The big recession forced many printers around the world to sell their business or consolidate. However printers by nature are not merger friendly and it seems they find new ways to survive. By investing in digital printing solutions and multiplying their options, they may finish up inheriting the Earth.
Business leaders and politicians talk a good talk, often about themselves, but the current chat at this level is all about how the green shoots of economic recovery are breaking out. For the past few years economic growth in the Emirates may have been better assessed by whether you could put an extra mango in the fruit bowl on the sideboard, but there is definitely a change in the air. The trigger without doubt is World Expo 2020 to be held in Dubai. Already it is creating a feel good factor: the glass is not just half full rather than half empty – it is well on the way to over flowing.
Printing and communications as a business sector is peculiar in the way it is subject to dark forces; ones that have the effect of rendering printing remarkably resistant to consolidation and/or mergers. Why this is so requires considerable thought and soul searching, from which there are sure to be lessons to learn.
USA, still the power house of the world, serves to highlight the fragmentation of the printing industry. Even in this home of franchising, syndicated selling and the Amazon market place, its four largest printing entities including Donnelley account for only 17% of the print revenue generated in that country. What is more significant is the majority of commercial printers have only around 10 employees. A feature of these figures is the way they run true and seamlessly across virtually all of the developed economies of the world and it would be surprising if the percentage values varied much from the norm in the UAE and North Africa. Any decline in print revenue streams always means a decline in the number of printers in business. The US figures suggest a decline year on year of around 2.2%. By way of an aside, in the dot com boom at the turn of 2000, one of the leading aspirants called itself HYPERLINK “http://58k.com” 58k.com, claiming there were 58,000 printers in the USA. Today if it had survived it would have to be called HYPERLINK “http://26K.com” 26K.com!
However, in at least one way the UAE does not mirror the figures from the USA and Europe. Its printing industry revenue is holding up as a percentage of GDP, a view garnered more by observation rather than solid statistics. The conclusion is strongly based – much of the growth in the region is garnered through young adults keen to participate in the economic growth choose to migrate to the region in significant numbers. At present the cost of labour is low, but rising costs of accommodation will surely lead to wage pressures and an increase in the take up of automation by printers. One shouldn’t discount the unpredictable effects the World Expo 2020 will have on the demand for print over the next five years or so.
There seems to be a common aspect relating to worldwide printing businesses; commercial sheet fed litho printing houses generally employ only around 10 people and very few printers employ 35 or more. Digital printing whether sheet fed or wide format are often small in scale and characterised by being worked as a family led businesses.
It is important to recognise these characteristics of the industry and if you are a printer recognise roughly where you fit in, for when any form of economic recovery begins to take place even at the fresh mango level, try and have a strategy that will enable you to take advantage of the growth in opportunities.
Digital Printing to the rescue
When economic growth sets in it will always comes with challenges, particularly after a long period of trading sluggishness, tight margins and intense competition. Well established printers, those that have managed to trade through the difficult times are the most dangerously exposed for two reasons: one is the small operating margins prevalent over a number of years usually means investment in new technologies and equipment has not taken place at a level that deals with the attrition rate and depreciation of the capital equipment employed. The second reason is the owner has tended to put funds back into the business previously drawn out when times were better.
In other words the fat has come off two backs – the owners and the business.
Contrast this with an investment in digital technologies, often speculative and carried out by one or two people acting in partnership.
For dyed in the wool risk averse businesses, the effect of improved growth can be far less positive. They become vulnerable to being swept away. Any business man capable of recognising how the market is changing stands ready to grasp the future with both hands. A good example of this phenomena can be found in the pages of M E Printer. The original Al Jazeera Printing Press founded 2003 in Qatar and featured recently in ME Printer (Issue 112) is good case to study. Here was a business vulnerable on many fronts and the two Kannath brothers bought the business and turned it into a highly productive diverse media and printing facility.
