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Printing Industry ChartBook:

2016 Trends and 2017–2018 Outlook November 2016

Center for Print Economics and Management

Printing Industries of America

REPORT PAGE 2 OF 33 NOVEMBER 2016

Printing Industry ChartBook: 2016 Trends and 2017–2018 Outlook

Contents

Introduction to Printing Industry ChartBook

Current Print Market Trends

Printers’ Business and Operating Models

Tracking Printers’ Profits

Looking Forward: The Economy and Print 2017–2018

Managing in Good (and Bad) Times—A Game Plan for Success

Help from PIA


Introduction to Printing Industry ChartBook

Welcome to Printing Industry ChartBook. The information in this publication has been

developed by Printing Industries of America’s Center for Print Economics and Management.

The resources of the Center for Print Economics and Management include:

Center staff—Dr. Ron Davis, Senior Vice President and Chief Economist and Tai

McNaughton, Economist

Strategic Partner—Margolis Partners CPA and Stuart Margolis, CPA

Joint Research Partner—Department of Management, Jennings A. Jones College of

Business, Middle Tennessee University (Dr. Ralph Williams and others)

The scope and objective of the Printing Industry ChartBook is to provide a short, graphic

presentation on essential information on current trends and future developments in the American

economy and printing industry. For the most part, the graphics speak for themselves, so the text

is limited. If you have questions or issues on the content of this report please contact us at:

Dr. Ron Davis

[email protected]

434 591 0527

Tai McNaughton

[email protected]

412 519 1756

mailto:[email protected]

mailto:[email protected]


Current Print Market Trends

As of the date of publication (October, 2016), the American printing industry is experiencing generally healthy market conditions. As can be seen from the charts below, the industry is outperforming most other U.S. manufacturing sectors in a variety of metrics:

Print is on a hot streak: According to a recent Institute for Supply Management (ISM) survey of 18 manufacturing industries:

In terms of shipment growth, 13 of 18 manufacturing sectors were up, and print ranked number 1.

In terms of new orders, 12 of 18 sectors were up, and print again was ranked number 1.

For production volumes, 12 of 18 sectors were up, with print number 1.

For employment, 7 of 18 sectors were up, with print number 2.

Finally, in terms of order backlog, 7 sectors were up, with print number 3.

#1 • Shipments

#1 • New Orders

#1 • Production

#1 • Employment

#2 • Exports


Why is the printing industry doing so well? There are a variety of factors:

First of all, the U.S. economy is in the seventh year of recovery from the Great Recession of 2007–2009. Although the recovery has been sluggish with fairly tepid growth, it has been a sure and steady climb without interruption.

Print has hit its sweet spot in the mature recovery phase of the economy.1.Most of the severe displacement of print by digital media is now behind us.

Print has hit its sweet spot in the mature recovery phase of the economy.1.2.

Labels, wrappers and packaging print, serves as an anchor on print sales as it generally tracks very closely with the overall economy.

Most of the severe displacement of print by digital media is now behind us.Most of the severe displacement of print by digital media is now behind us.Most of the severe displacement of print by digital media is now behind us.2.Labels, wrappers and packaging print, serves as an anchor on print sales as it 3.Recently print marketing and promotion, particularly direct mail, has demonstrated its effectiveness as a premium marketing and promotional media.

Labels, wrappers and packaging print, serves as an anchor on print sales as it generally tracks very closely with the overall economy. generally tracks very closely with the overall economy. 3.Recently print marketing and promotion, particularly direct mail, has demonstrated its 4.Even the print sector most impacted by digital media, informational and editorial print (books, newspapers and magazines) has been doing relatively well lately.

Recently print marketing and promotion, particularly direct mail, has demonstrated its effectiveness as a premium marketing and promotional media.effectiveness as a premium marketing and promotional media.4.Even the print sector most impacted by digital media, informational and editorial print 5.Printers themselves have adjusted their business models to take account of new industry trends and realities.

Even the print sector most impacted by digital media, informational and editorial print (books, newspapers and magazines) has been doing relatively well lately.(books, newspapers and magazines) has been doing relatively well lately.5.Printers themselves have adjusted their business models to take account of new industry trends and realities.industry trends and realities.6.


Secondly, past experience indicates that print typically takes a while to get on track after

the economy recovers from a recession, but once print recovers, it does best in the mature

recovery phase of the economy. We are in print’s sweet spot.

Thirdly, most of the severe displacement of print by digital media is now behind us, so

print is back as an industry that will grow in normal economic times.

