emerge.
And it's the big, established companies that seem most afraid of the coming transformation - most reluctant to invest, most averse to risk, most unlikely to benefit.
God bless the small printer that's already in the process of changing tomorrow's world!
By Chuck Gehman on Sep 19, 2012
I could not disagree less. It seems to me that it would take many years for the industry to get even close to an oligopoly.
At this time, the data I've seen indicates there is near perfect competition in our industry. We seem to match the Wikipedia definition very well, with some minor adjustments on one or two of the points:
"Generally, a perfectly competitive market exists when every participant is a "price taker", and no participant influences the price of the product it buys or sells.
Specific characteristics may include:
Infinite buyers and sellers – Infinite consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price.
Zero entry and exit barriers – It is relatively easy for a business to enter or exit in a perfectly competitive market.
Perfect factor mobility – In the long run factors of production are perfectly mobile allowing free long term adjustments to changing market conditions.
Perfect information – Prices and quality of products are assumed to be known to all consumers and producers.
Zero transaction costs – Buyers and sellers incur no costs in making an exchange (perfect mobility).
Profit maximization – Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.
Homogeneous products – The characteristics of any given market good or service do not vary across suppliers.
Non-increasing returns to scale – Non-increasing returns to scale ensure that there are sufficient firms in the industry.
Property rights – Well-defined property rights determine what may be sold as well as what rights are conferred on the buyer
By Doug Cox on Sep 20, 2012
I think Mr. Williams' data about the print industry and the oligopoly trend are accurate, and align well with what is observable in the market. Unfortunately the focus of the article was primarily on the exit strategy implications for those unlucky firms that can't innovate and move forward.
"Oligopoly looming" leaves room for a lot (many thousands, by Mr Williams' estimate) of companies to innovate, grow and be leaders - on either side of the "dumbell" mentioned in the article. As Paul Gardner mentioned, and I strongly believe, many of those that have made it this far are exceptional at being agile and flexible, and strategically thinking of print as just another tool in the communication and customer experience toolkit. That's one way successful "printers" will continue to succeed in the new market - by focusing on the value they bring to the customer experience lifecycle, and innovating new valuable digital services to compliment their excellence in print.
When that happens, the organization has an opportunity to find or create new, adjacent markets and escape some of the problems of simply being a printer in a shrinking industry.
This inspired me to blog some thoughts on those kinds of service providers, so thanks for the motivation!
By Doug Cox on Sep 20, 2012
Here's a link to my blog post in case anyone is interested: http://bit.ly/S7RBmt
Discussion
Join the discussion Sign In or Become a Member, doing so is simple and free