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Dr. Joe Webb Responds to Quarterly Outlook Webinar Questions

Thanks again from Dr. Joe Webb and the WhatTheyThink staff to all of you who joined in on the June 23rd Quarterly Update Webinar. We had the largest number of participants ever, and lots of questions. We really appreciate the interactivity. Unfortunately, we were not able to address all of the questions live during the Webinar, and, as promised, are answering the rest here! We will look forward to your joining us again for the September 8th Quarterly Update Webinar, and of course, to your frequent visits to WhatTheyThink!

Question: Why is consumer confidence is so low given the other numbers in Slide 7?

Dr. Joe's Answer: The economic situation is being underreported in the press (see my column at http://members.whattheythink.com/home/drjoe74.cfm where I discuss this), and bad news in Iraq gets heavy play in the news every day.

Question: Yes, we see the economic pick up, but the bottom line is the end user is under the assumption that we are in a bad economy thanks to a media [un]willing to spread the good numbers; end users drive print volume.

Dr. Joe's Answer: This is why it's important to concentrate on growing markets where you can. If you're a small printer, court new businesses if you can find them. But also, my column listed growing industries for the first four months of the year. Find businesses in these sectors or businesses that service these sectors in my recent column (the same column as noted above).

Question: Regarding the PIA Financial Ratios, profit leaders also spend twice as much as other printers on training and education for their staff.

Dr. Joe's Answer: They certainly do. They also spend more on data processing technologies, and interestingly, spend more on repairs and maintenance. This implies that they have less equipment that stays busier than their “laggard” counterparts; hence their internal capacity utilization is far superior to “profit laggards.”

Question: With Alcoa announcing that they will no longer supply aluminum for printing plates after this year do you see a pricing and availability impact for printers?

Dr. Joe's Answer: I hadn't heard this, so I don't know who would be there to pick up the slack. I'll investigate a bit more. Others have expressed concern that producers of other raw commodities used in ink and pigments production are also leaving the market. If I had to guess, it's a combination of having other markets to concentrate on and their inability to pass on some of their costs to certain customer groups.

Question: Current level of capacity utilization in print shops vs historical average? How long will it take for industry overcapacity to unwind? Will rising interest rates drive more print shops into bankruptcy? When will increasing profitability start to feed into CapEx for printing machines?

Dr. Joe's Answer: I've never been one for the capacity issue stuff. I recommend looking at my column here and also my columns that are downloadable as a PDF here. Interest rates won't really matter. From chatting with a few suppliers and printers, there is a suspicion that the industry has been “redlined,” and that lenders and leasing companies have been extremely reluctant to lend to commercial printers for quite a while. I've never been able to verify that (no one published a “redlined” list that I'm privy to, and I don't know if anyone admits to having one). I think the bulk of the printers who would be affected by a rise in Fed rates have already been affected: market rates determine that, and they are usually ahead of the Fed anyway, especially for those of marginal credit worthiness.

Question: Some people said that printers will be compelled to have different printing technologies available and mix these technologies in a same printed product. Is it what you mean also talking about "product mix"?

Dr. Joe's Answer: No. I'll try to give a basic example. A car dealer sells cars, and also has a leasing department, a parts department, and a service department. Each of those departments have different profit margins. Emphasizing the ones that have the best margins improves their bottom line, and that would refer to “changing their product mix.” So if a printer has a lot of low margin work (let's keep it simple and say “black & white”) and not a lot of high-margin work (“6-color work”), getting more 6-color work would improve their product mix.

Question: When does Dr. Joe Webb see capital investment finally start to pick back up? Does he expect it to get back to where things were back in the late nineties?

Dr. Joe's Answer: I expect them to be getting better, but not as good as then, for a while. But you should remember that it's more important to be selling the right things, and not wait around for a general rise in investment. It certainly helps, but selling the wrong things in a great investment environment is quite bad, too.

Question: Could you address the impact on printers of the consolidation of suppliers by buying companies?

Dr. Joe's Answer: This one can come down in so many different ways, so I get to be the two-handed economist as I answer it. It usually leads to lower prices because of better economies of scale. When it doesn't, and prices rise, that encourages competitors to come into the marketplace to punish those purveyors. For example, high coal prices helped create demand for oil. In our case, high prices for printing supplies will create interest in non-print alternatives. This kind of situation is what worries me most, because so many of the things that printers do have components of which they can't control the prices very well, such as postage and paper. They can change brands or stocks to adjust, they can design pieces so they achieve best postal discounts, but that just nibbles around the edges. Otherwise, they have to find other cost areas to adjust.

Question: Since the peak in about 1995, we have lost about 10% of uncoated free paper volume - most of it in cut-size. Cut size is generally considered the primary paper used in digital printing - your thoughts on this?

Dr. Joe's Answer: It's gone to the “it doesn't have to be printed anymore” market, basically usurped by Internet electrons and desktop on-demand usage.

Question: Any comments on Sun Chemical acquiring Rycoline?

