As a key supplier to printers, the ink industry has also faced a serious downturn on the publication side. The National Association of Printing Ink Manufacturers’ (NAPIM) 2002 State of the Industry Report detailed declines in sales of 7.5 percent in the publication and commercial sector. In terms of volume, heatset inks fell 13.2 percent from the previous year, while litho no-heat dropped 11.5 percent in volume. Gravure also suffered a 5.3 percent decline.
There was much confidence that 2002 would bring to an end the economic downturn in the U.S., but those hopes have not materialized. As a result, 2002 has been another year of decline in many segments of the publication market, particularly magazines and newspapers. The question of when the economy, and with it the printing and ink industries, will pick up remains an overwhelming concern.
The magazine industry has struggled during the past few years, as ad pages have declined significantly.
“On the consumer magazine side, ad revenues are basically flat to last year on an ad card basis, with ad pages actually being down approximately 8 percent on a year to date basis,” said Katherine Divita, spokesperson for R.R. Donnelley & Sons, which had more than $5.2 billion in sales last year. “On the specialty magazine side, both ad revenues (rate card basis) and ad pages are down roughly 20 percent to last year.”
With annual sales of more that $500 million in the heatset web and sheetfed business, Cadmus Communications, with corporate headquarters in Richmond, VA, is working closely with its customers during the economic slump.
“Industry-wide, page counts are off approximately 20 percent from past performance,” said Alex Hambleton, vice president of sales at Cadmus Specialty Publications.
However, it is difficult to define what is occurring in the heatset market.
“The trend seems to be that there isn’t a trend,” Laurel Spencer, Flint Ink’s vice president and regional manager, West Coast publication sales. “Trends in ad revenues, page counts and the use of lighter paper stocks seem to be as numerous and scattered as printers themselves. Overall, ad revenues and page counts continue to be 10 percent to 30 percent off 2000 levels. In some markets such as real estate, activity is beginning to increase over prior years, but in most other markets, there has been little or no change.”
“Our customers are holding steady,” said Dave Mistretta, marketing manager, web offset heatset at Sun Chemical. “Page counts continue to be down, and I think that will continue until the economy improves.”
Due to the U.S. Post Office’s rate increase for periodicals, publishing companies are looking at a myriad of ways to save money.
“Cost reduction and manufacturing efficiencies are what all companies are focused on,” Mr. Mistretta said. “For example, there is a trend toward lower basis stocks.”
One area where printers and their customers have sought to save money is by using lower-quality paper stocks.
“Even though some printers are shifting to lighter weight coated and Supercal papers, the driver seems not to be customer request but transportation cost reduction due in part to postal rate increases,” Ms. Spencer said.
Ms. Devita said that the relatively low cost of paper has kept publishers from seeking lower quality paper.
“Given the extremely low paper pricing that currently exists, we have not seen a major shift to lighter weight papers as most publishers feel that further reductions will jeopardize quality and brand,” Ms. Devita said.
Much like their ink industry vendors, some printers had also begun to economize prior to 2000.
“We had begun to focus on our internal systems prior to the economic downturn of ’01 in order to streamline ourselves to do what we do best in order to operate more efficiently,” Mr. Hambleton said. “We’ve looked to consolidate our vendors and have asked for volume discounts.”
In particular, Mr. Hambleton said that magazine launches are not being deterred by the slump in the economy. “There seems to be a lot of start-up magazines,” Mr. Hambleton said. “The entrepreneurial spirit is still there, and publishers still see the printed product as the most efficient, cost effective way to reach their audience. The web certainly has its place in today’s marketplace, but the end user still likes the feeling of holding a magazine in their hands.”
Superior Printing Ink president Harvey Brice said he sees more magazines in his mailbox. “I find I am getting more and more magazines every day, particularly in specialty areas,” Mr. Brice said.
New technology is also having an impact on the printing industry.
“Customers are looking for greater efficiency in delivering their messages and are turning to technology – the Internet, e-mail marketing, etc. – to accomplish this goal,” said Christina Blum, Flint Ink’s director of marketing, publication division. “Therefore, while the short-term impact of this decision or need directly affects the printer, in order for it not to become a long-term issue, it will be paramount for printers to position their services within the media mix vying for advertising dollars. A two-fold solution is to increase their efficiency and competitiveness within the printing industry through standardization, and to differentiate the benefits of printed media from other media such as e-mail marketing or Internet advertising.”
Printers are working with their ink suppliers to continue to become more efficient.
Ms. Devita said that R.R. Donnelley wants its ink suppliers to meet quality expectations by reducing variation in their manufacturing process, providing a consistent product and reducing ink formulations and having a strong quality program that manages and takes cost out of the supply chain. Meeting delivery requirements and developing innovative new products that are more efficient and offer ease of runnability on presses are also essential.
