Editor's Note: In part one of the 2010 State of the Industry Report, we'll focus on the current state of the wide- and grand-format industry, getting a snapshot of how business is and what are the biggest industry challenges. In November/December edition, part two will focus on the future market, including: the top three growth markets, what technology will drive change forward, and where we see ourselves in one year's time.
We're gotten pretty accustomed to the reports from The Conference Board and the ups and downs in the Stock Market over the past several months. The latest reports, indicate that the consumer confidence index dropped has dropped again in September to 48.5 from 53.2 in August—which was below what analysts were expecting. Although, confidence remains low in the US and unemployment high, experts believe the economic data indicates the country is strong enough to avoid falling back into recession.
The wide-format industry has not been immune to the same economic factors. The recession has taken its toll on manufacturers and print-service-providers (PSP) alike. We've seen the age of the printer install base increase because PSPs are reluctant to spend the money they have on hand for new equipment or could not secure funding or a loan for the equipment they need. Purchasing of supplies and hardware has varied by region, but manufacturers are still seeing lower volumes than 2008 across the board.
But even with much of this "bad" news, many industry experts believe that the worst is behind us. "The data that we have indicates that conditions are improving, but I would definitely say any existent overall wide-format graphics market recovery is fragile," said Tim Greene, director - wide format, InfoTrends. "I know many people are seeing business pick-up somewhat, but their customers are being very cautious, so they have to be cautious regarding new hiring or equipment investments."
"Currently, I would grade our segment of the industry as a 'C'," said Kevin Huseman, president, Point Imaging. "Comparatively, the wide- and grand-format digital segment is faring much better than screen and traditional off-set commercial which I would grade as a 'D-'."
"Overall, the industry is faring better," said Rick Scrimger, vice president and general manager for Roland DGA Corp. "We are seeing improved equipment and supplies sales this year and expect this trend to continue as the economy slowly recovers. However, we expect some unevenness in terms of the growth trend going forward due to uncertainties that still remain."
"Every customer I talk to answers this question the same way 'compared to 2009, anything is an improvement'," said Rick Moore, director of marketing, MACtac Graphic Products. "As far as the industry is concerned, there have been a lot of changes, consolidation, mergers, acquisitions, players that just didn’t quite make it. I think the industry is doing fairly well, but it is not stable, and there certainly will be more shaking and moving before stabilization."
"The last few months have marked a positive change in the business climate and we are beginning to see green shoots in the wide-format industry emerging after what has undoubtedly been a tough time," said Frazer Chesterman, managing director, FESPA. "When considering the economy and wide-format market in general, our Economy Survey revealed that, encouragingly, only five percent of respondents suggested that the recession would continue beyond 2011. Fifty-seven percent think the recession has passed, 10 percent believe the market has recovered and 28 percent believe that recovery will come later this year."
Caution Signs Remain
In terms of equipment purchases and business decisions, caution still seems to be the current mindset of the majority of the industry. We can easily see the evidence of this with the postponement of equipment upgrades. Overcapacity, though, is also a growing issue. With print volumes still significantly lower than 2008, many PSPs are not running their current equipment at full production speeds. This, in turn, also slows new equipment purchases. They reason, "why should I spend money on new equipment if I'm not using the printers I already have?"
While Pat Ryan, general manager, Seiko Instruments USA Inc. reported that they've seen improvement in equipment purchases since February 2010, the volumes are still substantially below mid-year 2008. "The economic downturn during late 2008 and 2009 definitely created a situation where the overall age of the installed printers in the field has risen, as companies postponed equipment upgrades," said Ryan. "This is now changing, but companies are much more cautious. Overall, the market seems to be looking for much more value for each dollar spent."
"We have seen improvements in the business climate, but at a slower rate of climb then we had hoped for," said Heidi Luck, marketing communications manager, Gerber Scientific Products. "It is clear that marketing dollars are being freed up for advertising and driving the requirement for wide- and grand-format printing. However, we still see an over capacity in many print-for-pay providers. Therefore, the demand for new equipment to meet capacity is not rising at the same pace."
" Like any industry as it matures consolidation occurs, we have seen this across all aspects… the printer manufactures, manufactures of substrates, distributors of supplies and print for pay providers," said Mike Richardson, director of sales and marketing, print media, Aurora Specialty Textiles Group. "However whereas the demand in 2009 seemed to have been stuck in neutral, in 2010 it has revved back up."
"The grand-format industry has been a tale of two businesses since the credit bust 24 months ago," said Randy Crow, president, Source One Digital. "The stronger players that operated well and persevered are growing again, while the weaker players that simply did not have access to operating or investment capital have been shaken out. We have seen considerable improvement in the business climate over the last 12 months and feeling very strong about the future."
