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.