Gravure remains an important printing process, particularly for major magazines. However, gravure has long been looked upon as being best suited for long runs, which does not fit well with the increasing need to develop shorter, more targeted runs to offset a decline in circulation. To do so, magazines often look toward shorter lead times.
“From a magazine publisher’s perspective, the most significant trend is the increase in versioning to try and target more select groups of people,” said Ms. Devita. “In addition, print counts have been decreasing due to declining newsstand and subscription sales.”
“There are several trends occurring in the publication gravure market,” said Tony Fontanetta, gravure account manager, Quebecor World. “They include the consolidation of materials across the printer platform, a movement towards the more frequent use of Supercal paper as well as the continuous demand by customers for printers to reduce their costs. Other trends include the shift in appeal toward a younger generation by publications that typically addressed a more seasoned audience. Publications such as Good Housekeeping and Cosmo are two examples.
“Across the board, print lead times are being shortened,” Mr. Fontanetta said. “This trend applies to all areas of the printing process from raw materials supplies (ink, silicone, cylinders) to prepress and engraving activities to actual press time with the goal of consistent, predictable turn-around times. Add to that the request for shorter press counts and increased version changes, and the gravure market is being pressed to compete with the offset printing process. The challenge for gravure printers will be how they manage these increasing up-front costs so they can compete with the offset market.”
Mr. Fontanetta believes that printers will need to standardize their operations in order to thrive in the future.
“One way in which gravure printers have an opportunity to remain competitive is through standardization, which is an increasing focus,” said Mr. Fontanetta. “In order for printers to benefit from standardization, they must apply this philosophy and practice to all aspects of the printing process. They are asking for standardization from their suppliers as well as requiring standardization in the pressroom. This allows the printer to share work from plant to plant and provide a finished product that looks the same, plant to plant and region to region.”
The newspaper industry has been in a slump the past few years, and 2002 did not bring much in the way of good news, although some industry officials see reason for hope for a recovery.
“The story of 2002 is going to be one of two halves,” said Jim Conaghan, vice president, business analysis and research for the Newspaper Association of America (NAA). “The first half of the year was difficult, but we’re on the road to recovery for the third and fourth quarters. We believe there will be a 0.6 percent increase in ad revenue for 2002, and a more normal year in 2003, with advertising increases in the 3 percent to 6 percent range.”
“I haven’t seen much of a recovery in newspaper advertising this year,” said Ron Baker, president of US Ink. “I talk with our customers on a monthly basis, and they are projecting flat ad revenue. We also are facing a lot of issues as a country, such as the potential for rising oil prices and a war with Iraq, which would impact any economic recovery.”
Classified advertising has been hurt the worst, due to unemployment. For example, according to the NAA, quarterly advertising for classifieds reached a high of $5.7 billion for the fourth quarter of 2000. By the fourth quarter of 2001, classifieds had declined more than 18 percent, to $4.65 billion. Classified ad pages in 2002 continue to decline even from the lowered 2001 standards, although automotive and real estate remain fairly strong.
“Real estate advertising has been up the past eight quarters, and automotive advertising has been up the past year,” Mr. Conaghan said. “Help wanted ads have really suffered, due to the loss of 1.5 million jobs.”
According to reports, newsprint costs have been hovering at the $425 per ton level, but there have been recent attempts by major print suppliers to raise prices by $50 per ton. With the price of newsprint on the rise, some newspapers have looked to cut costs by reducing web widths, which impacts ink manufacturers.
“We have had a certain amount of business that has been lost as some newspapers have gone from a 54-inch web to a 50-inch web,” Mr. Baker said.
Circulation remains another important concern. According to the NAA and Editor & Publisher, there were 1,586 newspapers in the U.S., with a total circulation of 60.68 billion in 1991. By 2001, the number of newspapers had declined to 1,468, and circulation is 55.57 billion.
Ms. Devita noted that overall newspaper readership and circulation in the U.S. continues to decline. “Both the percentage of the total adult population reading newspapers and total U.S. daily newspaper circulation have steadily declined since 1995, according to the NAA,” Ms. Devita said.
Norm Harbin, vice president, market and technical development, North America news ink for Flint Ink, said that newspapers are working hard to reach out to readers.
“Newspapers are developing a better understanding of how to meet the expectations of today and tomorrow’s customer,” said Mr. Harbin. “Why is there such an affinity for certain sections of USA Today, for example? Who reads newspapers and what do they want from them? And perhaps more importantly, leaders are envisioning what a newspaper must look like in the future to attract a growing readership and a greater segment of available advertising dollars.”