The first Al Jazeera Printing Press, was a mature business but could well have faced extinction, takeover, or predatory consolidation. Wisely it chose to sell out to the two brothers who were financially well managed. Note how there was no merger or consolidation involved. Let us take a look at another company, similar outcome, but arriving via a different path, that of embracing from within its own resources technological change as it became viable.
PS2 Print sits in the UK town of Runcorn in the North West of England an area that was once the heart of the industrial revolution, but prosperous once more after a long period of stagnation and decline. Now it is the heart of what could be described as a second industrial revolution. Many of the businesses there started up less than a decade ago and have embraced digital technologies from the time the commercial advantage was recognised.
About five years ago PS2 Print, then a well established litho house, decided to invest or perhaps a better way to describe it might be to diversify into wide format digital.
The initial investments were web fed machines, but in 2012 it installed an Océ Arizona 8X4ft (2.5X1.25 metres) flat bed UV printer and soon found it was sending out £30,000 per year for specialist sub contract cutting. However the new business growth allowed it to invest in a DYSS cutting table.
The business is now well rounded, shifting from a fairly conventional repro, print and design company to one offering a service that covers almost every facet of printing demand.
Nor is there any great incentive to absorb or work more closely with another printing house other than as a sub contractor. Interest may be roused if an owner of a litho house is wanting to sell out.
This reasons a printer chooses for selling out of course are varied; the owners age, no natural inheritance structure or perhaps the failure to invest in new technology has now become too big a financial hurdle to cross. It is rare for a competitor to come calling with an offer.
Any business structured with a spread of options similar to those at PS2 Print should be able to make very good money for a longish period of time and provide their owners little incentive for aggrandisement. Yet as with life, businesses do grow old and there comes a time when a change of management or direction needs to take place.
A well run business with good financial and structural records can fetch as much as 13 times its annual profit level, but there are a couple of caveats here.
The first is: Any sale must be one in which both parties get benefit from the deal so openness must be the key.
The seller must have kept genuine, well audit records that show all taxes and all local charges have been paid or accounted for and the buyer does on his part does not have secret or dishonestly obtained knowledge, perhaps by way of example, future land development that is influencing why he wishes to purchase the business.
Honesty and Integrity
The second caveat is one of honesty and its closely linked cousin – integrity. What may have seemed clever at the time to the print business owner can often produce a significant sting in the tail in the way it affects the price he will get for the business. If over the years of trading a significant amount of work was done cash in hand and not recorded in the books accurately, and though the sale may be calculated using the 13 times formula, it will not actually reflect the true value of the business for significant parts of its strength have been hidden. If the buyer becomes aware of the nature of these transactions it is not unknown for the buyer to report such practices to the respected revenue authorities in an effort to get the business for a lower price.
The Al Jazeera and PS2 Print examples and many other examples that could be introduced help to explain why the printing sector is one of fragmentation. The sector is made up of SMEs (Small to Medium Enterprises) and anyone who has done estimating in a printing business quickly finds out that for every 100 pounds, dirhams, dollars, euros charged out to a client for a service around 66-70% is for material costs and labour – rent and overheads grab at least a further 20% leaving a pretty modest balance for the owner to fritter away on riotous living.
Sure these figures can be manipulated and swapped around but you get the general gist of the argument. What is distinctive about the printing industry is that there is very little to be gained by increases in scale and this in turn makes mergers and acquisition the exception rather than the rule.
Explaining why this is so can take a little time. In retailing and many manufacturing industries such as cars, white goods and so forth real economies of scale are available the larger the business grows. But the economies of scale are gained in part by the better prices for raw materials and the decline in the number of staff required to manage with overheads (processing sales, wages buying services in transport and distribution and so on) relative to those in production. These costs don’t grow exponentially as the volume of production grows.
