The Economy and Print Markets in 2014-2015
by Dr. Ronnie H. Davis
Printing Industries of America
Figure 1: 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.
Figure 2: 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.
Table 1: 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.
Figure 3: Digital print and ancillary services contribute 1.94 percent to industry growth, while traditional ink-on-paper sales contributed 2.24 percent.
Figure 4: Growth is expected in the product logistics and market/promote function, while the inform/communicate sector will continue to decline.
Figure 5: The 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 6: Profits are projected to hold up at their current rate of 2.7-2.8 percent during the next two years.
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.
Prints 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 prints three functionsinform/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 customers 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.