by Dr. Ronnie H. Davis, Printing Industries of America

Another year, another forecast and yet another year of economic and political uncertainty and intense competition in print markets. In this article, we gaze into our crystal ball to offer our projections for the economy, printing shipments, printers’ profits and other print market dynamics. Also, we offer an action plan for 2014.

An economy stuck in second gear

So far, the pace of recovery from The Great Recession is the slowest of any recovery in the last half-century. The outlook for 2014 and 2015 is, unfortunately, for more of the same tepid growth. Our view is that the negatives will slightly outweigh the positives over the next two years, resulting in around 2.4 percent growth in 2014 and 2.6 percent growth in 2015. (Figure 1).

Currently, there are three primary negatives.

• There are continuing headwinds from weak global economic conditions.
• Obamacare is creating uncertainties and increasing health care premiums, reducing consumer and business spending.
• Political gridlock endures, preventing meaningful, permanent tax and entitlement reform.

At the same time, there are two major positives.

• The “sequester” will help reduce federal spending, thereby reducing the deficit and placing more resources in the private sector.
• Low interest rates and inflation will continue.

The biggest question mark is the direction of monetary policy from the Federal Reserve. What will be the timing and degree of the reversal of quantitative easing or purchasing of securities to increase the potential money supply and keep pressure off of interest rates? Inherent in this forecast is an assumption that the Federal Reserve can successfully temper its purchasing without a major disruption of asset markets and its wealth impact on consumer purchasing levels.

The bottom line is a fairly pessimistic forecast of subdued annual growth of 2.4 percent in 2014 to 2.6 percent in 2015. Growth likely will escalate slightly over the period as the recovery matures and gains some strength and as consumers and businesses adjust to disruptions in the health care sector. While job creation might improve from 2013 levels, the likelihood is that the unemployment rate will remain around 7.0 percent in 2014 and 2015.

Print’s 2014-2015 economic cycle

So, how will the economic scenario described here impact print markets? Print generally follows nominal or non-inflation-adjusted GDP, so the most significant variable driving print – the economy – suggests modest growth at best for print markets. However, printing shipments typically underperform the economy by 1.0–2.0 percent. Further, print usually leads in cyclical downturns, lags in upturns and does best in mature recoveries. While we may be in a mature recovery phase with the expansion now around four years old, it remains extremely weak (Figure 2).

All in all, this leads to a forecast of stable total printing shipments of $161 billion in 2014 and $159.9 billion in 2015. Within this total, commercial print and related support activities likely will grow from around $82 billion in 2013 to $84 billion in 2014 and to $84.5 billion in 2015. A major reason for growth in this portion of print is the Congressional election cycle and the pull of the economy on packaging and labels and wrappers. The increasing speed of the economy in 2015 also will add some boost to print, along with the economy moving into more of a mature (although weak) recovery (Table 1).

The other major portion of print markets, print-related media (publishers of newspapers, periodicals, books, directories and greeting cards), likely will experience declining total shipments of around 2.0 percent in both 2014 and 2015. Total shipments in this sector still will be sizeable – $77 billion in 2014 and $75.4 billion in 2015.

There are considerable dynamics within total print sales – by print process, print functions and specific print sectors or micro print markets.

Print patterns by process. In terms of printing process, a look back at findings from a recent Printing Industries Print Market Survey demonstrates the diversity of sales growth by process. Digital toner-based print sales, digital inkjet print sales and ancillary service sales are the segments adding to industry growth. The following estimates do not add to the total change in nominal print sales in 2Q 2013 due to some respondents not offering each service at their establishments, but it helps provide a visual of what aspects of the industry are adding to or subtracting from growth. In total, digital print and ancillary services contribute 1.94 percent to industry growth, while traditional ink-on-paper sales contributed 2.24 percent (Figure 3).

Print patterns by function. We also examine sales trends by print’s three functions—inform/communicate, product logistics and market/promote. The inform/communicate function is declining due to a shift to digital communication. The market/promote function is growing slightly, even as it faces intense competition from digital media, because print is a proven sales generator. The product logistics function is tied more directly to the economy as it faces virtually no digital competition (Figure 4).

The bottom line is that over the next two years, we expect the highest relative growth in the product logistics sector, most likely matching real GDP growth of 2.0-3.2 percent in 2014 and 2015. Next highest in growth rate is the market/promote function, with an expected growth rate of around 1.0-2.0 percent in 2014 driven by the national election cycle before cooling to around 1.0 percent in 2015. The inform/communicate sector will continue to decline in the 2.0-3.0 percent range each year.

