Web Offset Report 2003

Dec 1, 2002 12:00 PM, by Jill Roth, Special projects editor | jroth@primediabusiness.com

Although earnings reports for Q3 generally reflected improved bottom-line results, these profitability increases came through cost-cutting strategies rather than a healthier economy. Throughout 2002, business would pick up, only to slide again. A number of printers have indicated improvement during September and October, with prices stabilizing at lower levels. But there is no evidence that recent gains will be sustainable.

As the largest segment of the printing industry in terms of volume, web offset dominates the graphic arts. Its vitality is a strong indicator of the industry as a whole.

Because of web offset's dominance in the industry, AMERICAN PRINTER continues to publish an annual outlook for the market. This special report is prepared in conjunction with the Web Offset Assn. (WOA) (Alexandria, VA), which conducts a survey of its market segments each year. The results provide unique information about the current state of the web-printing industry, as well as forecasts for the coming year and historical data to use as a baseline for future planning.

A SNAPSHOT OF WEB OFFSET

This year's portrait depicts an industry hit hard by a volatile economy and lessening demand for the types of products web offset is well suited for: catalogs, advertising, publications and direct mail.

With tough competition from other printers and media, and a faltering economy, the web-offset industry is faced with difficult challenges. It is also severely tested by lessening demand for products that keep the presses running. When presses stop rolling, money stops flowing — forcing printers to make difficult decisions, including downsizing and severe cost-cutting.

Complicating matters further are customer demands for faster cycle times, ongoing skilled-labor problems and the need to invest in digital technology. It's not difficult to understand the scope of the problems the web-offset industry faces.

This AMERICAN PRINTER exclusive report highlights the most recent web-market outlook. It was developed in conjunction with WOA, along with this year's vendor sponsors Heidelberg Web Systems (Dover, NH), Paperloop (San Francisco) and Sun Chemical Corp. (Fort Lee, NJ).

In a departure from previous reports, which provided an overview of the entire industry, we are going to look more closely at some of the industry segments that web printers are most involved with: catalogs, magazines and direct mail.

THE FUTURE OF CATALOGS

Traditionally, catalog companies have been divided into either consumer or business, based upon the target end-user. About 10 years ago, companies in both segments discovered the potential of sales from the other segment. An example is the Lands' End corporate sales catalog, in which the company offers products that can be personalized by adding a business' name or logo. This gave rise to a new classification of catalogs referred to as “hybrid.”

In “The Future of Catalogs,” a recent study by the Graphic Arts Marketing Information Service (GAMIS) of PIA (Alexandria, VA), a new type of classification was developed: primary, secondary and business. Companies that derive at least 70 percent of their revenue from catalog sales were designated as primary. Stores that have for-profit catalog divisions were defined as secondary. Companies that sell mostly to other businesses were identified as business catalogers.

Since 1995, the secondary catalogs have been proportionally the fastest-growing segment, and this growth is expected to continue until 2010, according to the GAMIS study. Despite the accelerated growth of secondaries, however, they still represent the smallest base. In 2000, only 20 percent of consumer-catalog sales were attributed to secondary catalogers, with a still-dominant 80 percent derived from the primaries. The study also projects that the largest 1,000 catalogers (or seven percent of all catalog companies) will generate 90 percent of the entire industry revenue. This continued concentration of resources among the “mega-companies” will result in these companies selling a wider array of products, but not through a return to the “big book” catalogs. Rather, we can expect to see continuing distribution of specialized titles with narrower product focus. This will result in increased total catalogs mailed.

IMPACT OF OTHER MEDIA

And what about the impact of other media on catalogs? According to the GAMIS study, 96 percent of the participants had websites in 2000; the other four percent were in the process of establishing an online presence.

It is noteworthy that no respondent mentioned eliminating catalog mailings. While 46 percent believed the Internet would eventually reduce their mailings, 54 percent maintained their mailings would either stay at the same level or increase due to Internet growth.

In addition, the majority of Internet-only retailers have already begun mailing a paper catalog.

The catalog business remains healthy in spite of a slow economy. For primary catalogers, look for smaller firms to disappear or switch increasingly to the Internet during the next five to 10 years. However, the surviving larger catalogers anticipate circulating more catalogs and pages in 2010 than they do today.