Although industry experts share their optimism in the industry, there are still several issues which will slow further recovery. Unfortunately, there is more than just one issue at hand, as well.
"Identifying the biggest challenge really depends on the type of PSP we’re talking about and who their customers are," said InfoTrends' Greene. "In the reprographics market the challenges are the economic recovery—will it lead to a recovery in that segment of the printing industry? In the graphics market also the challenges are numerous but probably the biggest one is the re-allocation of advertising dollars away from print into Internet and digital display advertising."
HP's Yariv Avisar, vice president and general manager, Scitex Large-format Printing, feels the issues really revolve around the mid-size PSP—the wide-format industry's middle-class. "We are seeing our biggest customers become even bigger and capture greater numbers of the printed pages, while small customers are remaining competitive by specializing in niche applications. It's the mid-sized print service providers who are facing the biggest challenge because they do not have the expertise to excel in niche applications, but also do not have the capacity to grow very large," said Avisar.
Financing & Capital
As with 2009, access to capital and financing is still affecting PSPs in the market and this will continue to be a challenge moving forward.
"The greatest challenge for the industry operators will be access to enough capital to make the necessary investments in new technology, said Michael E. Robertson, president & CEO, Specialty Graphic Imaging Association (SGIA). "New technology that allows us to access new markets has been the lifeblood of the industry. An operator has to invest to advance not only in equipment but experienced personal that can deliver a quality product with pride."
"The largest challenge in the industry today is the lack of ability to achieve financing for capital expenditures," said Gerber's Luck. "Companies that are willing to invest into their business with the purchase of additional equipment are not able to obtain leasing. Until the financial institutions’ confidence level increases and funds are more readily available growth will be restricted."
Sue Freihofer, Product Development Manager, Signs Now, concurs, pointing to the economy as the prime challenge the market faces. "The economic climate has made it difficult to secure loans to update equipment in order to be more competitive in the market," she said.
"While credit is starting to loosen up, financing issues still persist for many small businesses, making it difficult for them to invest in capital equipment. This problem affects the entire industry from sign shops to manufacturers," said Roland's Scrimger.
"I think we have to acknowledge that in these economic times, lower prices will be necessary due to lower budgets and those not prepared to adjust, will have serious problems," said Malcolm Lane, president, Colortrac Inc., Americas & Japan Operations.
According to Jaime Giannantonio, marketing manager for Ultraflex Systems Inc., the issues with capital has also affected inventory and demand—and a PSP's ability to fulfill orders now as demand increases.
"The most significant challenge we’re experiencing is the increasing number of smaller orders, as companies remain hesitant to have money tied up in inventory due to the fluctuating economy," elaborated Lorna D’ Alessio, director of sales, advertising media, Value Vinyls. "The just-in-time mentality changes our work climate and administrative costs, as we rush to fulfill customers’ needs that were formerly managed more proactively."
"From a manufacture’s stand point local inventories are still depressed and large purchasers of wide-format graphics are waiting until the 11th hour to make their decision to run a campaign. As a result upward pressure is placed on manufactures to produce large quantities in a short period of time," said Aurora's Richardson.
Focus on Bottom Line
Because of the pressures of the economy, PSPs have been forced to focus on their bottom line—which sometimes also means they have to make difficult decisions about other aspects of their business.
"There is a reluctance to spend money on infrastructure and labor," said Dean Derhak, product director, ONYX Graphics. "We see this driving demand for automation and getting more done with less. The challenge for print shops is how to invest in software and process changes that will give them the increased productivity needed to meet customer demands with less infrastructure."
"Many providers are looking at improving their bottom line, by reducing elements such as labor and other elements that cause strain on cash flow," said Sal Sheikh, vice president of marketing, Oce North America. "They are also streamlining their internal production processes. Because of the economic conditions faced in the last 18 to 24 months, companies need to find more profitable opportunities and customers for growth."
Finding Profitability amidst Competition on Pricing and Tight Turnarounds
But where will those profitable applications come from? According to experts, it will be from a combination of factors which will enable PSPs to differentiate their business and expand into new markets.
"Just a few years ago print quality was the key competition point between wide-format graphic producers. Today, high quality imaging is a given. With image quality standardized, margins on graphic production are extremely tight. Successful graphics producers are changing their business models to find profitability before and after the production of the image," said Michael E. Robertson, president & CEO, Specialty Graphic Imaging Association (SGIA).
"Another challenge for the industry is to continue to advance technology into what you might call 'blue ocean' applications. In order to stay viable as manufacturers, we need to provide our customers with tools that allow them to both explore new markets and differentiate themselves in their core business segments," said Scrimger.
"The greatest challenge right now is how to stimulate sales while making that business profitable. We have all seen profits erode as we try to maintain business and perhaps try to pick up," said Michael A. Andreottola, President & CEO, American Ink Jet Corporation.
