Europe's Economic Slowdown Hits Ink, Printing Industries Hard

By Sean Milmo, Ink World European Editor | September 6, 2005

The European ink sector is going through tough times at the moment, but amid the gloom there are bright spots.

By Sean Milmo European Editor The European ink sector is going through tough times at the moment, but amid the gloom there are bright spots.

A slowdown in European economies has hit sections of the printing industry hard, in particular publishing. As a result, ink producers are struggling with reduced demand and a squeeze on their margins as prices weaken.

But some segments, like direct mail and parts of the packaging market, are doing better than others. Furthermore, printers see the current economic conditions as providing openings for expansion —with the assistance of their ink suppliers.

"The present economic conditions are risky for printers, but they are finding good chances to win extra business," said Marcus Ruckstaedter, sales manager for German printing inks at Zeller+Gmelin. "A lot of them are having to move into new fields to maintain or increase sales. It is up to ink producers to help them take these opportunities."

The small- and medium-sized businesses which make up a large proportion of Europe's printing sector are probably better positioned than before to withstand the rigors of a cold economic climate.

"Printing is still essentially an entrepreneurial industry," said Mike Hopkins, director of public affairs at the British Printing Industries' Federation (BPIF). "In the U.K., the total number of printing companies is not a great deal less than it was 10 years ago. The emergence of digital printing has helped to reduce the cost of entry and provide openings for new businesses."

"Overcapacity in the industry is at its highest level for a long time so margins are under pressure," he continued. "But we are not seeing a lot of bankruptcies. Printers are controlling their money better and overall are more realistic managers."

Ink Companies' Woes
Nonetheless even in large European economies like the U.K., ink producers are taking their worse battering in many years.

The British Coatings Federation (BCF), which represents manufacturers of printing inks as well as paints, has warned that the ink and coatings sector in the country is in serious decline. It has urged the U.K. government to give official recognition to the critical state of the industry.

For the first time ever, U.K. sales of newspaper color inks fell in volume terms in the first half of the year, primarily due to advertising decreases.

Sales of printing inks in the U.K. in the first half of the year were approximately 4 percent lower in value terms than a year ago. With selling prices about 1 percent lower than in 2000, volume sales have declined as well.

Since the start of this year, total jobs in the U.K. printing ink sector have been cut by around 10 percent, and employment levels are around 20 percent lower than they were in the late '90s.

In Germany, ink makers have also been badly affected by a slump in bulk sales because of sharp drop in both magazine and newspaper advertising. Even relatively large German ink suppliers have been cutting jobs.

In some European countries, particularly Germany, there has been a rise in the number of small- and medium-sized printers forming alliances or groups for aggregate purchasing of supplies, including ink, in order to take advantage of volume discounts and lower transaction costs. This has helped to accelerate the downward trend in ink selling prices.

Some owners of private ink companies may be feeling that now is the time to pull out of the business. But they are likely to have difficulties finding buyers.

A venture capital company recently withdrew from negotiations to buy Sericol, the U.K.-based screen printing inks manufacturer which is considered to be one of the most profitable of Europe's ink businesses, with a return on capital in recent years of more than 30 percent.

BP, owners of Sericol which it acquired when it took over the Burmah Castrol group last year, is now thought to have postponed the sale by at least a year to await an improvement in the economic conditions.

"This is a good business which is making good money," explained a BP spokesman. "We are in no hurry to sell. We will wait until we get a sale agreement which we think is suitable for the operation."

One major worry for ink companies, however, is that at least in some countries an economic recovery may not be sufficient to generate a revival across the whole sector.

The U.K.'s economy has in recent years been one of the fastest growing among major European countries. Yet ink sales have, except for a few short periods, been falling since mid-1998.

The British printing industry also appears to have been in constant decline since the late 1990s. Of the last eight quarterly surveys of the economic performance of BPIF members, only one quarter has shown positive figures from the previous quarter.