Dr. Joe's Answer: Not really. We will see more supplier consolidation as print demand is viewed as being in trouble. When markets are seen as declining, companies merge to combine their resources and look for other opportunities while maintaining their market positions and decreasing their costs.

Question: Consumer Magazine Demand: Traditionally, there has been a long delay between GDP recovery and consumer magazine ad page recovery. The current rebound in ad pages seems to be very unsteady. Do you see this rebound strengthening or do you believe this will continue to be an uneven recovery for the next couple years?

Dr. Joe's Answer: I think it will be a steady but slow improvement, without any massive breakout. There are too many media alternatives, but also, the industry still has postage and subscriber acquisition cost problems that don't seem to be easy to solve in a generic sense.

Question: Printer Consolidation: What kind of consolidation do you see among large printers? Do you see consolidation within industry verticals (catalog/magazine/direct mail) or across verticals?

Dr. Joe's Answer: Yes, to both. Some of the verticals may get antitrust attention, but they'll still go through.

Question: Printers Exiting Marketplace: If a printer closes, the assets are often resold at a discount. Do you see the failure/exit of printers as a cause of further pricing decline since this capacity will still be on the market?

Dr. Joe's Answer: Not particularly. Printers with newer equipment who use it well have lower unit production costs than those with older equipment. The older equipment, unless it has a real specialty purpose, should be gotten rid of because it prevents superior use of the newer equipment. One of the downsides of the slowdown is that the renewal of the industry's equipment has been slowed, making us more of a target for alternatives.

Question: What impact if any has the Moore Wallace / RR Donnelley merger had on the marketplace?

Dr. Joe's Answer: I'm not really sure. Seemed like more of a stock deal and a way for the owners to find a new CEO and “fix” things internally from a cost rationalization perspective.

Question: What is the biggest value added potential area of opportunity for the market?

Dr. Joe's Answer: We still need to understand why people buy print and how to match that up in innovative, measurable ways with new media. We should have been driving business Internet use, and we let geeks and nerds take it away from us without a fight. Now we have a chance for the adults to get back in charge again if we'd just get over our collective funk and fears.

Question: In a recent Seybold Report article entitled “The Demise of the Offset Printer” the author painted a gloomy future for “smaller printing companies”…what opportunity for survival and profitability do you feel adding digital printing offers to these companies?

Dr. Joe's Answer: It depends on the specific regional markets that they are serving. These folks have to compete with imaging technology that people have in their offices and their homes, much of which is sold by the same manufacturers. Since the equipment can be quite expensive, often more than the sales volume of the shop, it can be quite a problem. It requires a lot of marketing, and that's one reason why I look on the better franchises as the survivors in this area. But, yes, the decline in the number of shops in this end of the market is not stoppable. If they meant shops in the $2mm-$5mm range, yes, this group will be under stress, but digital printing has to become part of their focus. I don't think they have a choice.

Question: Where do you see Digital Printing going?

Dr. Joe's Answer: It will take a larger share every year of a declining demand for print. Much of the hyped mid-1990s opportunity for digital printing was grabbed by the Internet and office technology. Focusing on variable printing is fine, but it's not a big market. Printers usually don't have the intestinal fortitude or the ability to create markets, and the vendors never really understood, until recently, how important that is. You have to give people reasons to use the technology to create the demand. I've asked some of the vendors what other divisions' experiences are with using digital printing, and I get a blank stare. If it's that good, they should be eating their own cooking, and too many of them aren't.

Question: Many of the newspaper companies I talked to at the recent NEXPO show are looking to expand into the commercial printing market with improvements they make in their quality as they move toward or expand their Computer to Plate capabilities. Do you see this as a potential threat to the conventional commercial printer?

Dr. Joe's Answer: Newspapers have historically been active in commercial printing, dating back to the times when the only typesetting equipment in town was the hot-lead Linotype at the local newspaper. Except for the biggest dailies, some kind of outside printing has been part of the revenue mix of most newspapers. In 2002, newspapers reported $1.8 billion of revenue from such printing. It's usually local flyers and inserts and specialty newspapers that are on newsprint.

Question: Will the rate at which printers shut their doors start to decline appreciably or will there continue to be an X% decline in the number of physical plants year after year for the foreseeable future?

Dr. Joe's Answer: The consolidation by subtraction will continue, especially for small shops. The remaining shops will do okay. It's more an issue of people not starting businesses in our industry and being attracted elsewhere.

Question: What size printers are enjoying the so called profitability; is there a trend for different sizes and/or specialty printers?

Dr. Joe's Answer: I haven't seen those data to see if there is a general trend in that regard. PIA publishes some of those data. On March 26, Dr. Ron Davis released data from the 2003 ratios that showed that nonheatset web was the most profitable at 7% of sales, followed by heatset (2.4%), combination plants (1.6%), sheetfed (1.1%), and digital (0.7%). Profit leaders in these categories were substantially, if not incredibly, higher than average. As for data by product area, you will have to go directly to PIA for those.