Additionally, print logistics—our term for labels, wrappers, and packaging print—serves

as an anchor on print sales as it generally tracks very closely with the overall economy.

Finally, printers themselves have adjusted their business models to take account of new

industry trends and realities. This is especially true for members of Printing Industries of

America since they have access to programming from their local affiliate and the national

organization.

Additonally, print is doing well because print customers are still using print. The following

findings are from a recent survey of print customers jointly conducted by PIA’s Center for Print

Economics and Management and FedEx Office.

Most businesses use commercial printers:

What are customers having printed?

14%

86%

Company Business Printing by Volume

All internally/In-house Use of a Commercial Printer


Why do customers use a commercial printer?

Business

cardsBrochures

Direct

mailersBanners Menus Other

Series1 74% 64% 64% 49% 21% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Printed Marketing Materials

(% of companies)


Another reason for healthy industry sales is that some print market segments are very hot:

Other print market segments are “warm”:

2.652.59

2.512.48

2.472.42

2.42.38

2.332.29

2.1 2.2 2.3 2.4 2.5 2.6 2.7

SignsPackaging/envelopes

Specialty printingPharmaceutical/cosmetic labels

Point of purchaseDirect Mail

Private label convert.Food, beverage labels

Quick printingPosters

Hot Print Markets: Top 10

2.24

2.18

2.16

2.11

2.09

2.03

1.97

1.93

1.91

1.91

1.7 1.8 1.9 2 2.1 2.2 2.3

Graphic finishingBrochure

Personal care labelsBusiness cards

Household labelsPamphlet

InsertsTrade bindingGreeting cardsBook printing

Warm Print Markets


Even the lagging print markets are growing:

1.88

1.87

1.83

1.82

1.82

1.71

1.62

1.43

0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2

Circulars

Magazine

Catalog

Finance & legal

Newspaper

Loose-leaf

Stationery

Business forms

Print Market Laggards


Printers’ Business and Operating Models

Now, let’s profile your and your competitors’ business and operating models in terms of:

Print processes

Print products

Ancillary services

First, here is our estimate of print’s economic footprint for 2014–2015:

Shipments ($ Millions) Printing and Related Support Activities $84,613

Print Related Media $71,346 Total Industry Shipments $155,959

Establishments

Printing and Related Support Activities 27,526 Print Related Media 18,054 Total Industry Establishments 45,580

Employment

Printing and Related Support Activities 471,611 Print Related Media 442,980 Total Industry Employment 914,591


Six out of ten printers define themselves as a “family business”:

The breakdown of printing processes used by printers looks like this:

The most prominent product and service offerings provided by printers are:

79

76

75

46

28

17

15

13

2

0 10 20 30 40 50 60 70 80 90

Sheetfed

Digital toner-based

Non-print ancillary value added services

Digital inkjet wide or superwide format

Digital inkjet high-speed production

Flexographic

Web offset non-heatset

Web offset heatset

Gravure

Print Processes (% of Printers)


Other popular product and service offerings include:

76%75%

72%70%

68%66%

64%62%62%

55%54%

50%50%

0% 10% 20% 30% 40% 50% 60% 70% 80%

BrochuresDirect mailPamphlets

Business cardsPosters

Catalogs and directoriesStationery

InsertsQuick printing

Specialty printingSigns

Book printingGraphic finishing

Products and services offered by > 50% of printers:

47%

46%

45%

44%

36%

35%

33%

32%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Business forms printingMagazines and periodicals

Financial and legal printingPoint of purchase displays

CircularsPackaging and envelopes

Greeting cardsFood, beverage, and related labels

Products offered by 30–50% of printers


Less popular product and service offerings of printers include:

Printers also typically provide many ancillary services:

24%

22%

21%

21%

21%

20%

11%

0% 5% 10% 15% 20% 25% 30%

Loose-leaf manufacturing

Household labels

Trade binding

Private label converting

Personal care labels

Pharmaceutical and cosmetic labels

Newspaper printing

Products offered by < 30% of printers

65%61%

47%44%

35%35%

28%28%

26%26%

22%9%

0% 10% 20% 30% 40% 50% 60% 70%

Professional creative designMailing management

Web-to-print E-Comm. ProcurementWeb-to-print E-C Mrkt. Brand/doc. mgt.

Database management servicesCross-media marketing services

Kit fullfillmentLogistics management

Digital asset managementDigital database archiving

CD/DVD servicesDigital studio photography

Ancillary Service Offerings


Tracking Printers’ Profits

What about the bottom line? The following charts show average industry profits over the past few years plus trends for profit leaders (top 25 percent of printers) and profit challengers (bottom 75 percent).

