What’s Next? Assessing Print Markets in 2006 and 2007
Davis, Ronnie H
The Print and Graphic Communications Industry
U.S. Economic and Other Trends
With the arrival of each new year it is time to look ahead and assess future print market conditions. Our Technology Forecast article for this year is based on the recently published PIA/GATF report Over the Horizon: An Environmental Scan of the Economy and Print Markets 2005-2007.
The Economy Looks Good
In contrast with the reports in the general press, the U.S. economy is veiy strong and growing at a robust pace. The latest numbers indicate the economy grew at a strong 4.1% pace in the third quarter despite the damage from Hurricanes Katrina and Rita which probably shaved around half a point from growth. Expectations are the economy will end the year up, around 3.6% over 2004 levels-a very healthy pace.
PIA/GATF’s outlook for 2006 is for the economy to grow 3-3.5% over the year. Growth for the first six months of the year may exceed 3.5% with some slowing during the last half of the year.
The outlook for 2007 is of course veiy preliminary, but if the economy performs at trend rates growth should be in the 3-4% range once again.
Printing Industry Snapshot for 2006 and 2007
If the economy grows as forecast, print markets should remain fairly healthy over the next couple of years as print catches up with the “mature recovery” phase of the economy.
Six Opportunities on the Horizon
In any environment, there are opportunities and threats. In many cases, opportunities and threats spring from the same driver. There are six key categories of opportunity for printers over the next couple of years.
1. The “top of the cycle” opportunity. The biggest and best news for printers is a matter of timing. Based on the current trajectory of the economy and aggregate print markets, the next two years may provide the best growth opportunities in years-both in terms of the last few years and the next few years. This is true because the U.S. economy is well into a “mature recovery” phase, and this phase, historically, provides for maximum growth of print markets.
2. The digital opportunity. The second growth opportunity is tied to printing process-digital printing or toner-based printing. As discussed in this report, printers’ revenues from digital printing have been growing at a pace of 50% greater than total printing, and around twice the rate of traditional ink-on-paper printing. Overall, digital printing is still only around 10% or so of total printing shipments but this percent is increasing. The growth ol digital is driven by both advances in technology and the focus on targeted marketing with variable-data printing. As predicted in PIA/GATF s landmark futures study, Vision 21: The Printing Industry Redefined for the 21st Century, more printers are becoming “multi-processed” with digital printing in addition to sheetfed and web offset printing.
3. The ancillary opportunity. The third category includes ancillary services or print logistics that have been growing faster than traditional print sales. Over the past few years, ancillary service sales have increased at approximately twice the rate of traditional ink-on-paper printing. Printers are discovering it may be easier to pursue growth in ancillary services than in print sales. It has been estimated that for every $1 spent on printing, perhaps $6-8 is spent on various ancillary services, in conjunction with the printing.
4. Market segment opportunities. The next area of opportunity are print markets projected to grow at above-average rates over the next couple of years-direct marketing printing, packaging printing, and labels/wrapper printing. These sectors are growing as a result of the expected growth in the economy and some protection against global (offshore) production.
Direct marketing printing in particular should continue to grow at above-average rates. This will include both business-to-consumer marketing and business-to-business marketing, although direct marketing focused toward business is projected to have the highest growth pace.
5. Global opportunities. Next is printing for export to the global marketplace. While foreign competition is also a direat (as discussed below), it can be an opportunity for some printers. The U.S. still maintains a net export advantage in printed materials, although the gap is closing. Major export opportunities include:
* Newspapers, journals, and periodicals are the leading category of U.S. printed product exports. In 2003, this category generated over $1.17 billion in total printing shipments in the U.S.
* The second largest category of printing exports is labels. This categoiy amounted to over $446 million in 2003.
What countries are providing export opportunities for printers? Canada and Mexico are the two biggest markets. Other export opportunities include South Korea, the United Kingdom, and Singapore.
6. Improved management performance opportunities. Perhaps the best opportunity for printers over the next couple of years is to simply do a better job of managing their own performance. The PIA/GATF Ratios has proven that industry profit leaders consistently outperform other printers both in good times and bad. While even average printers do better during good economic times, it takes truly effective management to achieve superior performance in bad times.
With a favorable environment expected over the next couple of years, it is a good time to tighten up and focus on good management.
Four Major Threats
At this time, four major threats to printers appear on the horizon. A few months, ago there were five threats, but one of them-large postal rate hikes-has been eliminated thanks to PIAs lobbying efforts on postal reform. If this effort had not been successful, there would have been a large postage increase in early 2006 which would have taken a serious toll on the printing industry.
A shock to the economy and resulting recession. Although the outlook for the economy is optimistic over the next two years, there are risks to this outlook. The economy is in the fifth year of expansion since the last recession and will be in a seventh year if the expansion continues into 2007. The most likely cause of the next recession, when it comes, is an external shock, such as oil price hikes which have caused a majority of the past few recessions. If a recession occurs over the next couple of years, print markets will be more seriously impacted in a negative direction than the economy as a whole.
Escalating cost pressures in four cost items. In economics, most good news has a downside. The expected economic and print market growth over the next couple of years will put increasing pressure on printers’ cost. In particular, four cost items will be under pressure:
* Wages and salaries as labor markets tighten
* Paper prices as paper markets tighten
* Health benefits with the cost escalation in health care cost
* Rising energy prices which will push up printers cost for utilities and transportation
All together, these items take up about two-thirds of a typical printers’ sales dollar, so there will be tremendous pressure on the bottom lines of most printers. This is true even if top-line sales are growing.
Global competition and offshore print production. Another emerging threat is global competition. However, as pointed out above, global competition goes both ways, and thus, is also an opportunity for U.S. printers to export.
But in the context of threats, here are the printed product categories that have shown significant increases in foreign production over the last few years:
* Books are by far the most import-threatened product category with $1.44 billion in total book imports in 2003, an increase of almost 30% over 1998. The largest sales categories are in children’s picture/coloring books, technical and scientific books, and textbooks.
* The second-most-threatened print category is miscellaneous printed materials such as basic general commercial printed materials, i.e., advertising, posters, calendars, etc. This categoiy amounted to over $723 million in 2003.
* Labels are the third largest category of printed imports amounting to almost $250 million in 2003.
Continued intense competition and pncing pressure. While growing demand for print will help all printers it does not eliminate the intense competition that comes with over 40,000 printing firms. While printing prices have risen slightly over the past few months, they remain under pressure.
The complete report, Over the Horizon: An Environmental Scan of the Economy and Print Markets 2005-2007, is available to all PIA/GATF members. Visit www.gain.net to order.
Ronnie H. Davis, Ph.D., Chief Economist
Copyright Graphic Arts Technical Foundation Feb 2006
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