There is more importantly a threshold issue. A sheet fed press can perhaps touch 20,000 impressions per hour, before the law of physics and diminishing returns sets in; for example a sheet has to be stopped in its own length when it reaches the delivery. A web press solves this issue, but others come in to play. The press may run at up to 75-90 miles an hour (110-150-kph) equivalent of four to eight times that of the best sheet fed machines, but the same laws of physics sets in – the potential for rippling paper, its disintegration, heat dissipation from the ink rollers are factors that though possible to overcome, can only be done at costs that are scarcely economic.
In either case the cost of press manufacturing is such that a Russian Oligarch buying 100 Heidelbergs in one order will not be any better off competitively than an owner buying two machines of a similar kind. It would not be economic for a press manufacturer to tool up to make such a large order, only to see when the order was completed for the order book to return back to historic levels.
Some opportunities for scaling up can be recognised; paper for example can be indented and supplies such as ink can be future hedged, but the square footage cost of printing plates and the tonne rate for paper tends to plateau at fairly specific level in the same way as press manufacturing does.
In the work place a five colour B2 with coater requires a fixed level of support in the form of repro, platemaking and finishing equipment. Double the size of the press may speed the amount of sheets printed, but if the number of sheets printed is expressed as the ratio of electric power used, floor space required and handling services needed, along with upgrading working conditions, more air conditioning, humidification controls, car parking etc the unit cost of each sheet produced soon reaches a common threshold; this is why in the UK runs of 5,000 regardless of the number of pages is pretty well the optimum job run length.
Reacting to Changes
In the UAE run lengths average may be a little smaller and this may account for why the Heidelberg SOR series two colour presses are still in widespread use. While they cannot compete in productivity terms with say its five colour CD 75 machine a printer operating SOR machines will have found a niche range of clients whose order book requires runs of 1,800 to 5,000.
His vulnerability is not from a faster, bigger litho press but a sheetfed A3 Ricoh, Konica Minolta or Canon machine.
What we are seeing are the effects customer buying patterns have on the printing industry and why our industry will only ever be a reluctant magnet for venture capitalists. Small businesses can react quickly to changes in the market place (there certainly have been plenty of those over the past decade).
Let us suppose consolidation had some appeal. Set up a centralised web based selling facility to cut the costs of selling the services, indent the paper and create a centralised production facility close to a lower paid residential hub and off you go. Paper comes in on 40 tonne trucks and bingo you are in business, but wait: paper which will make up at least a third of the jobs value may come in to the factory at 40 tonnes a go, but 500 brochures dispatched to a buyer 500 miles away will absorb the savings by scaling up – the buyer could go round the corner and buy the same print using the web from Kall Kwik or a similar franchise.
The customer of a printer sees print more as a necessary evil, a cost that has to borne and reduced wherever possible.
The drive by the buyer to reduce his spend is one of cunning, relentless and ongoing, yet it is a cost he cannot avoid and the clever print manager knows this and so his efforts are directed at making sure a client’s spend is safe with him.
This is not as challenging as it may at first sight seem; most print buyers have learned that driving the price down to a point where it is no longer economically viable can cost him dear; a magazine publisher who fails to get his monthly publications out because a printer has gone broke could well go broke himself.
Refunding advertising revenue is a sum many times greater than his print bill.
Inheriting the Earth
Perhaps the way forward for producers of print is to learn from their suppliers. Here market forces have been at play big time, particularly amongst the Litho manufacturers. The UK agent for Ryobi for example is Apex Digital Graphics and in its stable are Konica Minolta, Screen, ECRM and of course the paper plate Ctp of Mitsubishi Ctp Systems.
This multiplicity of agencies while common in regions like the UAE would a few years ago have almost been unthinkable in the UK. When Heidelberg signed up a joint agreement with Kodak the industry was a buzz of astonishment and though the relationship ended in tears, the new partnership with Ricoh seems to be running strongly.
Neil Handforth Director of sales and marketing says: the litho press market in the UK and even wider afield is now a mature one, and though our maintenance and supplies business is very active, we do need to visit our customers with a range of options, given how fluid the market is today.”
So it is with printers: go forth and multiply your options, you may finish up inheriting the earth.