Patterns by micro print markets

We also track print micro markets in our surveys and sort them by hot, warm and cold segments. Here, we just report on projected hot markets for 2014 and 2015. Following is our latest tracking of the top 11 print micro markets – those with a demand index of 50-plus. Our demand index is calculated by subtracting the proportion of printers indicating a market is declining from the percentage of printers indicating a market is increasing (Figure 5).

A projected profit plateau

Printing industry financial performance as measured by before tax profit as a percent of sales has steadily improved since hitting a recessionary low of -1.4 in 2010. We project that profits will hold up at their current rate of 2.7-2.8 percent during the next two years. Profit leaders, printers in the top 25 percent of profitability, will see a similar trend with profits plateauing at around 10.0 percent percent of sales (Figure 6).

Action plan for 2014 and 2015

So, what should your action plan for 2014-2015 contain? Your key focus should be on profits and not simply sales. Profitability is a function of three fundamentals: sales, cost and prices. Profits increase with higher sales, higher prices and lower cost; therefore, profit leaders must have higher sales, lower costs and higher prices. What follows are a few proven suggestions.

To increase sales

• Specialization. Printers specializing in particular segments, such as labels/wrappers or direct marketing, that focus on a vertical market generally achieve higher sales.
• Diversification. Printing firms that provide more value-added ancillary services generally have higher profits than firms that only print.
• Process Advantage. Digital toner-based print and inkjet are growing much faster than traditional ink-on-paper print. Hybrid printing which combines digital and inkjet with traditional processes in the same job is growing.
• Printed Products and Services Offered. Particularly hot markets are not at all “print” as usually defined – web-to-print services, web development, signs/signage, integrated print, fulfillment and database management are hot, and printers offering these services gain margins.

To reduce costs

• Benchmark costs with industry metrics to determine where your costs are out of line.
• Shift fixed to variable cost by reducing overhead – using part-time and temporary employees rather than full-time permanent employees. Further, reduce headcounts by benchmarking metrics like sales and value-added per employee and factory employee.
• Substitute capital for labor. Profit-leading printers have higher investment per employee to “get better, not bigger.”

Practice smart pricing

Most printers compete on price. Profit-leading firms compete for price, charging higher prices by practicing smart pricing. Our research shows that a one-percent increase in price outscores similar percentage changes in sales or cost in terms of the profit impact by a multiple of three or more.

Smart pricing tactics include the following:

• Specialization, which reduces competition and allows pricing leverage
• Deep and intimate knowledge of a customer’s needs
• Diversification to value-added services within the specialization
• Strong branding of the firm
• Developing a sales compensation policy with incentives to sell at higher prices
• Pricing that is more demand-driven and less cost-driven

Be a learning organization

There is only one expense category where profit leaders outspend others – education and training. Profit leaders spend more than twice the percentage of payroll on training and education as profit challengers. Further, they provide training and education to all employees – production, technical, administrative, sales and management.

Dr. Ronnie H. Davis is senior vice president and chief economist for Printing Industries of America. For more information, contact rdavis@printing.org. This article has been reprinted with permission from PIA’s The Magazine 2014 Forecast issue.

by: Dr. Ronnie H. Davis, Printing Industries of America

How will the economy and print markets perform in 2012 and 2013? Here’s our outlook:

The 2012-2013 Economy
At the current time, the economy is forecast to continue the slow recovery from the recession. While a return to recession is always possible, especially since the recovery has been slow, the most likely scenario is for economic growth of more than three percent over the next two years. The largest unknown, of course, is the outcome of the national elections of 2012 and its impact on federal tax and spending policies, both over the short and long term.

2012-2013 Print Markets
If the economy trends as projected, print markets should continue to grow. The 2012 national elections will provide an additional boost. All in all, our projection is for three percent growth in 2012 and 3.3 percent growth in 2013 on a nominal or non-inflation adjusted basis.

In terms of print function, the national elections should give a particular boost to marketing/promotional print, which means that this function would grow at above average rates. In contrast, print intended to inform/communicate will likely grow at a less than average pace. Print logistics will likely be in between these two.