“The most significant trend is the quality ‘transformation’ of the newspaper industry,” said Mr. Harbin. “Ten years ago, it was good enough to print newspapers that seem mediocre in quality (in comparison to today’s standards) and offer limited color to advertisers. Newspapers didn’t expect advertisers and readers to have the great number of alternative choices that exist today, and the new competition for advertising revenue and readership has evolved.
“Today, newspapers fight mightily and strive to be competitive for precious advertising revenue. With more and more choices of how to segment their advertising dollars, advertisers demand color, quality and quick turnaround from newspapers just as they do with any other media,” Mr. Harbin continued. “Newspapers have realized that to grow that revenue stream, they need to better understand what their advertisers and readers need. Today, customer expectations are heading toward a magazine-like appearance from newspapers. This has driven quality and equipment requirements, which has led to new equipment purchases, as well as interest in producing products achieving quality considered ‘world class.’
“It has also led to improved inks that provide value and attributes such as brighter, cleaner color and that drive consistency across the platform,” Mr. Harbin said. “Today, with new presses, productivity is better and color capacity has greatly increased. In fact, the most expensive advertising formats (4-color) have been the most resilient in this soft economy, whereas less expensive black and white page ads have been harder hit.”
Overall, Mr. Conaghan sees some positive signs for the near future.
“The underlying fundamentals for consumers heading into the holiday season are relatively good,” Mr. Conaghan said. “Housing and automotive advertising are strong, and circulation has been holding steady.”
Jeff Gilliam, vice president of Impression Inks, said he believes a slight recovery in the newspaper industry should occur in the fourth quarter.
“Although advertising seems to be down, newspaper circulation seems to be holding fairly steady,” said Mr. Gilliam. “I think the industry in general is fairly optimistic for the fourth quarter, and that maybe the worst of times are past us.”
Mr. Gilliam said that Impression Inks has been in the heatset market since the company’s inception in 2000, and has made strides in the news ink segment this past year. Mr. Gilliam said the results have surpassed the company’s expectations.
“Our business has been just fantastic,” said Mr. Gilliam. “We have far exceeded what we had hoped for in sales for this year. The newspaper market was our big target this year, and we couldn’t be happier with what we have accomplished.”
Insert Business Remains Strong
According to the PIA’s Economic and Print Market Outlook for the remainder of 2002 and 2003, the insert industry looks healthiest, with growth forecast at 3 percent to 3.5 percent. Studies by the Newspaper Association of America and the Direct Marketing Association show that inserts continue to provide advertiser with strong responses.
“Retail inserts continue to be the most cost-effective promotional vehicle that utilizes printed material to drive store traffic,” Ms. Devita said. “By 2005, the cost required for a retail insert to generate $1 in revenue is expected to be 5 percent less than direct mail, 30 percent less than magazine advertising, and 44 percent less than online advertising.
Mr. Gilliam and Mr. Mistretta said that they have seen growth among insert printers.
“A lot of the insert people we work with have found that business has been fairly normal,” Mr. Gilliam said. “The insert market seems to have held its own, and there is growth there.”
“The one segment that is doing better than the others are retail inserts, which continues to chug along,” Mr. Mistretta said.
Mr. Conaghan believes that the insert business will continue to make steady gains, as retailers try to make up for slow sales during the past two years.
“The insert market has been stronger than the ROP side for the past few years,” Mr. Conaghan said. “It’s not booming, but it is doing better. It looks like it will be stronger in the fourth quarter, as retailers don’t want to miss out on the holiday season after the past two years.”
As the fourth quarter begins, there are some expectations that the worst may be over for the publishing industry.
“There are some signs that the fourth quarter will be busier than last year, based on production schedules; however, the numbers are still projected to be less than 2000. Actual activity will be the final determinant of a turnaround,” said Mark Hulsmann, national account manager, Banta Corporation.
“Generally, there is a cautious optimism that the industry as a whole is on a rebound and that we are at the end of this economic cycle,” added Susan Kuchta, Flint Ink’s vice president, sales publication division. “Specifically, short-run publication printers and flat-loaded printers seem to be faring better than other segments. This is primarily due to how they compete, their responsiveness to market needs and less seasonality in their business.
Mr. Mistretta said that the economy is poised to grow, but there are serious roadblocks that could derail any economic upturn.
“If the economy starts to rebound, we might be in good shape, but there are a lot of ifs - if we don’t have another terrorist attack, if we don’t go to war, among others,” Mr. Mistretta said.
Mr. Hambleton of Cadmus believes that there is reason for optimism.
“Our customers are saying that their ad sales people are getting a lot more activity and interest, which may bode well for the fourth quarter of 2002 or the first quarter of 2003,” Mr. Hambleton said.