The secondary-catalog market will continue to grow during the next 10 years. This segment had previously been limited to a few large retailers, but many more are now developing catalogs.

Business catalogs will experience the greatest degree of change in the next decade, according to the GAMIS study. Their revenue growth will continue to outpace consumer catalogs. They will be more likely to engage in international cataloging and use the newest printing techniques the earliest. Business catalogs will easily experience the greatest migration of sales to the Internet, however, causing a significant decrease in paper catalog products. But because business catalogers will enjoy stronger growth than primary catalogers, the overall growth of this segment, both in new companies and new titles, may offset a portion of this reduction in pages and circulation.

MAGAZINES IN REVIEW

In spite of public awareness of large consumer titles, trade publications dominate the listings in the Standard Rate & Data Service (SRDS) Advertising Source directories. This reflects the industry's abundance of smaller titles serving niche-market targets. More than three out of four trade magazines pertain to particular businesses and occupations, and nearly six in 10 consumer titles address a special interest. In this scenario, advertising revenues are much more significant than circulation revenues, which is why magazines have been hard-hit in a slowing economy.

Challenges confront magazine publishers in the 2002 to 2010 period. Principal among them, according to a recent GAMIS study, “Magazines in the 2000-2010 Era,” are major hikes in postal rates, consolidation in single-copy distribution and pressure to control newsstand returns, and the collapse of and/or stress in traditional reader marketing channels. Publishers also are faced with challenges and opportunities brought about by the Internet and balancing the efficiencies of new technologies with the costs.

Different classifications of magazines will weather this decade differently from others, according to GAMIS.

Weekly news publications will almost certainly decline in the face of Web competition, with major erosion of the category by mid-decade.

General-interest magazines should grow with the industry overall.

Lifestyle titles are expected to exhibit stability as a category and could grow at the pace of the overall industry.

Special-interest consumer magazines will experience mixed results. Some will gravitate to the Internet, and others could gain audience with Web exposure, as advertisers grow increasingly selective in their marketing efforts.

Custom-published titles should proliferate and grow a point or two ahead of the industry. A healthy economy and targeted marketing trends will support this category.

Metro-regional publications will see mixed results. Their content is vulnerable to Web competition, which will offset revenue gains as print-ad strategists focus more narrowly on target markets.

Trade publications will be reformulated and repositioned as the decade matures. The category could contract as much as 15 percent or more by mid-decade.

Farm magazines will be repositioned and scaled down, reflecting the decline in farm population. The loss of titles could be as high as 15 percent by mid-decade.

CONNECTING TO DIRECT MAIL

Direct mail is expected to grow faster and increase its share against other direct-marketing media such as catalogs and telemarketing, according to “The Status and Future of Direct Mail” from GAMIS. In 1998, direct mail represented 24.7 percent of print media (consisting of newspapers, periodicals, directories, catalogs and direct mail). That number is expected to grow to 26.3 percent in 2008.

An important trend is the displacement of mass media and mass marketing by more focused and more targeted direct-marketing activities. But the future of direct mail is being shaped by a number of conflicting trends and developments, which means it won't be business as usual.

Database marketing and data-mining techniques will significantly improve direct-mail targeting, resulting in increased response rates and more productive mail. We have only begun to see the effects of database marketing on a very limited basis. New technology and the growing need to get more bang for the buck, however, will drive marketers to pursue more and more targeted mailings with higher response rates. Database marketing is most applicable to consumer direct order (sales pitches), but this currently represents less than 25 percent of direct-mail expenditures, according to the GAMIS study. Further, database marketing has not been beneficial for business-to-business applications or for lead generation.

It is obvious to printers that the direct-mail industry is concerned about the cost of paper, printing and postage. On the other hand, order fulfillment, mailing-list development and creative design can balance some of this pressure.

This segment is full of extremes. In the future, the use of both simpler formats and more-complex formats is likely to increase. The GAMIS study forecasts that direct mailers will spend more on the average direct-mail piece to take maximum advantage of database marketing. On the other hand, more direct mail in the future is likely to restrict itself to simply advertising a website address. Almost half of direct mailers in the GAMIS study intend to increase their use of self-mailers in the next few years. And the look of direct mail is likely to become more varied in the future.