"The greatest challenge in the industry right now is finding cost effective methods to innovate. Prices have been driven down on most media, inks and hardware with the maturing print market and increased pressure from Asian commodity products making it difficult to invest heavily in R&D. We have not seen the media side of the industry launch breakthrough products since the advent of air escape, probably because of the diminishing return on R&D investment due to margin erosion," said Phil LaFata, Director of Marketing & Int'l Sales, Arlon, Inc. "The key challenge will be to introduce new products, imagine new applications & drive innovation, without driving the cost of inks and medias above current levels."
"Competition on pricing and lead-times can be challenging and requires you to be more innovative and creative when quoting," said Melissa Thompson, flexible magnetic products sales manager, Master Magnetics, Inc. "More and more companies are getting into this industry because it’s growing and the initial capital expenditure isn’t that great for the ROI, plus there are some excellent business support programs in the printing franchises."
"Commoditization of print services and the price pressure that has resulted from this in a market with excess capacity continue to present a significant challenge for print service providers the world over. There is a need for printers to become more rounded ‘solutions providers’ to their clients, to be more focused on creative problem solving and less on process and production efficiency," said FESPA's Chesterman. "Digital technology, in most cases blended with conventional processes, can undoubtedly help printers to become more efficient. But its real potential is in its ability to help printers respond more comprehensively to clients’ marketing challenges, to expand the range of products and services they can deliver. That is the first step towards deeper customer loyalty, better margins and more sustainable business for printers."
Used Equipment, Slow Sales of New Equipment
According to Marco Boer, vice president, IT Strategies, 90% of the challenges in the wide-format market stem from the economic recession. Issues with financing and capital have slowed the sale of new equipment and forced some PSPs to hang onto older equipment longer than they originally intended. According to Boer, in some cases, print service providers that are unable to survive financially could spill a flood of gently used wide-format printers on the market, further slowing sales of new equipment as the demand recovers.
Capacity Issues, Low Demand
Managing capacity, according to Rick Moore, director of marketing, MACtac Graphic Products, is one of the biggest challenges the industry is facing. "All of the industry reports I have seen indicate that it will be years before the industry volume returns to what it was in 2008, so there is a smaller pie to divvy up. This affects capacity at every level, from the manufacturer to the print service provider. Managing capacity, and the decisions that come out of that regarding service, output, margin, overhead, etc., will mean the world to those who can navigate those waters."
"Print production demand continues to be the largest challenge to the industry as we continue through 2010," said KIP America's Rich Gigl, vice president of marketing. "End-user print demand continues to be low as the AEC industry continues to struggle with the current economic position related to over population of real estate in both the commercial and residential sectors."
"When you combine leaps in output capability with an expanding installed base of devices, the result is an almost exponential increase in output capacity," said Point Imaging's Huseman. "Combine the increased capacity with reduction in demand due to the current recession and margins come under significant pressure."
Even though most PSPs are involved in various marketing campaigns for their customers, marketing their own businesses can be a roadblock. "No matter what the state of the economy, I think the biggest challenge facing print shops is their ability to market their product line offerings to their target customer base," said Mark Radogna, group product manager, Professional Imaging, Epson America. "Even if a company acquires ground-breaking printing technology, it will have a hard time growing business if it does not properly build awareness of the products that now exist within its portfolio."
Time to Transform
According to Seiko's Ryan, its change or die for most participants in the market. The recession has truly changed the industry landscape in all market segments.
"The market conditions are having a profound impact on printer manufacturers on several fronts. Initially, the dramatic drop in sales forced manufacturers to redesign their businesses towards much greater efficiency. Those manufacturers without strong financial backing are now in financial jeopardy as the economic malaise drags on. Their long-term prospects don’t look good, and I expect some consolidation over the next 12 to 18 months as fringe manufacturers exit the marketplace," said Ryan. "The same process is happening to sign companies, and sign suppliers. Everyone is forced to retool for efficiency. And everyone is forced to redesign their products and services for a more cost-conscious, value-orientated market."
"The economy has definitely changed the way many printers view themselves and the niche they serve. The feedback we continue to receive from many of our customers is that they're growth in a down economy was directly tied to their flexibility or ability to expand into new areas of print," said Mark Overington, vice president of marketing, EFI VUTEk. "The clear winners were those who were able to move away from a commoditization mindset, diversify their product offerings by producing unique applications and provide their customers what turned out to be higher margin services. Similar feedback came from new customers who moved into digital grand format as a necessity to remain competitive and reverse continued margin erosion due to shorter runs and increased localization. The challenges we see today are for commercial and screen printers who don't have a short run or digital print model. As analog margins continue to decline into the low single digits, those printers will need to look at premium margin alternatives."