December 18, 2002 -- The national economy is slowly making its way back to good health, but printers can’t assume a return to economic growth will automatically bring them back to profits and prosperity. The printing industry, facing continued overcapacity and more consolidation, has changed fundamentally, and understanding these changes is the key to succeeding in the new environment. That was the message from leading industry analysts at the 22nd annual PRINT OUTLOOK conference sponsored by NPES The Association for Suppliers of Printing, Publishing and Converting Technologies in Washington, DC on December 5 and 6. Conference proceedings may be purchased for $150 in CD-ROM or hard copy formats, or for download from the NPES FTP site. Contact the Member Services Department at 703/264-7200 or e-mail [email protected] for more information. "This is a sobering time in this business. We’re right in the middle of a witch’s brew," said PrintCom President and Conference Chairman William Lamparter. Changes in customers’ needs and marketing philosophies are fundamentally altering business prospects for print, Lamparter said, even though "print quality is better than it has ever been, and print cost effectiveness is better than it has ever been." Business in general has abandoned mass distribution in favor of a more customized approach, and printers must grasp this change and add value to their services, he said. Industry "Megatrends" Charles A. Pesko, CEO of CAP Ventures, told PRINT OUTLOOK attendees that "if you want to grow your business by more than one or two percent per year, you’re going to have to look at services beyond print. Print buyers and printers tell us that for the next six months business is going to be pretty flat out there." Even in the second half of 2003, "we don’t see robust growth. We’re not going back to business as usual," he said, noting that industry consolidation will continue and accelerate. Digital color has fallen from a printer’s cost of 30 cents per page to about a dime, and will soon be five cents, Pesko said. For many jobs, digital color will soon be cheaper to produce than conventional offset printing, he said, predicting that digital printing’s market share will grow from 22 percent to 39 percent by 2006. Major Threat in Postage Costs "Postage is the enemy," warned Professor Frank Romano of the Rochester Institute of Technology’s School of Print Media. "Postage is the prime consideration that every publisher is concerned about." Print is fighting for market share through successful implementation of new technologies, especially computer to plate, Romano continued. "CTP has been the salvation of the printing industry. It was CTP that brought the greatest amount of automation to the industry." However, he predicted that CTP adoption will plateau in the next few years, and both the number of print plants and total industry employment will continue to shrink in the near future, Romano said. Not All Printers Will Share in Recovery TrendWatch Graphic Arts Director Vincent Naselli noted several encouraging trends in today’s print business but still warned that recovery will be slow and "not everyone will share in the growth." He projected declines in purchases of many types of printing equipment, contrasted with projected strong growth for digital color printing, largely because "the reliability issues have been put to bed." Consolidation and changes in customer needs will continue to affect the industry, he said, citing a number of surveys of print, prepress and other specialties to gauge their current concerns and business priorities. Asked about their top business challenges, printers continue to list general economic conditions as #1 and direct competition as #2. "Competition from non-print options doesn’t make the top 10," Naselli said. "It’s a big barrier when you don’t see the opportunity or the impacts on your business." Recovery not Complete until 2004 Industry sales have increased in two consecutive quarters for the first time in two years, said National Association for Printing Leadership Vice President and Chief Economist Andrew Paparozzi. Assuming no setback in the war on terrorism, "we expect print sales to grow in 2003 at a rate of 4.7 to 5.2 percent, after declining for two consecutive years," he added. But, he said, the recovery is painfully, frustratingly slow and will not be complete until 2004. Paparozzi said NAPL’s current forecast of growth in 2003 is a downward revision from previous estimates. "The recession was a lot deeper for us than for the economy at large," he said. "Since about 1998 our industry has not kept pace with the economy. This has had nothing to do with the business cycle. It’s structural," Paparozzi said, representing "a profound change in how people communicate." He noted that there is potential for printers in diversifying into other services, but "there’s a big difference between diversifying and diversifying profitably." Some of the areas with opportunity for growth include digital printing, four-or-more color lithography and communications support services such as fulfillment, mailing and database management. The biggest threat to printing companies is forgetting that they are in the communications business, he said. "Our primary function will always be to learn everything we can about our clients’ unique communications needs – ink-on-paper and electronic – and how we can best satisfy those needs." Previously Proven Tactics Didn’t Work NPES Consulting Economist Dr. Michael Evans reported that the traditional mechanisms by which government has sought to propel the economy out of recession—chiefly through tax cuts—apparently have not worked this time around. For one thing, Evans said, when people received the $600 tax refund checks distributed in 2001 they didn’t spend them. Prospects for 2003 feature sluggish consumer spending, weak corporate spending and investments, and modest overall economic growth. Evans joined other speakers in predicting that print may not necessarily share in any new economic surge. "The economy is growing, but the manufacturing sector is still declining. This will continue indefinitely," he said. Moreover, "for several years now production in the printing industry has lagged behind overall