SHOP TIL YOU DROP?

The unstable economy has tightened the purse strings for many web printers. Yet, to remain competitive and keep costs as low as possible, automation is playing an increasingly important role in these larger shops. The concept of the “Digital Smart Factory” is gradually being accepted, and recent advances in technology, coupled with the commercialization of standards such as PDF, JDF and CIP3/4, have resulted in an accelerated move toward computer-integrated manufacturing (CIM).

Press purchases have slipped down the list of “must-buys” for web printers. Slightly more than seven percent of survey respondents indicate that they plan to purchase a heatset web offset press in the next 12 months. That figure is down from 10 percent in 2001 and 20 percent in 2000. In contrast, 8.7 percent plan to purchase a coldset/open-web offset press, up from last year's six percent.

The purchase of sheetfed presses appears to be declining — at least for the short term. Only 5.8 percent of respondents indicated they intend to purchase sheetfed presses in the coming 12 months. This is down from nine percent in last year's survey. Digital presses still remain low priorities on web printers' shopping list, although approximately 10 percent of web printers own some type of digital press — usually a direct-imaging press.

In the process of selecting a press, printers have a long list of features they consider important — all of which add up to increased productivity and savings. Features designed to increase efficiency are seen as having primary importance, followed closely by units that have high-speed printing capabilities (in terms of impressions per hour). Printers also are interested in automation features that will reduce makeready times.

Digital workflow has benefits beyond just prepress, and web printers are starting to see the value of closed-loop color controls, especially in the area of reduced makeready times and the need to meet customers' quality and turnaround demands.

In the pressroom, printers will also be looking at press dependability and durability, the quality of the impressions themselves and, perhaps most importantly, the projected ROI in a down economy.

BEYOND THE PRESSROOM

Slightly more than 20 percent of this year's web-offset-survey respondents plan to purchase CTP systems in the next 12 months. This figure, not surprisingly, is down from 2001 when 30 percent of respondents reported their desire to buy CTP. The intent-to-buy numbers do reflect web printers' willingness to invest in productivity-enhancing technology. CTP is maturing, and the introduction of a wide range of digital-proofing systems is driving more aggressive adoption of a digital workflow.

Buying CTP has become easier because of the variety of energy sources, configurations and front-end options now available. The investment, although pricey, is not as risky as it was a few years ago.

Printers, who once doubted the value of CTP offerings, have begun to embrace and benefit from this technology. In a recent TrendWatch Graphic Arts (New York City) report, 41 percent of 20- to 49-employee commercial-print shops expect to use more digital plates in the next 12 months. In addition, more than 3,000 U.S. printing establishments plan to invest in a CTP system in the coming 12 months.

“Change is slow, especially during these economically challenging times. CTP has methodically captured acceptance away from the imagesetter,” says Vince Naselli, director of TrendWatch.

Web printers are also buying four-color digital proofing systems. Almost 25 percent are in the digital-proofing market — up from 18 percent in 2001. Web printers are finding a need for a wide variety of digital proofing devices. On the market today are solutions that run the gamut from digital halftone-dot proofs to continuous-tone proofs to imposition proofs; desktop devices also are available, aimed at the design community but with an eye toward the needs of the printer.

Starting to emerge in the digital-proofing area are soft proofing and remote proofing. Systems are coming onto the market that allow clients to check proofs from the comfort of their own office using Internet-based software. A number of vendors also offer collaborative soft-proofing systems that enable customers to view proofs simultaneously with everyone on their team, including ad agencies and printers themselves. Early reports are very positive regarding the success of these collaborative ventures.

Web printers still are buying imagesetters (10 percent). As print sales have slowed during 2002 and excess capacity has grown, the number of firms that plan to invest in prepress equipment has declined across the board. Many printers, however, already have invested in this equipment or are working closely with specialized trade shops and service bureaus to serve their clients. CTP and digital proofing still remain strong areas of interest for web printers trying to improve productivity and meet customer demands.

