Our Newest Rivals

Published: August 01, 2002, By Susan L. Kelly, Raine Consulting Inc.

It's a fact: The general commercial printing industry is under severe pressure and is looking for anything and everything to fill capacity. This includes a new focus on traditional converted products such as labels, envelopes, packaging, novelties, plastic cards, and direct mail.

Why would a commercial printer expand into converted products? The gap between shipments (revenue) and profitability is widening and accelerating, which makes it that much harder for printers to maintain status quo with traditional commercial print products. This trend is a clear indicator of an industry on the verge of a fundamental shift in its business model, one that includes expanding into different types of printed products.

The Drivers
What's driving commercial printers to expand into converting products? Some facts to consider:

• Real commercial print sales growth continues to under-pace GDP growth and is highly dependent on advertising.

  According to the Printing Industries of America, more than 44% of print demand comes from advertising, and the outlook for ad spending is getting worse according to analysts and industry research firms. Merrill Lynch constantly revises its growth forecasts for ad spending to be around breakeven to 1% growth for 2002. Zenith Optimedia is predicting the same.

• Commercial printing's return-on-investment model has a very high sensitivity to recessions.

  When you have a capital-intensive industry that depends on a 3%-5% per year growth market with fully utilized assets, even the slightest shift of a marketing budget away from print to reduce costs or to another medium can have devastating effects on profitability.

• Commercial print companies' valuations have been decreasing since 1998.

  Over time, the selling price of commercial printing companies is going down. Owners of commercial print companies are looking to offer expanded product lines to their customers in an attempt to protect their company's bottom line.

• Overcapacity due to page count reductions and lack of equipment retirements is a factor.

  The number of printing establishments has contracted 18% in less than eight years with another 20% reduction expected in the next ten years. However the number of printing press retirements continues to trail. Harry Quadracci, chairman of Quad Graphics, said it best: “You still have the old machine and unless you throw it in the ocean you have more capacity. We have more capacity than ever, less market than ever, and more competition than ever.” Printers wanting more capabilities or thinking that a lowered price per thousand can be achieved with faster or more efficient equipment are being lured by “trade out and trade up” pitches by equipment manufacturers. Short-term gains drive longer term, and inevitable, pain for the entire industry.

• Commercial printing is going commodity…and fast.

  Price elasticity basically has gone out the window and many printers cling to their customer relationships as the last resort to keep the work. In a recent sampling study of identical commercial print jobs averaging between $10-20M, there was a price differential of 38% from the lowest to the highest bid. Variances of this magnitude mandate customers shop around for their printer. When you layer on top a tightening economy, pricing brutality catalyzes the search for other printed products to make up the difference in lost volume.

• Print distribution channels are under pressure.

  Traditional distribution channels for print and publishing also are under extreme pressure: the United States Postal Service for print, the wholesaler channel for books, and the newsstand channel for publishers. Commercial printers get tired of being caught in the squeeze play between time and costs associated with the systemic problems their customers have when distributing printed products to their customers. Grass is always greener and any converting product that appears to have a direct-to-customer's-customer relationship looks enviable.

• Lastly, from a customer's perspective, changing buyer behaviors are driving the need for printers to offer a “one-stop shop” approach in their selling solutions.

  Many purchasing groups, especially in Fortune 1000 companies, are slashing operational budgets by reducing head count and increasing responsibility among buyers. Previously, larger purchasing groups operated with specialized buyers managing only one print segment such as promotional materials, packaging, or labels. Now these responsibilities are combined into one position with a single buyer responsible for all print and packaging. With reduced expertise, buyers are relying on suppliers to fill the gaps. Buyers are re-defining their “best print suppliers” as those that can provide the most products and services in one complete package.

  Expansion Strategies
  So how do commercial printers enter the converting world, and how successful are they when expanding their product offerings to their customers? Here are five approaches Raine has observed:

  1. Increase customer ‘wallet share’:

     Commercial printers investing in this approach offer their customers more capabilities, more products, and more services. They try to make it easier for their customers to “single source” suppliers. Their objectives are to increase their market share of all printed products within their best customers; deepen the relationship; and increase supplier switching costs. Commercial printers are actively responding to their customers' shift in sourcing ‘print programs’ versus ‘print jobs’ including how to use the Internet cost-effectively.