Strategy and Tactics for the Expected Economic Cycle
In designing strategies and tactics for the coming environment, keep in mind the key differences between print and the economy over a complete economic cycle:

• Although we project overall printing shipments adjusted for inflation to continue to grow, on average, for the next decade, they will likely grow less than the economy – perhaps around 1-1.5 percent less. For comparison purposes, we project the economy growing by around 2.5 percent and print by 1.5 percent for our composite cycle.
• Print generally leads recessions and lags recoveries, so that printing shipments turn down earlier as the recession begins and turn up slower once the economy recovers.
• Print does best when the economy reaches a mature recovery phase. In this sweet spot, print actually can outgrow the economy for a few quarters.

While printers and suppliers can’t do anything about the business cycle and these overall macroeconomic trends, they can help themselves by understanding this pattern as they manage:

• First, be aware of not only the current health of the economy and print markets, but also their respective positions in the cycle. Just as importantly, consider the emerging directions of both. Make sure that you take this into account before making any major business decisions, such as investment in new equipment or new business segment.
• Second, many operational decisions must be adjusted concurrent with the cycle. In particular, a focus on reducing fixed cost and making more costs variable with the business cycle is imperative. Don’t get caught with high fixed cost just as the cycle turns down.
• Third, print’s performance in bad economic times is in line with manufacturing as a whole and is actually not that bad compared to other manufacturing sectors. This does not make it any easier to cope, but at least there are plenty of industries and firms out there suffering as much or even more than print.
• Finally, remember to manage forward and not backward. While you have to be aware of past trends and manage for today, always remember that the cycle pattern will continue and the next up phase is coming.

Dr. Ronnie H. Davis is senior vice president and chief economist for Printing Industries of America. He can be reached via phone at 434.591.0527 or via email at rdavis@printing.org.

by: Hugh Pinkus, Proudfoot Consulting

Recession, the “R” word – it’s everywhere. Anytime conditions are favorable for an economic downturn, it becomes as dirty a word as anything heard on “The Sopranos.” The difference is that network television can and will often use this term. You can’t surf through MSNBC, CNN, or even the local news without hearing a reference to the mortgage crisis, rising energy prices, or falling consumer confidence. But recession does not have to be a dirty word. With the right foresight, planning, and action, many companies not only survive an economic downturn, but can benefit in the long run due to the new processes – such as labor optimization and inventory control – created because of it.

Should It Stay or Should It Go?

The first step in preventing an economic downturn from cutting into your profits is to conduct a stringent analysis and streamlining of your company’s cost structure. The administrative and operational infrastructure of all organizations tends to grow in good economic conditions, but rarely is that matched with swift reduction when business volume ebbs.

Understanding your company’s cost structure is essential for reducing or eliminating costs that don’t impact sales. Both client-facing and support staff are involved in indirect expenses on a day-to-day basis. They are an excellent resource for identifying wasteful practices. An organization-wide approach to removing direct expenses that are no longer necessary and reducing newly unnecessary indirect expenses is the best way to ensure success.

With your employees’ input, as well as your company’s current sales projections, you can reasonably determine your available operating funds. This is very important, because you need to know how much you need to cut back before actually beginning the process. There may be more capital to work with than originally thought.

Given the current unfavorable business environment, instead of focusing on your annual objectives, you should determine your three-month objectives and related staff accountabilities. These decisions should be discussed with your staff members to keep everyone informed.

After determining your available working capital, formulating your business strategy is critical. Of all the initiatives currently underway, which are most likely to bring money in the door the fastest? Also, which of your initiatives would be the easiest and most cost-efficient to complete? These programs should be given the highest priority. While politically easier to execute, irritants and projects with small dollar savings drain resources and attention from improvements that save big money.

Labor Optimization and Communication Is Key

Unfortunately, during an economic downturn, some hard decisions need to be made. The most obvious way to reduce costs is a reduction in staffing. A determination about those workers who add critical value and those who don’t needs to be made. One could argue that the entire staff provides critical value. In this case, which members add the least? Are there areas where responsibilities clearly overlap? In this case, one person may need to fill the shoes of two in order to weather the economic storm. Those workers who add the most critical value and are not in the firing line should be informed of this to maintain morale levels.

Employee morale is crucial to ensuring that productivity remains strong and that the corporate environment remains upbeat. It is very important that you ensure worker participation by including them in communications so they know what is going on.