In the finishing arena, mailing and distribution capabilities still hold the most interest for web printers, with slightly more than 21 percent indicating their intent to purchase related equipment. This is up considerably from 2001, indicating a growing awareness of the additional revenues to be derived from flexible and efficient postpress operations. Undoubtedly, mailing and distribution capabilities are being enhanced in response to customers looking for a one-stop shopping experience. Fulfillment is a major area of value-added service for today's marketing-oriented printer.

DO MORE WITH LESS

Equipment purchases represent only part of the total picture. Printers must also look externally to drive a healthy bottom line. When asked how they plan to improve their firms' operations, the overwhelming choice among this year's respondents was increasing sales volumes in current markets. This also was the No. 1 answer in both 2000 and 2001, and the numbers are increasing. A whopping 68 percent of respondents are looking to increase sales in their present market as compared to 29 percent in 2000 and 53 percent in 2000.

Perhaps in recognition that other industries are consolidating, web printers took a big step forward this year by indicating their interest in increasing sales in new markets. Finding and selling to new customers in new markets is much more difficult than increasing sales with existing customers. Nevertheless, 49 percent of this year's respondents plan to look to new markets for more sales dollars. This is up considerably from 12 percent in 2001.

Although most firms are concentrating on current customers, there is a definite marketing trend toward attracting clients in new, untried markets. We believe this reflects the declining dollars being spent on print in general, plus an effort by web printers to broaden their customer base.

With this move, printers are showing an increasing awareness of their budding marketing skills. It also reflects a greater recognition of printing and its related services as manufacturing operations. More automation and internal efficiencies will help printers streamline their production process, making it easier for them to enter new markets with proven products and services.

In the past, printers have concentrated on selling more products and services to their most profitable customers. While still a major focus, printers are finding that the costs associated with developing new clients — and luring them away from the competition — may be well worth the investment. Of course, this will drive additional competition in already crowded markets, with new competitors arriving on the scene almost daily.

In total, however, it is encouraging to see web printers taking a greater interest in marketing strategies that move away from the tried and true. With so many companies fighting over the same piece of the pie, opportunities for expansion in existing and emerging markets must be fully explored. By improving internal efficiencies and learning how to better serve customers' needs, printers can become consultants to their clients. By providing customers with solutions, printers can solve their own bottom-line problems.

THE PRICING DILEMMA

And pricing is part of the problem. This year, 17 percent of respondents indicated that they intend to increase prices. This is up considerably from 2001, when only three percent were planning to increase prices.

This response is probably a reflection of the market's pricing softness. Competition creates pricing based on unrealistic expectations. Jobs are quoted simply to keep the presses running. Competition from online-print-buying operations tends to further commoditize pricing. But attempting to raise prices in a sluggish economy is not easy to carry through. Printers might be better served to look toward internal efficiencies to cut costs. This is the approach many web printers have taken to improve their profitability during the past year.

In fact, slightly more than 53.6 percent are looking to improve internal efficiencies — up considerably from 2001 when only 18 percent were committed to the goal. With the maturing of technologies and the ongoing adoption of industry standards, printers are on the verge of being able to implement CIM practices across their entire operation. Technology allows them to speed makereadies, get more consistent color and operate presses with fewer people. Technology does not eliminate the need for skilled workers, but it does take the inconsistencies and vagaries out of the printing operation.

It is interesting to note that although 53 percent of respondents indicate they plan to improve efficiency, only 13 percent plan to install production equipment. Printers, however, are looking to acquire and/or improve both prepress and postpress capabilities, moving slowly, but surely, toward a more automated and integrated manufacturing operation.

CHALLENGES/OPPORTUNITIES

As in the past, the WOA survey asked web printers what they considered to be major problems facing the industry. In 2000, a lack of skilled employees weighed heavily on the minds of web-offset printers, with 77 percent listing it as their No. 1 concern. In 2001, with a slowing economy, only 59 percent listed it as a concern. In 2002, with downsizing and slow??downs abounding throughout the industry, only 49.3 percent indicated that a lack of skilled employees was a major problem.

Don't be deceived, however. If there is still that much concern in a floundering economy, what will the industry do when the cycle turns? This is not a new problem, or even one unique to the printing industry. Regardless of the economy, employers are still having difficulty finding staff with the right kinds of skills. For one thing, the skills most required have changed, and the industry has not attracted enough young people to fulfill its needs.