manufacturing." As a result, demand for printing equipment will remain sluggish, he said. "Not Much" on M&A Front Merger and acquisition activity throughout the printing industry has seen a "precipitous decline" from its peak in 1998-1999, with transactions involving less than $500 million in company sales projected for 2002, and most deals affecting distressed businesses, said industry M&A expert Harris DeWese, Chairman and Principal of Compass Capital Partners. He predicted that "merger and acquisition activity will continue low through 2003," but three to five "new buyers" will emerge in 2003-2004, and there are likely to be at least a few mega-deals involving famous industry names. Continuing consolidation is likely to focus on commercial printing, specialty printers and direct mail shops, he said. Ad Sales on Track for "Solid" 2003, Brighter 2004 Advertising industry analyst David Peeler, former CEO of CMR, predicted that the U.S. advertising market "is on track for a solid 2.5 to 3.0 percent growth for 2002," followed by a strong 2003 and a stronger 2004 thanks to the conjunction of the Olympics and the election cycle. The biggest winners in the ad arena in the near term are likely to be Spanish language media, growing at more than 20 percent annually, and spot television, which is directly fueled by political campaigns and Olympic coverage, Peeler said. Other areas which will experience stronger growth include network and cable television and local newspapers. Internet advertising, lost 18 percent in 2002 and is "still a very small medium," he said. There is still too much capacity in consumer magazines, and further consolidation can be expected. "Still an Opportunity for Printers that Want to Grow" PIA’s Davis noted that steady productivity improvements and growing awareness of ancillary services mean printers still have growth opportunities. The national economy "is likely to keep growing at 2.5 percent in 2002 and about 3.0 percent in 2003," Davis said, citing continuing low inflation and interest rates. The typical printer’s profit before taxes was one percent in fiscal year 2001, Davis said. For 2003, print sales should be up three percent to $167 billion, with prices for output remaining stable. Diverse Approaches to Growth Davis moderated a panel of three top executives from print companies of different types, sharing their current strategies and expectations. Metzgers President Joe Metzger outlined how an "adapt or die" policy has guided his firm’s evolution since its founding in 1976. Along the way, Metzgers, located in Holland, Ohio, added offset press capacity, direct mail and kit fulfillment, and other ancillary services. The Digital Print Impressions division of Merrick Printing Company, Louisville, Kentucky, started out six years ago accounting for about $1 million of the parent company’s $17 million annual business, but today accounts for more than one-quarter of Merrick’s total volume, said DPI Vice President/General Manager Denise Eberhart. Consolidated Graphics, a $700 million parent company, operates through 66 individual operating companies, each managed independently, said Consolidated Chief Financial Officer and Executive Vice President Chris Colville. Consolidated will spend between $22 million and $24 million on new equipment this year and again in 2003, he added. Long Term Future of Print Conference Chairman William Lamparter moderated a panel discussion on print’s long-range prospects among the conference analysts. PIA’s Davis observed that "we now have a great variety of business models in the industry, and most involve at least some ancillary services." Other panelists agreed on the need to deliver broader services to clients. Printers will also be called on to do much more client education than before. "The average print buyer today is a relatively un-knowledgeable person," said Romano. "They need the printer to teach them." White House Briefing PRINT OUTLOOK attendees once again took part in a high level economic and political briefing by members of the White House staff, focusing on prospects for economic recovery, improved international trade and better education policies. Daniel Keniry, assistant to the president for legislative affairs, said President Bush will push to make the current tax cuts permanent and will strive to take full advantage of the Trade Promotion Authority restored to him by Congress last year. The themes of the next two years, Keniry said, will be economic recovery, the war or terrorism, Iraq, homeland security and a bipartisan effort toward Medicare reform, including a prescription drug benefit. In response to a question on the growing impact on business of health care costs, he said the administration will push for tort reform as a way of containing these costs. "The fourth quarter will be rather slow, and 2003 will be slow at the beginning, with ever accelerating growth through the year," predicted Dr. Douglas Holtz-Eakin, chief economist for the White House Council of Economic Advisers. "The recession was earlier, deeper and more sustained than we had anticipated," he added. And, he warned that the recovery is subject to risks, including a less robust or delayed recovery in business investment, cutbacks in consumer spending, oil price spikes and acts of terrorism. However, he also noted that "the single most striking aspect of the U.S. economy is that during this downturn we have seen sustained productivity growth." International trade is a key part of this concern, and attendees heard an update from Christopher Padilla, assistant U.S. Trade Representative for Intergovernmental Affairs and Public Liaison. Padilla noted the administration has called for complete elimination of tariffs on industrial equipment by 2015. "Open markets, free trade, patent protection, and transparent rules" are the administration’s key policy goals, he said. Education is also a central priority for the Bush administration, said Dr. Susan Neuman, Assistant Secretary for Elementary and Secondary Education. She said major efforts are being targeted toward improving reading skills at all levels of school, but particularly in the early grades. "A real, high quality reading education effort at the early stages does make a difference," she said.