This is an ideal time for additional training. Cross-training workers boosts productivity and flexibility because workers will possess the skills to “cover for” each other in the event of an illness, vacation, or termination. This investment in extra training also streamlines the process flow and provides deserving workers with extra responsibilities.

Another place to start is through the examination of direct v. indirect employees. Which employees are directly involved in procurement, production, sales, promotion, and supply chain? Indirect employees, usually involved in administrative and clerical roles, are often the first to go. In many cases, these employees are hourly, or non-exempt. Are there part-timers on the staff who perform unnecessary functions? A way to cut overhead without wholesale staffing reductions is through an examination of their schedules. Is there overtime that can be cut?

In order to cut labor costs, management also needs to take a long look at the contractors it currently works with. Contractors often have slower response times and are more prone to experience communication lapses. Although considered “on the payroll,” contractors not only work for themselves but often have other clients that distract their focus. Also, contractors work for a profit themselves, cutting into company profits. If there is a way to accomplish company objectives using current employees in lieu of contractors, this option should be examined.

Sales and Variable Costs in Sync

When projected sales decrease during a recessionary period, production levels need to drop proportionally. This is not the time to tie up working capital in the form of excess inventory. Management must identify costs that vary with production level and ensure that those costs are being reduced appropriately.

During a downturn, management should utilize a multi-faceted approach to maintain or even increase company margins. One of your top priorities should be to build consistency across the organization regarding production and labor policies. If variable costs do not decrease in direct proportion to production decreases, management is failing to do its job. Essential to addressing such inconsistencies, the entire operation must be aligned toward common goals using common metrics. Performance indicators should be reviewed to ensure that they are appropriate measures of your progress.

Profit-enhancing Key Performance Indicators (KPIs) include:

• Parts produced per labor hour – This number should remain constant and within predetermined benchmarks especially when production slows down.
• Ratio of overtime hours to total labor hours – As production slows, the amount of overtime also should decrease – preferably at a much faster rate. Reducing overtime should be a top priority.
• Day’s sales in finished goods inventory – This, too, should remain constant across good times and bad.
• Day’s production in raw materials inventory – With so much focus on finished goods, tying up working capital in inventory of any form should be on your radar.
• Maintenance labor hours worked per maintenance planned hour – Planned hours require leadership approval. Are your maintenance people stretching out projects or doing unnecessary work?
• Ratio of administrative costs to total labor – If your employee count has dropped, you need to ensure that your administrative costs are downsized to match your new business structure. Do you really need the same number of customer service reps or payables clerks?
• Average span of control – Do you need as many supervisors as before if your direct labor headcount is down?

Improving Managers and Supervisors

Improving management skills among first-level supervisors or managers gives them tools to improve margins. In an economic downturn, how these front-line managers perform their jobs is crucial because they possess the ability to improve margins at the point of production. To their credit, many companies already recognize this, and are devoting greater resources to supervisor education. Unlike many types of training, the purpose of supervisor education is to not just transfer knowledge but help instill a “culture of execution,” an environment in which plans are consistently converted to action. It is the focus on results that distinguishes this education from typical “management training.” The ultimate outcome is not simply a trained supervisor but rather an improved operation where the best demonstrated production is achieved consistently, and the best demonstrated performance is steadily improving.

In addition, management should seriously consider conducting an assessment of current company-wide processes and procedures. Are reporting procedures as fluent as required to support new, streamlined processes? Is company performance in line with industry benchmarks? It is essential to step out of the trenches and shift to a “fact-based view” where emotions are removed from the situation. Management should consider partnering with an operational consulting firm – such initiatives often require the perspective of an experienced and objective third party. These firms specialize in enabling the necessary program changes that adapt your company to current as well as future business conditions.

With a little planning, cost reduction, and optimization of resources, virtually any company can survive the hardship of an economic downturn. In fact, while competitors dither, lean times are periods of opportunity. All it takes is a proactive approach, proper planning, and streamlining processes. Companies that properly adapt to current conditions will see an even brighter future when the economy shifts upward.

Hugh Pinkus is a project director for Proudfoot Consulting. Proudfoot is the recognized leader in operational management consulting. For more than 60 years, Proudfoot has specialized in implementing change to achieve measurable and sustainable performance improvement in client companies. Its teams work with client company management, and with people of all levels of the organization, to design and install programs and increase bottom-line financial results. For more information, contact Joe Froelich at (404) 260-0557 or visit www.proudfootconsulting.com.