Reorganizing operations to accommodate the needs of younger workers may be one step in solving the problem. Look closely at what would attract someone to work for your company. It isn't necessarily a case of money. Even in tough times, employees would like to work in creative environments in which staff development occurs regularly through new experiences and varied work assignments. Continuing education is important to today's employee.

Companies that provide training, tuition reimbursement and fast-track advancement programs are positioning themselves to attract and retain the best employees. And firms willing to provide unique benefits, including flexible hours, will position themselves as especially desirable employers.

Although the industry faces ongoing problems with a lack of skilled employees, the No. 1 problem facing printers in 2001 and 2002 is competition. Eighty-seven percent of this year's respondents view competition as extremely troubling, up somewhat from 82 percent in 2001. Doubtless, it's a tough market out there, with printers struggling to find the magic formula for attracting customers' business. With decreased dollars available in a tight economy, competitive pressures will only increase.

There will be winners and losers, and in the years ahead, we can expect to see our industry shrink even more — and transform itself into something more than printing. Those who cannot maintain comfortable operating margins will find it difficult to invest in the tools required to remain competitive in the market. It takes capital to build a market for print and to undertake the changes needed for true efficiency improvements in the plant. Finding ways to better serve our customers, produce faster and cheaper, and making the customer's job easier will provide the competitive advantage that will make the difference between bankruptcy and survival.

MARKETING IS THE KEY

Even when money is tight, printers must not back off their marketing efforts. Keeping your name in front of both current and prospective customers builds an awareness and excitement in the marketplace. By investing in promotional direct mail, advertising and public relations, printers will be in the public eye at the right time and in the right place.

Buyers make decisions based on choices with which they are most familiar. By keeping your firm's name in the forefront of buyers' minds, you can build a reputation for innovation, value, customer service, trust and technology leadership. And don't forget the direct sales calls. People buy from those they know and like. Even if your customers aren't all buying today, don't neglect them. Keep in touch. Nowhere is the old adage, “Out of sight, out of mind,” more appropriate than in the printing industry during 2003.

In 2002, the challenge of digital technology appears to have been met, at least to some degree. Only 26 percent of survey respondents listed it as one of their top three problems, down from 43 percent in 2001. Tied to the concern about digital technology are product problems, listed as one of the top three problems by slightly more than 20 percent of the respondents. As the industry moves to an integrated, automated manufacturing operation, challenges will continue on the digital front. But the rewards are worth the struggle.

Finding capital to invest in digital upgrades is only a part of the problem. Deciding which technologies are appropriate and which can be bypassed is a major concern. And getting it all to work together seamlessly requires more than taking the shrinkwrap off the box and installing software. Printers need to keep a close eye on their expected — and unexpected — after-purchase support.

Not surprisingly, almost 60 percent listed capacity problems as a top-three concern this year, compared to 39 percent in 2001. Paper prices, once of major concern to printers, is edging up again in importance. Twenty-nine percent of respondents listed this as a major concern, up from 15 percent in 2001, but still not reaching the 50 percent level expressed in 2000.

INTO THE FUTURE

Web printers have a strong relationship with customers and have worked together for years. They are uniquely qualified to manage customers' information and to distribute it both in print and electronic form. Printers truly can provide an integrated solution that will increase print volume. But it takes focus and innovation, plus a willingness to change.

“Success requires change, and change will not always be easy,” comments Tom Basore, executive director of WOA. “It will require significant investments in new, advanced technology and the systems integration, process improvement and human capital necessary to support technology. If our industry keeps moving forward with technology, we can certainly continue to command consumer attention and advertising revenue and deliver more value to our customers.”

The challenges inherent in the future also represent our greatest opportunities for growth and profitability. Web-offset printing has stood the test of time, and, with savvy marketing and maturing technology, its future will be assured.

The Graphic Arts Marketing Information Service (GAMIS) is committed to developing market research to help printers and manufacturers better anticipate the future and run their businesses better. For more information on becoming a member or to receive information on any of the studies mentioned in this article, contact GAMIS executive director Jackie Bland at (703) 519-8179.