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Trends in 2018 for the Print Market

Posted Friday, December 1, 2017 by Michael Makin, President and CEO, Printing Industries of America.

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With 2017 behind us, it is time to think about 2018 and what might be in store for print and printers over the next 12 months. My focus is on four topics essential to print in 2018:

The Overall Macroeconomic and Business Environment

First off, the most crucial determinant of 2018 trends will be the direction of the overall economy. Going forward, will the U.S. economy accelerate and pick up speed? Or, will it break down and fall into a recession after over eight years of slow growth? Or, will it continue the steady but lackadaisical pace of the past eight years? A case can be built for any of these three scenarios.

PIA’s view is that the economy will most likely grow at a modest but increasing pace over next year. We believe the recent economic acceleration will continue with growth in the 2.5- to 3 percent range. This is a significant improvement over the past few years and is based on some form of corparate tax reform being enacted.

2018 Print Markets

Print will, of course, generally track with the economy in 2018. Over the last few years, most printers that survived the Great Recession have seen their sales recover, although it has taken a few years. The typical printer that managed to survive the recession still took a severe hit in sales over the years 2008–2010—a sales decline of almost $300,000. On the plus side, survivors’ sales swelled by over $500,000 in the recovery phase of the cycle.On an annual percentage change basis, total sales of the average surviving printer (since many printers did not survive the recession) dropped by almost 10 percent in 2009 before stabilizing in 2010. Since the end of the recession, the average printer has experienced single-digit positive sales increases each year.

For 2018, we expect overall print sales to increase slightly, which would align with print’s tendency to perform best in a mature recovery phase of the business cycle. If the economy continues to grow in the 2- to 3-percent range, print should do well, growing by 1 to 2 percent in total shipments. Of course, if the economy picks up speed, print will accelerate. Conversely, if the economy declines, print will decline deeper and faster.

What about printers’ bottom lines? Over the last decade, the average printer’s before-tax income as a percent of sales has been around 3 percent. If the economy performs as forecast, we expect the profit rate may rise slightly to around 3.2 percent. If the economy stumbles, the average profit rate would drop to 2 percent or less.

Key Micro-Market Trends in Print

Within this overall sales and profit pattern there will be some key micro-trends. These include:

Profit Leaders Outshine Profit Challengers—While the economy and overall print trends are important, historically some printers always outperform others. PIA’s Dynamic Ratios program indicates that printers that achieve profit-leading rankings do so consistently. That is, achieving high profits is not a random occurrence but is achieved from strategic and operational excellence. Similarly, printers in the profit-challenger category typically remain in that category. This is not to say that printers that change their ways—improve themselves strategically and operationally—cannot move from profit challengers to profit leaders. They can, but the pattern will remain the same—about a quarter of printers will be high-profit printers and the remainder will basically break even.

Print Processes Winners—The current trends regarding print processes will continue in 2018 regardless of what happens to the economy and overall print markets. Print processes that will grow relatively fastest over the next 12 months include:

Fast Growing Print Market Segments—The current trends for specific print market segments will also continue over the next one to two years. These print market segments will likely grow at relatively higher rates than other sectors: - Packaging and specialty packaging - Labels and wrappers - Signage - Direct mail - Point of purchase

Crucial Opportunities and Challenges for Printers in 2018

As described above, the 2018 environment will be challenging yet full of potential opportunities. Here is my checklist for printers as they contemplate their businesses for next year:

Plan for the worst but be ready to capitalize on opportunities

There is no doubt that the risk of an economic downturn is rising. At the same time, there is also increased opportunity for the economy to break out of the tepid recovery and accelerate. What to do? Educate and energize your management team and entire workforce to the possible economic and print market scenarios for the coming year. Remind them that the end of the year is the time to think about what went right, what went wrong, and what needs to change for next year in their areas of responsibility.

Additionally, remember that increased risk is not a reason to delay or eliminate investments. While the risks are high, the rewards are also high.

Make time for strategic thinking and defining your business

Strategic thinking is always imperative for success but it is even more important in a changing environment. When it comes to strategy in the printing industry, printers should address the dual issues of product/service focus and value-added ancillary services. Financial performance typically correlates with specialization by a printed product or vertical market. Also, diversification into various ancillary services usually correlates with higher profits. Printers need to re-think where they are in this process and consciously define their own business models.

Take a fresh look at pricing, estimating, and utilizations

Increased profits result from some combination of lower costs, higher prices, and/or increased sales. Too often, printers focus on costs and sales and ignore pricing and utilization rates. Profit leaders have higher profits for two core reasons—lower costs or higher prices. Develop a more nuanced and complete view of the relationships between costs, price, and utilization rates. The fact that a typical printing job is composed of 40 percent fixed costs and 60 percent variable costs provides printers with a lot of discretion in pricing.

Focus on education and training

Printers can gain a competitive advantage in human resources management. Profit-leading printers have a much stronger focus on human resources management, particularly training and education. Implement a “high performance work system.” - Be all-inclusive in benefits, awards, profit sharing, and bonuses. Employees should perceive equity in sharing gains in good years and pains in bad years. - Be transparent in sharing information on financial status, business plans, strategies, etc. - Develop knowledge workers. Invest in education and training opportunities for employees. - Link performance and reward. Reward employees based on individual performance, their team’s performance, and the firm’s performance.

Pay more attention to people costs

The profit gap between profit leaders (printers in the top 25 percent of profitability) and profit challengers (the remaining 75 percent) averages 10 percentage points—a whopping difference of $1 million in profits for a $10-million-a-year printer. Since roughly 40 cents of every dollar of a typical printer’s sales is expended on people (wages, salaries, benefits, and payroll taxes), managing people and their costs is a key determinant of profitability. Profit leaders are able to use less labor per sales dollar because they abide by the classic dictum of substituting capital for labor. Profit-leading printers employ an average of more than $15,000 in net assets per factory worker employed compared to average printers.

Prepare for tighter labor markets, higher compensation costs, and tougher recruiting

Finally, two out of three of our possible economic and print market scenarios point to significantly tighter labor markets. For printers this means be prepared for:

Take advantage of any tax law changes

Keep an eye on any changes to both personal and corporate tax laws and evaluate your business practices accordingly. Be ready to take advantage of changes in investment and depreciation rules, pass-through options, and other aspects of tax changes. Don’t wait until the end of the year to see how your business might be impacted.

At Printing Industries of America we will continue to focus on providing our members with the programming and services they need to maneuver in the coming dynamic environment. Good luck!