2004 2005 2006 2007 2008 2009 2010 2010 2012 2013 2014 2015All Printers 1.7 2.5 2.7 3.4 3.1 1.5 -1.4 1.4 1.8 2.7 2.6 3Leaders 8.7 9.4 10.3 10.1 9.7 9.4 7 9.5 9.6 9.9 10.3 10.3Challengers -0.6 0.2 0.2 1.2 -0.9 -1.1 -4.2 -1.3 -0.8 0.3 0.3 0.6

-6-4-202468

1012

Profits % of Sales 2004–2015

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2010 2012 2013 2014 2015

Profit Gap: Profit Leaders & Profit Challengers


Package DirectMail Books Comm./

Adv. Mags. Forms &Docs. Binding Converts/

Labels3.3% 4.9% 3.5% 2.5% 2.8% 5.1% 4.7% 4.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Profit Rates by Sector 2015

<$3 Million $3-$6 Million $6-$10Million

$10-$18Million >$18 Million

All Printers 2 2.6 3 1.7 5Profit Leaders 13 9.8 10 5.9 13.1

0

2

4

6

8

10

12

14

Profit Rates by Size 2015


Looking Forward: The Economy and Print 2017–2018

What about the outlook for the economy and print going forward? At this time there are many unknowns and concerns:

An aging and anemic economic recovery—the weakest of 11 post-war recoveries but still going after 7-plus years

The impacts from the election

Global headwinds


Generally, the inflation-adjusted growth rate of the U.S. economy has been slowing down for decades:

Compared to the most recent 11 economic recoveries, the current one is anemic:


The average post-war economic expansion is around seven years, so the current one is getting old. Also, there is no particular pattern between the number of years the expansion lasts and the strength or average growth rates.

A key variable is the presidential election. On average, the most risky year for a recession is the second year after an election—2018.


Another indicator is that the second year after a presidential election has an average variance from trend growth of 0.5 percent.

PIA’s outlook is for continued slow growth for next year:

50%

30%

20%

HANDICAPPING THE ECONOMY 2016-2017Trend Recession Acceleration


With our most likley economic scenario, print should grow by around 2 percent per year over the

next two years. If there is a recession, print will decline by 2–3 percent. If the economy

accelerates, print could grow by almost 3 percent.

2010 2011 2012 2013 2014 2015 2016 2017 2018

Trend 2.5 1.6 2.3 2.2 2.4 2.2 1.9 1.5 2

Recession 2.4 2.2 0.5 -1.5 0.5

Acceleration 2.4 2.2 2 2.5 2.5

-2.0-1.5-1.0-0.50.00.51.01.52.02.53.0

Economic Scenarios 2016–2018

2014 2015 2016 2017 2018

Trend 0 2 2 2.1 2.1

Recession 0 2 0.5 -3 -2.5

Acceleration 0 2 2.2 2.7 2.7

-4

-3

-2

-1

0

1

2

3

Print Scenarios Through 2018


Managing in Good (and Bad) Times—A Game Plan for Success

Now, let’s focus on a game plan for success: Print’s strategic and operating ecosystem

Effective management practices in printing

A process of self-evaluation with examples

How PIA’s Center for Print Economics and Management can help

First, our research demonstrates that printers that “think outside the plant”—that is, develop and implement a specific strategy—typically earn higher profits. They often do so by specializing in a specific print sector (by product or vertical market) and also by diversifying into additional value-added services. This “diversified specialization” strategy adds revenue and lowers cost,

thus increasing margins.


Another perspective on profitability is our “profit box.” This perspective simply says that the

only ways to increase profits are to: Lower cost Increase unit sales Increase prices

An additonal factor that can boost profit is higher capacity utilization. Of course, this factor increases profits by both lowering cost and raising unit volumes.


A key charicterisitc of print that pritners need to be aware of is that there are no significant economies of scale. Lower costs do not necessarily arise from larger plants or scale. This is true because print is a batch manufacturing process. In their search for lower costs, printers need to “get better, not bigger”.

Cost Control Pricing Power Sales Growth Smart Utilization

The 4 Pillars of Profitability


Another key industry characteristic is that, for a typcial print job, fixed cost comprises about 40 percent and variable cost the remaining 60 percent.

So what are the key effective management practices in the printing industry given these key characteristics? According to our recent joint Effective Management Practices survey in conjunction with the Department of Management at Middle Tennessee University:

1. Analyzing financial ratios—Top management benchmarks operations with industry averages and profit leaders (for example PIA Dynamic Ratios).

