Moving Past the Great Recession:

Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond Printing Industries of America Economic and Market Research Department Dr. Ronnie H. Davis, Vice President and Chief Economist Ed Gleeson, Manager, Economic and Market Research

Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond December 2010 Printing Industries of America Economic and Market Research Department Dr. Ronnie H. Davis, Vice President and Chief Economist Ed Gleeson, Manager, Economic and Market Research

Copyright 2010 Printing Industries of America All Rights Reserved Printing Industries Press Catalog No. 1849 Reproduction in any form by any means without specific written permission is prohibited. Individual trademarks are the property of their respective owners. Product names are mentioned in this book as a matter of information only and do not imply endorsement by Printing Industries of America. Printing Industries Press books are widely used by companies, associations, and schools for training, marketing, and resale. Quantity discounts are available by contacting 800-910-4283. Printing Industries Press Printing Industries of America 200 Deer Run Road Sewickley, PA 15143 Phone: 412-259-1770 Toll Free: 1-800-910-4283 Fax: 412-741-2311 Email: membercentral@printing.org Internet: www.printing.org/store

Contents Introduction... 1 The Economy: Recession and Recovery... 2 Assessing the Damage: Print and the Great Recession... 4 Print Market Outlook for 2011 2012... 6 Different Paths: Printers Race for the Future... 7

Introduction This report presents our annual review of the economy and print markets during the past year plus our economic and print market outlook for the next twelve to twenty-four months. Additionally, we offer an assessment of longer-term competitive issues for printers. The following four sections address these topics: The Economy: Recession and Recovery. Assessing the Damage: Print and the Great Recession Print Market Outlook for 2011 2012 Different Paths: Printers Race for the Future The analysis provided in this report is updated and current as of mid-november 2010. Some of the information has been previously published in various Printing Industries of America reports, including Economic and Print Market Flash Reports and Ratios reports. In addition, some of the information is from the upcoming book Competing for Print s Thriving Future, to be published in late 2010. For the most part, however, the material (including the charts) has been specifically produced for this report. The objective of this report is to serve as a resource to plan the year ahead for your firm. Also, since it provides alternate scenarios in many instances, it can also be used to make mid-course corrections as the year unfolds.

The Economy: Recession and Recovery The Great Recession of 2007 2009 was a dramatic departure from the relatively mild recessions of the past two decades. The departure is true in both intensity and duration when compared to the last two recessions of 1990 1991 and 2001 2002. Indeed, even when compared to the last recession approaching this level of severity, The Great Recession scores high in creating economic damage and havoc as shown in Figure 1. The good news is that after lasting an official eighteen months, the recession has been declared over as of June 2009. However, while the recession may be over, the recovery appears stalled as the economy has taken to moving in an essentially sideways direction. Since peaking in the fourth quarter of last year, the growth rate of economic activity has declined with a very weak 1.6 rate in the second quarter this year and 2.0 percent in the third quarter (Figure 2). Typically, the steeper the economic decline, the stronger the recovery. However, this is definitely not true of this recession. In fact, the recovery gap between this recession and the last similar magnitude recession (1981 1982) is large and has increased significantly through the past six months (Figure 3). Where will the economy go from here? A look at the full recovery paths of the past four recessions should provide some guidance. While there is considerable variation in the recovery paths among the last four recessions, the average first year and second year increases in inflation-adjusted GDP are 4.6 percent and 4.2 percent respectively healthy gains (Figure 4). As we look forward to the path of the economy in 2011 and 2012, much uncertainty remains even after the November election results. However, based on a number of factors, including the election, the likely outlook has improved. At this time, the most likely trajectory of the economy over the Figure 1 Figure 3 RGDP Change 1st year 2nd year Figure 2 Figure 4 2 Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond

Figure 5 Figure 6 2.0 next two years is a somewhat stronger rebound with inflation-adjusted growth of 3.3 percent in 2011 and 3.5 percent in 2012. While this is not a robust recovery, at least it is improved from just a couple months ago. Other less likely scenarios include a sluggish recovery and a return to recession (the dreaded double dip). While these are less likely scenarios, we present them as alternatives for your own planning purposes if conditions change over the next few months (Figure 5). Using these same three scenarios, we can focus further on the quarterly pattern of economic activity over the next twelve months. In the forecasted most-likely rebound scenario, the economy bounces up to 2.7 percent growth the first quarter and picks up speed in each of the next four quarters (Figure 6). Whatever path the recovery ultimately takes, labor markets will remain in an over-supply situation for a while. A standard rule of thumb is that the economy has to grow at around 5 percent for a full year to lower the unemployment rate by a full percentage point, so it will take considerable time to soak up the large pool of unemployed and discouraged workers that have accumulated over the last three years. Further, the time it takes to return to job creation and a resulting reduction in unemployment has been increasing over the last few recessions (Figure 7). Even with the growth rate forecast in the likely rebound, the unemployment rate will range over 9 percent for most of 2011 and more than 8 percent for 2012. The most likely path of the unemployment rate is a range of 9.0 9.5 percent next year and 8.5 9.5 in 2012. In Figure 8, we take a look at the likely unemployment scenarios from 2007 to 2018. If unemployment behaved like it did in past recessions, by Figure 7 Figure 8 2011 the unemployment rate would be 6.5%, while if it was consistent with recent recessions it would fall to 9% by 2011. Based on current trends, we do not expect the unemployment rate to drop below 9% until 2014, the government forecast is more optimistic; they expect unemployment to drop to 7.9% by 2012. Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond 3

Price changes should remain in check for the next couple of years given the slack in the economy. However, inflation risk may start rising with the incessant bond buying and money creation over the past couple of years as well as the purchases at the end of this year and early next year already announced by the Federal Reserve. Inflation for the full-year 2010 is expected to be around 1.2 percent, which is just about the minimum level targeted by the Federal Reserve as a healthy rate of price change. The outlook for inflation in 2011 is for a slightly higher rate of about 1.7 percent as the economy recovers. Expectations for 2012 are more uncertain, but at this time, a rate of around 2 percent is a reasonable forecast. Assessing the Damage: Print and the Great Recession According to Printing Industries of America s print market tracking model, the Great Recession shrunk print s economic footprint by historic proportions last year. The number of U.S. printing plants declined to 33,565 down from 36,508 or 8 percent in 2008. Total shipments in 2009 (not adjusted for price changes) were $140.7 billion down from $166.6 or 15.6 percent industry wide. Employment declined by 6.9 percent from 976,400 to 909,200. In total, 2009 print markets declined by 2,943 plants, $25.9 billion in total shipments, and more than 67,000 employees (Figure 9). After adjusting for declines in printing prices real or inflationadjusted printing shipments decreased by about 9.1 percent. Even after the declines, print s economic footprint is still substantial compared to other U.S. industries and remains a major American industry. At this time we do not have an end-of-year reading on 2010 print markets, but the turnaround has already begun for printing shipments with growth returning in the first three quarters of 2010 helped by the slowly recovering economy and robust election spending on direct mail. Although shipments will be up for the year, they will still not match pre-recession levels. The number of printing plants and printing employment will surely decline. Sorting Print by Function and Process We can further examine printing shipments by function and process. Although many print products and services provide multiple functions, we can sort by three major intended functions: Print intended to inform or communicate factual and editorial information. Magazines, newspapers, books, and reports. Figure 9 4 Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond

Print providing product logistics to manufactured products. Packaging, labels, wrappers, and product user manuals. Print intended to market, promote, or sell various products, services, political candidates, positions, or ideas. Marketing and promotional print such as catalogs, direct mail, and brochures. Of these three functional categories, marketing and promotion is by far the largest component, comprising more than half of total shipments. The information and communication function is the second largest category, comprising 27 percent of total shipments (Figure 10 and Figure 11). Product logistics accounts for approximately 20 percent of total printing shipments today, or about $28 billion per year. With the exception of product user manuals, which could be online or in other digital formats, product logistics print is the one print function that does not compete against other (mostly digital) media, so it actually has a protected competitive position. Product logistics print is most directly related to the general level of economic activity. In Figure 10 Figure 11 2009 Shipments ($ Billions) 2009 Shipments (Percent of Total) contrast to the other two functions (print intended to inform or communicate and print intended to market and promote), print logistics is not subject to digital displacement, since this print is directly tied to products either as packaging or labels. Therefore it is the print function most tied to the level of economic activity both in the short (cyclical) sense and in the longer run. Additional threats may reduce this print function. First, is the degree of import substitution, since imported manufactured products will use packaging and labels produced primarily in their county of origin. Another factor that could significantly influence this function is the shifting changes in distribution channels. If more consumer and business products are purchased off of the Internet rather than purchased through traditional distribution channels, there may be changes in packaging and labeling needs. All things considered, this category of print should continue to grow at rates similar to overall gross domestic product and underpin overall printing shipments. Print by Process At the present time, digital print (toner-based and inkjet) accounts for close to 13 percent of annual industry shipments or $18 billion. Shipments of digital print continue to grow and are forecast to grow in the future at rates in excess of overall economic growth. Of course, one of the reasons for this high growth is that digital print is taking business away from traditional print. In fact, about one of every four dollars of digital print is from this source (Figure 12 and Figure 13). Printers ancillary services currently account for around 12 percent or $17 billion in annual shipments. Over the past decade or so, printers have increased their offerings of these services. They have benefited from both the general growth of these services and from increasing their market share by either competing against specialized firms providing these services or through mergers and acquisitions of these providers. In my view the dollar volume of these services should continue to grow even though the long-term growth rates may be less than the growth rate of the overall economy. Recent Trends in Printers Profits The Great Recession pushed the printing industry over the brink last year with the average printer participating in the 2010 Printing Industries of America Ratios survey losing 1.35 percent of sales. This is a decrease from the 1.5 percent profit as a percent of sales posted the previous year and Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond 5

Figure 12 Figure 13 2009 Shipments ($ Billions) 2009 Shipments (Percent of Total) down from the 3.1 percent profit achieved in 2008. Overall profits for the decade peaked in 2007 at 3.4 percent. Industry profit leaders (printers in the top quartile of profitability) earned 7.0 percent on sales last year, a decline from the 8.4 percent earned in 2008. Profit challengers (printers in the bottom 75 percent of profitability) averaged losses of 4.2 percent on sales last year, their third year in a row with losses. As can you can see in Figure 14, the profit gap between profit leaders and all printers and challengers has held very steady through the past few years. Print Market Outlook for 2011 2012 At the start of 2011, the economic recovery will be eighteen months old based on the official recession end of June 2009. As I have often stated, print leads recessions and lags recoveries. The good news is that with the recovery, well-established print markets should gain some traction. However, the lift from the extremely contested elections of 2010 and the resulting shot in the arm for direct mail will be lost. All in all, the economic growth should make up for the loss of campaign spending. On a nominal or not-price-adjusted basis, print markets should grow by around 3 percent or so in 2011 and 2012 based on the likely rebound Figure 14 6 Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond

Figure 15 Figure 16 economic scenario. Even with the recovery achieved in 2010 and the projected recovery for 2011, printing shipments will remain below prerecession levels (Figure 15). Over the next two years, there will be a continued shakeout of printing plants from industry restructuring. As the surviving plants pick up the sales of the failing plants, they will, of course, outperform the overall print markets. Perhaps around 2,000 or so printing plants may go out of business in the next year or two. The impact of all of this is that survivors will likely see their overall sales grow by fairly significant rates over the next two years (Figure 16). Printers profits tend to lag both print sales and the economy. As the economy continues to recover, print profits should continue to rebound over the next two years. My projections call for overall industry profit rates to rebound to around 2 percent and profit leaders to more than 9 percent (Figure 17). Different Paths: Printers Race for the Future Now we look farther down the road and examine the prospects for survival and future success of the current population of printers. To evaluate the future prospects of today s printers, we need to look at their demographic characteristics and their specific strengths and weaknesses. In total, at the end of last year, print s economic footprint included 33,563 printing firms. The vast majority of these plants were small less than 20 employees (Figure 18). It should be noted that these are plants, not firms. Since most printing firms are one-plant operations, there is a fairly close correlation between the number of plants and the number of firms Figure 17 Figure 18 (Figure 19). Based on the number of multipleplant firms, it is estimated that there are approximately 28,000 or so distinct printing firms in the U.S. Of these more than 70 percent are familyowned firms. Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond 7

