Value-Added Services Raise Concerns

By David Savastano, Ink World Editor | 09.02.05

As the cost of doing business rises, printing ink manufacturers are looking closely at their pricing


The National Association of Printing Ink Manufacturers (NAPIM) released its State of the Industry Report during its recent convention at Palm Springs, CA.

As was the case with last year’s report, the financial numbers are disturbing. For example, the return on net assets (RONA) was 10.2 percent for 1999, a decline from 11.3 percent in 1998. The report concluded that the 1999 returns “would be unacceptable to most successful companies.” In addition, the historical earnings before interest and taxes (EBIT) sank to 5.4 percent.

From these numbers, it is clear that the printing ink industry is, in general, not clearing enough money to make a reasonable return on investment. That is a serious concern, especially as the costs of doing business, such as raw materials prices and wages, are increasing.

In addition, printing ink manufacturers have also been offering a variety of special services, such as rebates, prebates, billing on consignment, placing in-plants, and other incentives, in order to get contracts from customers.

These services cost varying amounts of money, but are often given away for free. As a result, printers have come to expect these services.

With costs rising and margins tightening, industry executives are now beginning to reevaluate the way they are doing business.


Return on Investment
In the era of dot.com companies making huge gains, the printing ink industry’s return on net assets are causing much concern among top company officials.

Henri Dyner, president and CEO at Sun Chemical Corporation, said that the industry’s low rate of return on capital investment may discourage future investment.

“We are living with returns on capital investment that were not acceptable in yesterday’s world, much less in today’s new economy,” Mr. Dyner said. “When you look at the fact that both our suppliers and our customers have better rates of return than we have, you have to ask yourself, why would anybody invest money in the ink industry? That is a clear and present danger we face.”

H. Howard Flint II, chairman and CEO of Flint Ink Corporation, said that the low return on investment is a serious cause for concern.

“We think the industry needs price relief,” Mr. Flint said. “The industry is not returning its true cost of capital. We’re a very important part of our customers’ operations.”

It’s not just printing ink companies that are seeing tight margins: raw material suppliers are also facing difficulties.

“In addition, some of our suppliers are facing the same pricing pressures,” Mr. Dyner said. “Take the manufacturers of azo pigments, for example. Their return on capital is absolutely abysmal. As a result, flush capacity is slowly getting tight, and I don’t see more money being invested to increase capacity. In fact, two global pigments manufacturers announced that they would no longer invest in capacity expansion for azo pigments. To me, that means one thing … I see an even greater build up of pressure for a price increase in printing inks.”


Customer Expectations
Part of the problem is that ink companies have included so many value-added services without receiving or asking for compensation. These services range from fairly standard approaches, such as volume rebates and providing training, to highly expensive in-plant operations, providing expensive equipment, billing on consignment, and offering prebates.

After a while, customers take these services for granted.

Mr. Flint said that the ink companies are at fault for not requesting full compensation for their products and services.

“I don’t blame the customer for asking,” Mr. Flint said. “I blame us for providing more services and not being paid for it. We’ve not said no. We should have said ‘yes, but it will cost you more money.’”

Rick Clendenning, INX president, said that customers now expect added value services, and printing ink companies have helped to foster that expectation.

“I blame us, the ink industry,” said Mr. Clendenning. “We’ve created our own trouble. It’s at the point that customers look at it as expected value rather than added value. We’re all trying to compete in the market place, and as an industry, we’ve always competed that way, to go one up on our competition.”

“I think the perception of value-added services is that the customer thinks it’s included in the price of the ink,” said Harvey Brice, Superior Printing Ink’s president. “ They want it all with the lower price. What are the value-added services we can give? They say that’s nice, but what’s the price? The company has to be aware of what we are giving them.”

Ronald T. Barry, chairman and CEO of Color Converting Industries, said that because ink companies have not emphasized the need to receive more money for all they provide, printers naturally have come to expect more service for less money.

“Many customers invite a number of ink companies to quote on items, then use the lowest of these prices as the market price,” Mr. Barry said. “Many times there is not an appropriate assurance that the lowest price ink will meet specifications. Additionally, our industry is then asked to provide services and point-of-use equipment with significant capital investment. Seldom does it seem that prices quoted have accurately reflected the actual cost of the ink, equipment and the ongoing services.”

As a result, ink industry officials say they are looking at the value of the services they are providing, with an eye on the bottom line.

Prebates, which first surfaced in the early- and mid-1990s, allowed companies to offer major customers who signed long-term contracts cash rebates in advance of any shipments. Industry officials say that this approach had its faults, and is being eliminated.