2. A quality focus from top management—They get involved in driving and measuring quality and customer satisfaction.

3. Entrepreneurial orientation—Top management is focused on risk taking; innovation; and creative, competitive strategies and solutions.

4. Goal setting—Top management sets specific, quantifiable short-term and long-term goals and communicates them to employees.

5. Strategic thinking—Top management has developed a strategic plan to achieve specific business goals.

6. Social networking—Top management has developed a high reputation in the industry and supports industry organizations and causes.


So what can you do at your firm to improve performance? We suggest a three-step process:

You should focus on your operating metrics. Low profits are caused by some metrics that are two high and some that are too low. The too lows include:


Our studies indicate that price increases are more effective in boosting the bottom line than cost decreases or sales volume increases.


Another focus should be on metrics that may be too high:

A key focus should be on people cost (wages, salaries, benefits, payroll taxes) since they comprise over half of total cost for a typical printer:

People Cost Gap, 53%

Other Factors, 47%

Sources of the Profit Gap


Profit leaders have an advantage of around 5 percent of sales in people cost compared to profit

challengers:

The advatage also shows up in direct factory wages and total factory payroll:

Profit Challenger Profit LeaderPeople Cost 35.05% 40.21%

32.00%33.00%34.00%35.00%36.00%37.00%38.00%39.00%40.00%41.00%

% o

f sal

es

People Cost as a % of Sales: Profit Leaders and Challengers

Profit Challenger Profit LeaderDirect Factory Wages 14.4% 12.8%Total Factory Payroll 25.5% 22.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

% o

f sal

es

Plant People: Direct Wages & Total Factory Payroll


The advantage also exists in administrative and salespeople cost:

Profit Challenger Profit LeaderExpenses 8.3% 6.6%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

% o

f sal

es

Salespeople: Salaries/Commissions/Benefits/Taxes

Profit Challenger Profit LeaderExpenses 6.4% 6.0%

5.8%

5.9%

6.0%

6.1%

6.2%

6.3%

6.4%

6.5%

% o

f sal

es

Overhead People: Administrative Salaries/Benefits/Taxes


Finally, we can see the people cost advantage of profit leaders in terms of employees per million

dollars of sales:

All in all, the people cost advantage of profit leaders amounts to a gap of over $14,000 in profit

per employee.

Profit Challenger Profit LeaderEmployees per $Million 6.7 5.9

5.4

5.6

5.8

6

6.2

6.4

6.6

6.8

Employees per $Million in Sales

Profit Challenger Profit LeaderProfit per Employee $297 $14,529

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$

People Profit Gap: Profit per Employee


Fewer People but Smarter People: Profit leaders enjoy this advantage because they usually invest

more in plant and equipment per employee—substituting capital for labor. Also, profit leaders

spend more on training and education as a percentage of payroll/per employee:

Implement a High Performance Work System:

Be All Inclusive-Employees perceive equity in benefits, profit sharing, awards, etc.

Share Information-Transparency in organizational information on financial, business plans, strategy, etc.

Develop Knowledge-Investment in education and training opportunities

Link Performance and Reward-Employees rewarded based on their performance and team performance

We have developed a “profit calculator” that estimates the profit impacts from 1 percent changes

in various costs, utilization rates, and price increases per million in annual sales:

Profit Calculator: Annual $ Impacts ($1 Million in Annual Sales)

*Categories do not add up to total because of overlap

$10,000

$10,000

$9,400

$23,300

$10,500

$56,000

$47,000

$112,000

$15,000

$18,000

$97,000

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000

Prices

Utilization

Value Added

Sales/ Employee

Sales/Producton Employee

People Costs

Paper/Consumables

Production Cost

Sales Cost

Admin.Cost

*Total Addition to Profit


PIA’s Center for Print Economics and Management Programs and Services:

New Financial Performance Assessment

Comprehensive comparative assessment of your Key Performance Metrics

Detailed variance analysis

Specific action plan and recommendations to improve your bottom line

Review and discussion with your management team

On-going assistance and consultation

PIA’s New Dynamic Ratios

Shorter Form—73% fewer line items (114 to 32)

Interactive dashboard

Focus on Key Performance Metrics

Self-selected peer comparisons

Legacy reports and data still available

Best Management Practices for the Printing Industry

Comprehensive survey in cooperation with MTSU management professors

Management strategies and practices

Family business issues

Full report and Flash reports

Custom Proprietary Research

Custom industry surveys

Market research—new products, services, pricing

Target market estimates

Focus groups and qualitative research

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