Question: The slide showing a graph of shipments and profitability appeared much more positive in 1996 than what appeared to be in an earlier slide showing the beginning of each administration. Why?

Dr. Joe's Answer: At the time of the beginning of the chart, we were coming out of recession, and there were no new media substitutes. The Internet did not really come into its own until the 1997 and 1998 timeframes. I had forecast in 1997 that after 2000, our industry was at great risk. I knew firsthand, because I was in the thick of it and I saw how my business partner and I were able to leverage the Internet with our e-store and also that we dropped our printing costs in one year by about 75-80%.

Question: Do you think that in the digital printing arena, on demand has the increase or variable data? At drupa the attendees purchased tickets and the law prevented giving their information so they can't use it. How is privacy going to impact variable printing?

Dr. Joe's Answer: The privacy thing is another issue that is far overblown. Sharing our information makes life easier. A good article on this subject is here. The most important thing is that people can opt out of getting things, and also that private financial and medical information—and the voting booth—be just that: private. But to totally clamp down via the “privacy police” would limit people's freedom in the other direction, and would limit economic growth. Oh, and don't forget this item from the April Fool's edition of WhatTheyThink.com.

Question: Customer knowledge about printing processes and capabilities can affect (improve) their relationships with printers...who is responsible for educating the buyer—professional associations? Individual printers? Educational institutions?

Dr. Joe's Answer: The buyers, if they are good ones, are responsible for educating themselves, to use their resources more efficiently. The sellers are responsible for being one of many information resources for buyers. I think what you're talking about is the educational aspect of marketing. If that's a matter of just brochures, Web sites and promotions, then the marketer is missing the point. The ultimate issue is that the suppliers of printing capabilities and the technologies that create those capabilities don't really need to educate the buyer, but rather, to understand the problems that the buyer needs to solve or the goals that they want to achieve, and to craft ways for the buyer to meet those objectives.

Question: A lot of your presentation, e.g. metrics, understanding your customer, trends, understanding factors that affect print, cost savings and more, follow the Six Sigma Methodology. Have you looked into how Six Sigma can help re-design the print supply chain process, and if so, do you have any comments?

Dr. Joe's Answer: One of the biggest influences on my thinking about the industry was the late Bryon Ramseyer, who was a proponent and implementer of quality control management, including Six Sigma, throughout his operation. There are businesses in the industry that have implemented these concepts on the shop floor, and not much elsewhere. There is a sense among many that every print job is different, and therefore, many of these concepts can't apply, and the industry misses much of the benefits of these ideas. (For my comments about Bryon, go here)

Question: On one of your slides not discussed here, you mention having smaller companies partner with larger companies who have equipment the smaller ones cannot afford. What can a vendor do to help facilitate that partnership?

Dr. Joe's Answer: Publicizing installations and user group membership is a good way to do it. Vendors can also create and co-fund mini-public relations events and invite people who might “buy time” on the equipment to it. It also means that the vendors should be active in local associations to feed that “grapevine,” as well.

Question: You mention commodity pricing ... Please comment on the "squeeze" along the value chain. Commodities are increasing in price ... raw materials, paper, etc. Along the chain, if unable to pass along price pressure, eventually we will see businesses increasingly suffering from low returns which will drive further consolidation and/or business exit and/or changes within the supply chain. Any predictions?

Dr. Joe's Answer: Many of the commodity price increases are balanced by productivity increases (smarter management) that reduce some other kind of cost. Also, higher prices make alternatives more attractive. If the market is growing, the higher prices can be “paid” for because each additional dollar of sales has a higher profit margin (this is what “economies of scale” is all about). Barring this kind of combination of these kinds of situations, the prices have to be passed on somewhere, or they are just “eaten” in lower profit margins. I think we're getting close to that stage in many supplier situations. As far as the printers, though, there is so much slack in the system, and the alternatives to print are perceived to have lower cost, so these increased costs are not likely to show up in street prices of print to any great degree. I am resisting the opportunity to say “on the other hand,” because this is one of those kinds of discussions.

Question: Might this point regarding industry shipments decreasing, yet the industry showing higher profits, possibly be related to print having shorter run lengths? Would this then make make-readies more important and data collection? Shorter runs make process knowledge interrelations more critical for the printer in both prepress and press. Is this true; if so, how?

Dr. Joe's Answer: Let's not get hung up here as to what is a short run and what isn't, because that will sidetrack us. The issue is, are they shorter than other times? I learned my lesson a long time ago when I asked a magazine printer what a short run was, and they said 50,000 copies. Your instinct is quite correct. Even going down from a 1,000,000 run to a 900,000 run means that you have 100,000 fewer copies on which to write down the fixed cost of that job (makeready, planned startup waste) than before. And when you're in a situation where it's hard to pass those costs on, they have to come from somewhere. When fixed cost becomes a higher and higher percentage of the overall job cost, that situation has usually been addressed with new technologies, such as newer presses.

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