2009 State of the Industry Report – Part 1

Who am I? Where am I? Where am I going? Those are some of the most fundamental questions we ask ourselves as we go through life. Business isn’t any different. From time to time we need to step back and evaluate the state of our businesses, answering those ever-present questions. In times of economic and financial uncertainty, these kinds of thoughts—and discussions—are even more important because the answers will shape the fabric of our businesses for the upcoming years.

In this year’s State of the Industry Report, we’re going to break it into two sections. This month, we’ll focus on the current state of the wide- and grand-format industry, getting a snapshot of how business is and what areas have been affected the most. In our November/December issue, I’ll focus on the future of the market: what areas show the largest opportunity for growth, what technology will drive change forward, and where we see ourselves in 12 months.

As you are probably well aware, the wide- and grand-format industry has been converging for the past decade. Your company is probably very different from when it originally opened its doors. No longer are shops only printers, they’re partners and facilitators, assisting corporations large and small with their marketing programs and critical projects. And by the time this recession rebounds, the industry will be very different, and every company will look very different than it did back in 2008.

While many financial pundits have officially announced the end of the recession, with the recovery already underway, I think most in the wide- and grand-format industry can agree that it still seems like we’re at the bottom—and a very bumpy bottom at that.

No one segment of the industry has been immune from the recession. The entire industry has been hit, regardless of ink technology or application specialty. We’ve heard about companies closing, about firms merging and consolidating to stay afloat, and about business being off, and not by a few percentage points.

According to Joseph N. Masters, graphic display marketing manager and sustainability manager, Alcan Composites USA, within the overall graphic display industry, “our fabricators tell us that their business is down on average 30 to 50 percent, depending on the shop, and business hunger is driving aggressive sales approaches. We’ve certainly seen some shops close in this economy.”

“We have seen market declines related to this economic downturn in the range of 15 to 20 percent in terms of volume, and I think perhaps greater in terms of revenue because of the discounting and ‘mix’ changes that drive revenue downward,” said Tim Greene, director, Wide Format & Jetting Technologies, InfoTrends.

“From watching dealer sell-through of hardware, it appears that the market has hit bottom in Q3, 2009. The quarter over quarter declines have stopped, and we’re likely to see some renewed growth in Q4, 2009. However, it has to be put into context because while we may see statistics that show 10 percent or higher growth from Q3 to Q4, 2009 in unit sales, the reality is that sales may still be down as much as 40 percent or more when compared to one year ago,” said Marco Boer, partner, IT Strategies.

The New Normal

In some instances, the growth in previous years made this crisis more painful, as companies had to adjust to the new economic realities. “The industry has been used to double digit growth in large format graphics market overall for a number of years now,” said Christopher Howard, senior vice president, sales & marketing, Durst Image Technology US, LLC, “so the slowdown has certainly been a bit of a difficult environment.”

“The industry as a whole is struggling,” said Angie Mohni, vice president marketing, Neschen Americas. “We are seeing some stabilization within the economy, but we are not quite out of the woods yet.”

“I think the wide-format industry, like many others, has redefined expectations for growth due to current economic conditions, but I also believe it has been very resilient. Challenging times are what help an industry adjust, realign and thrive,” said Rick Moore, marketing director, MACtac Graphic Products.

But as Moore also pointed out, the wide-format industry is changing—for better or worse. With its close ties to the advertising industry, the industry many times reflects the moods and trends from the corporate marketing world—and things there have changed dramatically. “Marketers are challenged to find ways for their products and services to remain top of mind with customers, and fortunately, customers have more and more creative platforms to choose from to gain that mind share, including the Internet, where they are increasingly allocating their spending. Most marketers have indicated that their print advertising spending, as well as spending on other traditional advertising outlets like radio, is not their priority right now. That is an indicator to our industry that we must be more creative, showing these decision makers we offer new and creative solutions that can help them achieve their goals,” said Moore.

“There is no question that in a recession marketing and advertising spends are reduced, and in turn this directly affects the wide-format production companies,” said Barry Polan, vice president, national sales, Crush Creative. “This is not to say that there are not rays of hope. Knowing that the general client spend was trending downward, we took a proactive approach to win new business and capture a larger share of the printing needs of existing clients. This helped us a great deal to offset some of the expected attrition.”

“Recent trends seem to point to a market that is slowly moving back toward more ‘normal’ conditions. It seems that many consumers—from small shops to large ones—are still a bit ‘gun shy’…waiting for a sustained period of recovery before jumping back into the market with both feet,” said David Grant, vice president of marketing, Oracal USA.

“The industry saw a contraction from 2008 to 2009 of approximately 30 percent in the outdoor graphics markets. With tightening credit markets, limited capital availability, cuts in marketing & advertising spending, and economic uncertainty, there’s been a pull-back in spending. 2009 has been a ‘reset economy’ where a new normal has been reestablished, however, we are seeing indications of continued solid business and expect that to continue through the end of 2009,” said Rick Scrimger, vice president/general manager, Roland DGA.