“We see prebates going away,” said Leonard D. (Dave) Frescoln, president and COO of Flint Ink Corporation. “The problem with prebates is that they become invisible. They tie up our capital. We think the customer would get a better return if we could allocate our capital to R&D. Obviously, when we give a rebate, we want something in return, like a very long contract. It ties their hands. We think our customers probably like it at the time, but not in the long term.”

“We’ve said to our customers that we need to find a different method,” Mr. Flint added.

Billing on consignment, or turning over inventory to the customers who will be billed when the product is used, has advantages and drawbacks.

“The ink on consignment is still ours until it is used; the customer doesn’t pay until the ink is used, and it saves on shipment costs,” Harvey Brice said.

Mr. Frescoln said that consignments only work if the ink company has control of the inventory. “The biggest asset in our industry is inventory,” Mr. Frescoln said. “Consignment only makes sense if the consignors have control of the inventory.”

In-plant operations are generally the most expensive value-added service. According to industry officials, a 24-hour-a-day, seven-days-a-week in-plant costs the ink company at least $250,000. For a large printer or for a printer who doesn’t have a branch office nearby, that may make sense, but there is a point where providing an in-plant is not economically feasible.

“In certain market segments, our customers have cut their work force so lean, that they are asking us to do more for them,” Mr. Clendenning said. “Now, in most cases, our in-plants are becoming part of their process. Somehow, we must be compensated for these extra duties, so we can continue to offer these services.”

Finally, since many purchasing agents are looking at the bottom line rather than what the inks actually provide in the pressroom, there is a tendency by some sales people to quote on price alone. While that may lead to greater market share, it does not serve the best interests of either the printing ink manufacturer or the customer.

“Market share is destroying our business,” said Bob Gans, chairman of Gans Ink & Supply Company. “As an industry, we don’t advertise that we do something important, and we should not denigrate or degrade our products and what we do. It’s not intelligent to buy on price alone. We always want to provide top-notch quality, but we are being horribly harassed by low prices that don’t reflect the value that we give to the printing industry.”

“You can’t be everything to everybody,” said Jeff Koppelman, president of Gans Ink & Supply Company. “In business, just like in life, desperate people do desperate things. If you are desperate for increased business, it’s quite possible that your decisions and actions are somewhat clouded.”


What’s Next
With the increases in raw material costs, labor and environmental costs, printing ink manufacturers are looking at what they have to do to become more profitable.

The squeeze of lower pricing and increasing costs is having an effect on the industry, both in terms of minimal profits and in fueling consolidations. That, in turn, will lead to fewer printing ink manufacturers.

“Environmental costs, labor costs, the total cost of doing business has gone up while our pricing has actually gone down,” said Mr. Clendenning. “It’s a serious situation, with labor costs and the big in-plant demands. We’re trying to find ways to become more efficient, but that also has a cost. We’re not getting back what we need. The industry is becoming smaller, as people are finding it very difficult to meet these demands. If it doesn’t ease up, there are going to be fewer alternatives to go to, and the lack of players is going to be a problem.”

One area where ink companies are suffering is the labor market. Skilled technical people are receiving lucrative offers outside the industry, and ink manufacturers are finding it hard to keep these top people.

“To run a business, you’ve got to have good people,” Mr. Clendenning said. “With the economy as it is, it’s hard to keep good people. Companies outside the industry are willing to pay extra for good employees to get them to change careers. If you don’t get a proper return, you can’t keep these people satisfied. They deserve to be rewarded fairly and adequately.”

Printing ink companies have worked hard to become more efficient in their operations, and have kept their raw material costs down as best as possible in order to keep ink prices low. In many cases, ink prices have actually declined during the past 10 years. However, there just isn’t much room to cut costs, and raw material price increases have to be made up somewhere.

Mr. Dyner said that as a result, there is pressure on ink companies to raise prices.

“There hasn’t been a price increase in five years,” he said. “During the last decade, we have had increases in wages. While we have offset that to a great extent through improved productivity, and raw material prices (until recently) have been relatively stable, there has not been parity between what we are able to charge for our products and what it costs to bring them to market.”


Determining Profitability
Ultimately, ink companies have to examine their costs, and decide if it is profitable to take on a contract, or to offer services such as an in-plant.

“You have to look at several things, including the volume level of an account,” said Mr. Frescoln. “They can be a good thing, but I think in-plants have been installed into accounts that don’t make good economic sense. Another issue is that ink companies tend to have branches in the same general locations, and you can’t afford to operate in-plants and branches close by. We have to become more selective.