In 2001, the U.K. economy is likely to grow at 2.2 percent, according to the latest economic forecasts. This will be stronger than the growth in much of the rest of the European Union. Despite the terror attacks in the U.S., consumer spending continued to rise in the U.K. in September; retail sales were 6 percent higher than a year ago.

"It's the services sector in the U.K. which has been doing relatively well," said David Ross, a London-based printing industry consultant. "U.K. manufacturing, including the printing industry, has been in recession. Print output went down in the second quarter of this year, and judging from the evidence so far available, it went down in the third quarter as well. Yet, depending on who their customers are and how good their marketing is, some printers are still doing well."

Elsewhere in Western Europe, economies are still expanding slowly because consumer confidence has weakened particularly after the Sept. 11 tragedy.

In Germany, where the economy is expected to grow by less than 1 percent this year, retail sales are falling, while in Scandinavia consumer spending has dropped as well.

"Ink sales across Scandinavia have probably gone down by as much as 15 percent as a whole in the first nine months of this year," said Bertil Ahlberg, marketing coordinator at Akzo Nobel Inks. "Much of the impetus behind the decrease has been a reduction in advertising following the fall in consumer spending."

The slump in advertising spending across Western Europe began in the second half of last year in some media when the collapse of the dotcom sector caused massive cutbacks in promotional expenditure by internet and other new technology companies.

Then in the first half of 2001, decreases in advertising expenditure spread across much of the newspaper, magazines and TV markets.

Since the September terrorist attacks the drop in advertising spending has fallen sharply, with some companies, particularly airlines, stopping advertising altogether.

"There has been a rise in the number of people buying newspapers because they want to read about news of the crisis," said Mr. Ahlberg. "This has helped to maintain volume demand for newspaper ink. But because of the continued decline in advertising, color inks have a lower share of the total newspaper sector."

Consumer magazines in some countries have also been experiencing both a decline in advertising and increases in circulation. In the U.K. where magazine advertising has been falling, the Audit Bureau of Circulation (ABC) estimates that the overall circulation of consumer magazines went up by 13 percent in the first half of the year.
In fact, for the first time in at least two decades, the usual link between advertising expenditure and GDP growth has been broken in the U.K. In mid-2000, advertising spending in the country was rising at an annual rate of around 10 percent. By the second quarter of this year, expenditure was dropping by 8 percent, according to the London-based Institute of Practitioners in Advertising (IPA). Yet over the year, GDP growth has been comparatively healthy.

Areas of Opportunity
A similar divergence between economic growth and advertising spending has become apparent in other major European countries, like Germany and France. This has prompted media analysts to conclude that consumer product companies are moving away from the traditional mass campaigns in both print and broadcast media.
These analysts warn that advertising spending in the mass media may never return to the levels before 2000.

Instead, advertisers will concentrate on reaching specific groups in newspapers and magazines and generally take a more targeted approach to promotional activities. This change will help to stimulate a continued expansion in direct mail.

There is also likely to be greater emphasis on in-store promotions with more point-of-sale advertising and more eye-catching packaging. This should help bolster sales of screen and UV inks.

Makers of UV inks believe that they can take advantage of both the need for higher print quality in areas like direct mail and packaging, and also requirements for lower costs at a time of economic problems.

"Printers are moving over to UV because they want to differentiate their product through higher quality but also because it helps improve their productivity," said Mr. Ruckstaedter of Zeller+Gmelin, which believed that UV volume sales will rise by 6 percent in Germany this year.

Most ink producers should do relatively well in the fourth quarter of this year. However, manufacturers of standard inks like coldset and heatset products in particular will be eagerly watching for signs of a permanent upturn in the new year.

"The fourth quarter is usually a good period for the printing industry because nearly everyone is getting geared up to meet the extra demand of the Christmas season," said Mr. Ross. "The first quarter of next year could be difficult in a country like the U.K., because the economy could slow down further. Recent years have shown that the printing industry does not perform well in good economic conditions, so it's not going to do brilliantly when growth slows. Nonetheless, even in difficult times there will always be well-run companies who will find ways of boosting sales."