“Despite these conditions, however, recent reports indicate this downward trend might have reached the bottom,” said Bill Dundas, director of technical affairs, ISA. “Because commercial advertising historically is the vanguard of economic recovery, a turn-about in the market for digital signs and graphics might already have begun. By all indications, however, this won’t represent a return to the pre-2008 boom days but, instead, to a more moderate and steady growth pattern.”

Difficult Markets

One of the things that’s interesting to me, is that some of last year’s high-growth areas—retail and POP signage, as well as vehicle graphics and exhibit/trade show graphics—have been some of the hardest hit during the recession. In many—if not most—instances large projects have been delayed or reduced, some cancelled entirely. According to InfoTrends’ Greene, “As I see it there have been few if any segments of the market that have NOT been impacted by this economic downturn.”

“Print and sign buyers have cut back in relation to the economic decline,” said Catherine Monson, CEO, FASTSIGNS International, Inc. “Specifically, we have also seen larger customers tighten their print and sign buying budget. Any purchase that can be delayed is being delayed.”

Howard elaborated a little more on some of the difficulties facing PSPs during this time. “The one item that seemed to have the most impact to customers was the constantly changing landscape of projects that their customers were going to implement and then pulling back from. It made the business and production planning abnormally difficult and the lead time for projects was cut down dramatically, as when a customer did decide to do a campaign it was needed immediately,” said Howard. “This was particularly the case in the retail segment early in the year. It looks like this is beginning to stabilize and the end users are moving back towards a more planned project approach which means that budgets are set and being followed.”

Less POP in Retail & Trade Shows

It’s no surprise that the retail and trade show segments have been hit the hardest—especially in light of the ties both have to the larger advertising industry. According to Adam Florek, research analyst with Lyra Research Inc., spending on advertising has dropped worldwide, but particularly in the US and Europe, as companies cut marketing budgets. “Advertising companies reported year-over-year revenue declines of 15-20 percent,” said Florek, “revealing less spending on everything from billboards to banners. Sluggish consumer spending and the difficult environment for retailers are hampering demand for POP applications.”

“The demand for graphics in these segments is down from last year as marketing and advertising budgets have been cut at most manufacturers and national brand corporations across the country,” said Ed McCarron, director of marketing, Digital Imaging, InteliCoat Technologies.

“Retail advertising has been hit hard, but I’m not sure if we can define it as the hardest,” said Crush Creative’s Polan. “However, there is no question that budgets have been reduced. We are already seeing things turning around. ‘Back to School’ was a big push and ‘Holiday’ is trending well, also. The Entertainment clients are going strong, as are cosmetic companies. We see that our clients that have lower ticket items are generally fairing well.”

“Even though many large companies are completing mergers and acquisitions, changing or updating architectural signage to reflect these changes is being delayed,” said Lance Hutt, global product manager—Digital, Avery Dennison Graphics & Reflective Products Division. “Many large and corporate jobs are currently on hold. Large national companies are holding back and are not as aggressive with branding and identity projects. However, they are still pursuing shorter term product-focused promotional campaigns.”

“Even though these shops produce graphics for many different industries, trade shows are down as a whole substantially,” said Mohni. “Companies are cutting back on travel unless it is critical, which drives attendance down and exhibitors are making due with their current displays and graphics. These factors have caused a lot of pressure on some trade show shops.”

According to experts, the vehicle and fleet graphics markets were also heavily affected—mainly because of its tie to advertising and marketing dollars. Some companies have not pulled back entirely, but have moved to partial wraps to continue branding and advertising. It’s a less expensive option that still gives them exposure to the market for their products and services.

Building AEC Business

Another industry that has seen tremendous hits over the past couple of years has been the architectural, engineering, and construction (AEC) markets. Growth in this segment has generally been flat, a few companies reporting minimal growth somewhere in the neighborhood of a few percentage points. “I think the markets closest to the building and construction industries have been impacted at the highest levels,” said Greene.

“The CAD segment, however, has been hit the hardest. Reprographers were struggling anyway as they tried to incorporate building information modeling (BIM) into a new business model. The bursting of the housing bubble—not just in the US but other countries like the UK., Spain, Italy, and Eastern Europe—is putting the final nail in the coffin for many AEC customers,” said Florek.

“This market is fueled by the building industry and we all know that market has been one of the hardest hit in this economy. Many of our large-format printer partners have felt the most pain from this market collapse,” said Steve Blanken, sales director, Contex. “I think the turnaround will begin late fall although I do not believe it will be a windfall turnaround. We are starting to see some of the stimulus money hit the government infrastructure markets and this, we believe will slowly get the ball rolling in the building markets, hopefully moving in them in the right direction.”