Figure 19 For many years now, the number of printing plants has been declining even as printing sales moved up or down. Almost all projections on print s future call for long-run declines in both printing shipments adjusted for inflation and the number of printing plants. Printing Industries of America s long-term outlook is for plants to decline by a larger percentage than shipments. As long as plants decline more than shipments, the surviving plants would, on average, experience increasing sales based on the projections from the Beyond the Horizon report (Figure 20). Which of today s printing firms will survive and transition to the future? More important, which firms will not only survive but thrive in the future? We can generally profile the differing futures that lie ahead for three distinct categories the overall printing industry, typical surviving printing plants, and sales leaders (firms in the top quartile of sales change). On an annual basis, these three have significantly different projected future sales metrics minus 2, plus 1, and plus 5 respectively (Figure 21). Of course, these metrics vary even more depending on process (conventional ink-onpaper, digital toner, inkjet, and ancillary services). We can relate the future odds of success to the present time by classifying current printers into four categories SuperPrinters, Survivors, At- Risk, and Expendables (Figure 22). Today s Super- Printers are those in the top quartile in sales change and profitability. The probable Survivors are the next quartile, the At-Risk are the next quartile, and the Expendables are the bottom quartile or least likely to survive. There are many factors that influence whether a printer is a SuperPrinter, Survivor, At Risk, or one of the Expendables. While the book Competing for Print s Thriving Future investigates this Figure 20 Figure 21 Figure 22 Industry, Survivors, and Sales Leaders 3 2 1 0 1 2 3 4 5 6 Industry Survivor Sales Leaders 2 complex issue in much more detail, here we look at one key distinguishing factor how a typical printer in these different groups copes with value migration in printing. 8 Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond

Figure 23 Value migration happens in a marketplace when the key component of customer-perceived value transitions from one spot to another. In a traditional product manufacturing industry, the transition path in customer-perceived value is almost always from the product itself to services around or ancillary to the product, to the business, or consumer solutions provided by the product to ultimately outsourced management of the service. This value migration can occur in both a businessto-business and business-to-consumer situation. In the business-to-business case of print, this transition path has been going on for decades as printers have evolved from producing the printed product to adding value-added ancillary services to providing communications or advertising solutions and now to providing outsourced print management services. There is much evidence to suggest that it is the SuperPrinters that are furthest along in this transition, and print s future evolution will surely move in this direction (Figure 23). The key conclusion here is the imperative to migrate the value-adds that your firm provides to the more sustainable path of ancillary services to solutions to management services. At whatever point your firm is currently along this path, you need to move farther to the right to be successful in transitioning to the future. Related to this issue is the selection of a business model. In a recent survey, printers were provided four specific business model descriptions and asked to select the one best describing their own firm. The four options were: A niche printer specializing in a narrow print product segment such as direct mail, labels/ wrappers, etc. A niche printer specializing in a narrow vertical market segment or specific industry such as travel, entertainment, health care, etc. A general commercial printer offering a wide variety of printed products and services to a general customer base. A communications provider offering a complete set of value-added services, including printing, database management, fulfillment, mailing, etc. It should be noted that that, since respondents self-selected their description, there is no independent verification of the accuracy of the selection. Most interesting, many printers continue to define themselves as undefined general commercial printers. This is true even as the conventional wisdom on the most appropriate strategy for printers is to define themselves in a more narrow sense. When asked to pick a strategy that best described their firm, a majority of printers (32 percent) still select general commercial printer. Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond 9

The second most selected business model was communications provider offering a complete set of value-added services, including printing, database management, fulfillment, mailing, etc. (30 percent). This was followed by niche printers specializing in a narrow print product segment such as direct mail, labels/wrappers, etc. (14 percent). Ten percent of respondents identified themselves as niche printers specializing in a narrow vertical market segment or specific industry such as travel, entertainment, health care, etc. (Figure 24). There are, of course, many other imperatives printers need to address to make the transition. We have discussed most of these in previous writings, but the most important are: Thinking outside the competitive box combining specialization and diversification strategies Practicing the various operational tactics of SuperPrinters, including manufacturing and administrative efficiency, training and educating staff, and compensation plans that align the interests of a print firm s sales staff with overall firm profitability. Practicing pricing power to compete for price not on price. Figure 24 These and other strategic and tactical options for increasing the odds of success are covered in Competing for Print s Thriving Future. In closing, there are tremendous challenges facing printers over the next year or two. However, the severity of these challenges should be reduced somewhat now that the economy and print markets are both in recovery modes. 10 Moving Past the Great Recession: Print s Recovery Path for 2011 2012 and Beyond