“We run an economic model and look at the return,” Mr. Frescoln said. “The key is to look at account profitability. We have to get a return on investment for the improvements that we made.”

Michael Murphy, NAPIM president and Sun Chemical’s senior vice president and general manager, ink operations, said that his company has turned down business when it wasn’t economically profitable.

“The industry needs to know that the return is not acceptable,” Mr. Murphy said. “We’ve walked away from some business where it just didn’t make sense. We had the business, and decided that we couldn’t afford to meet a competing offer.”

“Everybody has the option to say no and we have walked away from, or been asked not to walk through, the door to additional business a number of times over the last few years,” Mr. Koppelman said. “What’s the point of becoming bigger and bigger if you are not making a profit? We in the ink business have specialty chemical products that are looked at by our customers as commodities, and that is a terrible shame.”


Unbundling Services
Mr. Murphy said it is important to determine what the printer really needs, and provide those services accordingly.

“Our approach is to find out what’s important to the printer,” said Mr. Murphy. “One printer may value a pressroom audit and be willing to pay for it. Another may value training. Whatever is most valuable, we’re ready to provide it … if we get a reasonable return for doing so.”

Mr. Dyner suggested that unbundling services may be the best approach for receiving payment for value-added services, and that if Sun Chemical can help a customer save money, Sun Chemical should be able to share the savings as well.

“We are looking very closely at doing this,” he said. “We need to identify what is really of added value to a printer – how much are these services worth to the printer … and how much does that save him? Then, those savings should be shared.

“We’re getting mixed results so far in this effort, but we need to start somewhere to change the dialogue between us and our customers to one that focuses on the total cost of a print job and away from the price-per-pound of printing ink,” Mr. Dyner said.

Mr. Frescoln said that the next logical approach for ink manufacturers is to unbundle their services, offering one low price for ink without services, and a menu of services and their costs.

“I think you’ll see the unbundling of services, and having a menu of value-added services to choose from while offering a base price for the ink,” said Mr. Frescoln. “That way, customers can truly assess our value.”


Providing Real Value
Mr. Dyner said that in the end, printers are the ones who could be most affected if ink industry returns don’t improve.

“The danger is that ink makers will cut back on R&D, and ultimately, it could be more expensive at the end of the day if presses run at lower speeds or have more waste as a result of this,” he stated.

“We want to provide the best total cost solution,” said Michael Brice, COO of Superior Printing Ink, “Our unit price is higher, but what if another product’s color is weaker, or it takes more time to come to color, or there’s more downtime and waste? What does the printer end up saving? We try to look at price vs. cost. It will end up costing more to use a less expensive ink.”

Ultimately, a customer will have to decide if they value higher quality or lower prices.

“Some people have a unit price mentality, and others total quality,” Mr. Flint said. “If you are producing products with superior performance, the customer will be likely to pay more. You have to prove the product.”

Ultimately, being rewarded for providing services that saves the customer money may well be the best approach.

“My experience is in the packaging industry, but I believe many of these issues spill into other ink markets,” Mr. Barry said. “It seems to me that our industry is at a critical juncture as it deals with the service aspects of business relationships. Without question, the services we incorporate into the ink departments and pressrooms of our customers has the potential to add at least as much value as the ink that we provide. These services are not smoke and mirror gimmicks. They are data gathering and reporting capabilities that document savings in cold hard dollars (e.g. better managed inventories, reduced press down time, etc.)

“I say that our industry is at a critical juncture because we have a choice as to how we present our services to the market,” Mr. Barry continued. “There is a direct measurable cost to provide these services. The demand for these services varies greatly from customer to customer, and even from plant to plant, within a specific customer system, so, naturally, the costs to provide these services are different. It makes sense then, to try to accurately and fairly distribute these costs through the price of ink. Shouldn’t we consider adopting the time-honored successful marketing strategy of ‘user pay?’ What could be more fair?

“I know this may sound like blasphemy for an industry that has traditionally produced revenues via manufactured products,” Mr. Barry said. “With the entire world marketplace moving from industrial base to informational base, should we not consider the validity of producing revenues based on the value of the goods and services that we provide? During this ‘Infodustrial Age’ transition, it seems to me that we have the perfect opportunity to build a successful model of how to most appropriately be compensated for the true ‘value’ that we bring to the marketplace.”

When the time comes that ink manufacturers are paid for the value they believe they provide, the industry will breathe a collective sigh of relief.