  2. Alliance and partnering strategies:

     Since the economic downturn there's been a greater awareness and acceptance of commercial printing companies willing to work with and through other printers and converters. The cost to acquire and maintain customers is at an all-time high, and commercial printers are willing to share information, customer relationships, and revenues to stay in the game.

  3. Investing in front- and back-end modules of capabilities:

     Many commercial printing companies have expanded their capabilities into the front-end activities (i.e., creative, pre-media, and digital workflow) as well as the back-end activities (i.e., fulfillment, mailing, and inventory management). Others have installed modules of extensionary capabilities throughout their operations, such as die-cutting, plastic card production, flexography, and gluing lines, so they can gain regional penetration to a greater number of customers. Also there are printers that want to stabilize plant loading and look to new products to reduce the seasonality of commercial print.

  4. Digital printing and database management:

     One of the most popular paths for expanding product lines is digital printing. Major equipment manufacturers (e.g., Heidelberg, HP/Indigo, and Xerox) are helping commercial printers lower the entry barriers to converting products. By co-developing new applications, equipment manufacturers help printers sell a wider range of cost-effective print products to their customers while selling more digital equipment. As more printed products incorporate variable data programs, the preferred supplier pool will shift dramatically. Growing competency (and investments) in database management also opens up a brave new world of product solutions to new customers.

  5. Nanotechnology applications.

     Nano-technology is the science of designing and building unique structures smaller than 100 nanometers, many of which are no bigger than the width of cell membranes. It provides the ability to manipulate atoms to create new materials — everything from new floor coverings to sunscreen. NanoInk is developing a new lithographic process for making DNA arrays, which are used for genetic screening and analysis. It sounds futuristic, but commercial printers are signing up quickly for unique applications that involve proprietary inks and substrates to deliver to customers.

  One example is Mail-Well's recent license from Nacopi Technologies' Rub & Reveal scheme that magically reveals hidden messages and images for direct mail. Or consider Chromatic Technologies' interactive and heat-sensitive inks that change color by the warmth of your hands. Or what about embedding nanotext for security labels? Nanotechnology companies quickly are becoming converters' new customers, suppliers, and competitors.

  Bottom Line: Provider or Partner
  There's a new set of rules emerging that converters and commercial printers need to understand:

  • To the buyer, it is more important which supplier can provide the most products at the best quality, price, and delivery time.

  • How print products get distributed and consumed by the customer's customer is more important than who manufactures them.

  • Offering more products by managing alliances, partnerships, or outsourcing is just as effective as adding new equipment to your floor.

  Printed products of every kind, both converting and commercial printing, are witnessing a trend toward convergence and so are the companies that make them. It's time to examine your company's position: Is it a provider, a partner, or both?

Susan L. Kelly is president and managing partner of Raine Consulting, Glen Ellyn, IL. In her 20 years of Fortune 200 experience, she has worked with leading companies in the computer hardware and software, advertising, information services, publishing, and printing industries. Susan holds an MBA degree from York Univ. and a Bachelor of Technology degree from Ryerson Univ., both in Canada. She can be reached at 630/790-2799; e-mail: This email address is being protected from spambots. You need JavaScript enabled to view it..

Printing: Threats and Opportunities
Editor's Note: Turning the challenges of emerging technologies, shifting markets, increased competition, and an uncertain economic climate into a printer's opportunity will be the focus of Executive Outlook 2002. The full-day conference will be held October 5, the day before the Graph Expo and Converting Expo show opens its four-day run at McCormick Place in Chicago, IL.

“Emerging Technologies/Shifting Markets — Turning Threats into Opportunities” was selected as the theme for the conference to emphasize that change and competition can provide an opportunity for individual printers to prosper, says Graphic Arts Show Co., the conference organizer.

For more information contact GASC, 1899 Preston White Dr., Reston, VA 20191; 703/264-7200; gasc.org.