Greene agreed with Blanken. “There are already positive signs and positive reports, in a recent survey we had many print service providers report that they believe the business will rebound here in the second half of 2009 and the first part of 2010.”

Recovery—When?

Right now, the question on everyone’s mind is: When? When will the recovery begin? Has it begun? If so, when will the wide- and grand-format industry start to feel the changes? Many in the industry are taking the lead from federal government economic forecasts which predict the start of a slow economic recovery in late-2009.

Alcan Composites’ Masters feels that “the worst is definitely behind us,” which is good news. But, is he alone with his optimism?

“As for improvements in the state of the industry as a whole, we have seen positive signs, almost monthly, since the fall of 2008,” said MACtac’s Moore. “However, it would be difficult to predict the exact timing of a return to normalcy for our industry. This is a day-by-day recovery, and even today I think everyone understands just how fragile the tipping point is for advancement versus decline.”

“Although we are far from seeing a complete recovery we are hoping that things bottomed out in May, as we have seen improvement the last couple of months. The impact to our same center sales was dramatic beginning in October 2008 and I believe it will take some time before we see growth trends similar to what we saw in 2006 or 2007. I expect a slow recovery from this recession,” said Monson.

“It may take a while before the industry finally recognizes ‘a turnaround’. We think we’ve seen the market stabilize in the third quarter. Sales for vendors and PSPs alike are no longer going off the deep end, at least sequentially. Going forward, we sales will look more favorably, at least compared to the horrendous results OEMs and PSPs reported in the last three quarters,” said Florek.”Still, it’s going to take a while before the industry returns to its pre-2008 height. The market should see a limited recovery in 2010 and 2011 before reaching 2008 levels in 2012. We expect the market to grow in the long run, but that growth will be constrained.”

“We noticed a slowdown in investment not because business issue, but because of financial issues. The crisis is financial, not economic. Our customers want to invest to produce more for less. For that they need their banks and also be confident in their market. That was not possible the first part of the year, but we see things going very well on the second part,” said Joseph Mergui, president, Caldera.

“As the economy begins to rebound these markets are starting to see signs of improvement, which we expect will only increase over the coming year. The benefits of digital printing are still very appealing, and once company budgets begin to grow again, we expect to see continued growth and success in this market,” said McCarron.

“While we don’t have a lot of empirical data to back this up, it appears that sales of wide-format equipment were hit particularly hard by the economic crisis…perhaps harder than sales of consumables. That condition seems to point to an environment where many PSPs are finding ways to ‘get by’ with their existing hardware by postponing purchases of new hardware. Fortunately we’ve seen signs that sales of wide-format hardware and consumables have picked up considerably lately, if still somewhat below previous high levels. We have high hopes for 2010, both domestically and internationally,” said Oracal’s Grant.

“Manufacturers that rely on sales of equipment as their primary revenue source have also had a tough time. Credit is not easy to come by, especially for smaller, less established shops. Without these new placements, many equipment manufacturers have had a tough time. The economy is seeing some stabilization—whether that is temporary or not we can only speculate—but my hope is that we will see some growth by the summer of 2010,” said Mohni.

“Things are turning around now. Through the recession I’ve stayed in close contact with SGIA members from various sectors of the community. Most are experiencing much better business conditions today than they were during the second quarter of 2009,” said Michael Robertson, president and CEO, SGIA. “From my sources, the sectors within our community that were hit hardest are fleet graphics and niche markets, such as recreational vehicle graphics, where disposable income drives sales. But even the hardest hit sectors are seeing things beginning to open up now.”

“It seems there was a very broad impact hitting both large and small companies. Smaller companies should have fared better by being able to make changes more quickly than large ones. Companies there were on shaky financial ground entering this crisis have been hurt the most,” said Randy Paar, display graphics product manager, Océ North America. “Right now, everyone is still in a holding pattern. Consumer confidence has to return to the general market so manufacturers see demand for product; and inventory and cash flow increases, which fuels advertising budgets. There is still a lot of uncertainty out there. The US government stimulus money is still mostly unspent. People don’t know what form the proposed healthcare plan will take, nor what it will cost. Home equity has been wiped out and many workers are unemployed or were forced to take pay cuts. Some economists predict a turnaround soon, but the general consensus is that full recovery is still a long way off.”

“Because of the timeline of the economic downturn, construction and real estate suffered the most and the soonest, followed by financial institutions. And because these industries account for a significant portion of the sign market, the sign industry was hit particularly hard,” said Lee Manevitch, technical support director, Signs Now, a division of Allegra Network. “It’s too early to recognize any positive trends, but one advantage of being a franchised system is that we can track same-center sales. We’re confident that the economic turnaround is in the not-too-distant future; when we see our same-center sales trend positive for several months accompanied by other economic indicators that the economy is rebounding, we—and I’m sure the entire country—will breathe a sigh of relief.”

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