Case Study: Case Of What Do We Do Now?, Part I

Since I wrote my last column, I have held six four-hour public seminars on "Surviving the Economic Downturn" in different parts of the country. I talked, of course, but I mainly wanted to learn from the questions and concerns I heard from the attendees. What is different since all of the bad economic news? Are there real fears? And, if so what's the answer to, "What do we do now?"

I'm committed to doing as many of these sessions as I can until we get a better picture of the general printer population. (See the seminar schedule at www.cprint.org). What have I learned so far? Well, I changed my mind on one thing. There is not panic and fear among printers. However, and this is where I have changed my mind from the last article, there is not as much concern as I think there should be.

The reason I changed my mind is many printers are still dealing with the easily fixable issues of getting over the train crossing and don't see the locomotive bearing down on them. To some extent, it is because we're not as familiar with economics in general. Now, understand that I don't think we should panic or fear. But we should be concerned and actively doing something about it.

Recession

Let's begin with the big picture and work down to our shop level. What is meant by the economy being down? The overall measurement referred to is the gross domestic product (GDP). Simply put, that's sales. It is the sales of your business added to the sales of my business added to the sales of General Motors and all other businesses located in the U.S. So if you sell printing to General Motors and they, in turn, use that printing to produce an auto that they sell to someone else, we count both transactions (sales). That's okay, as it is just an overall measure of the economy. It's the best one we have, anyway.

In the old days, our main measure was the gross national product (GNP). That's the total sales of U.S. companies regardless of where the sale took place. Before the global economy, Exxon was a U.S. company and Toyota was a Japanese one, so it was a relatively good indicator. That got out of hand when Toyota built a plants in the U.S. and Exxon began buying and selling oil that never entered the country. So we stopped focusing on GNP and started to focus on the more relevant GDP.

So what is good and bad, or how do we read the GDP scoreboard? When sales are up, or the GDP is up, that's good. Most of us really don't pay attention to it at our level. In April 2008, the GDP was reported at $11,717.4 billion. As recently as January 2000, the total was $9,847.9 billion, for an eight year increase of about 3%, which is nothing to write home about, but an increase nonetheless. The 10 years prior (1998 to 2008), there was a 13% increase overall. Better, but nothing like the 1990-2000 increase of 36% (www.data360.org). So growth had been slowing through April 2008, then we saw a decrease of 0.15% in the July 2008 quarter.

We don't have any more recent data since it takes time to compile. But all leading indicators, as well as the news, show sales (the economy) are definitely down since then.

So how do we read the scoreboard? A recession is a significant and broad based decline in economic activity lasting more than a few months (National Bureau of Economic Research). The rule of thumb generally used is two consecutive quarters of negative growth of the GPD—that is, sales are down in the second quarter compared to the first; and then sales are down in the third quarter compared to the second.

What's broad based? Normally, you not only see declines in overall sales (GDP), but also a decline in employment, real personal income, wholesale/retail sales, and industrial production. The consensus is we entered a recession in the fourth quarter of 2007 (Oct-Dec), but it wasn't until last fall that it began boiling over in the news.

As a bright spot, I've maintained a broad based print shop sales index for more than 10 years and, in my opinion, printing sales are a leading indicator of the economy. That means our sales go down before the overall economy, but we also go back up before the economy as a whole does. So, we will see a pickup before the overall economy.

Macro vs. Micro

What about depression? A depression is a 10% decline in sales (GDP). By that measure, many printers are in and out of depressions repeatedly for years without knowing it. Overall, though, this hasn't happened in the U.S. since the 1930s. It may, however, be happening now.

So what? There is a difference between the macro economy and the micro. Macro is the overall economy, such as adding all printing sales and looking at that. Well, PIA's chief economist Ronnie Davis and his team do that and have reported we had an overall 2% sales increase in the first half of 2008. They also say we will probably have an overall 1-1.5% increase in all of 2008, meaning we're giving back 0.5% in the last half.

Again I say, so what? I don't know about you, but if my print shop is up 1.5% for 2008, then I'd be happy, but ho-hum. Ah, but this is where micro economics comes into our lives.

Micro economics is more concerned about the little things such as how our print shops (as well as individuals, households, and other firms) make decisions. That's where we get clobbered; not at the macro level.

Micro is like my friends in upstate New York who saw major business after major business close in the 1990s. In fact, a report by the Public Policy Institute shows that total job growth in the area rose by 2.3%. That's 2.3% over a 13 year period (1990-2003). Even other rust belt states grew four times that fast, and the nation as a whole grew eight times that fast. In fact, the total U.S. GDP grew 42% during the 1990-2003 time period.

So business for our printer friends in upstate New York (as well as my own West Virginia in much of the 1970s and 1980s) was very difficult while the rest of the nation prospered. That's the difference in the micro and macro.

Put It In Perspective

But you don't have to be in upstate New York or any other place particularly for a depression to occur in your shop. My firm has measured hundreds of printing companies throughout the U.S. and Canada over the past 23 years. We find that 50-75% of a printing company's total business comes from their top 25 accounts. While others have supposed, assumed, and conjectured about this, we have actually measured it. In fact, I don't know of any other study that has measured this except for our private studies. We further find that the top account is commonly 10% or more of sales.

Okay, now let's say your top account walks, for whatever reason. Presto! Your shop is in an instant depression. Remember, a 10% loss in sales (GDP) is a depression.

We saw this in the 1990s when banks bought out banks. We saw it when companies in the north were purchased and then moved to the south. We saw it even back in the 1970s and 1980s when independent drug stores were being bought up by the chains. The same can be said for supermarkets and practically every line of business that you can think of. Fortunately, in growth times, these firms are replaced by other businesses.

So, there's no difference today, eh? Not so fast. Today the indicators are that we are going through a major shift in the economy. You didn't see GM, Ford, and Chrysler on the brink in those days. You didn't see banks failing on a grand scale—at least, not since the 1930s. You didn't see real estate going down in value. This recession is different from the others we've been through since the 1950s.

That means there is a significant change going on. And that brings me back to my point. We should be concerned. Not panicked.

We must prepare for when we lose a top account, not if we lose one. Most of us are not prepared. Most of us have coasted for so long that we don't run a lean, mean printing machine. Most are so thinly capitalized (little to no working capital) that we can't afford to keep going long enough to get a new account. And, sadly for most of us, we haven't really tried to get new accounts for so long that we don't know how.

So, the good news is there is not a lot of panic out there. The bad news is that many printers are ignoring reality. I'll pick up on this again next month.

Tom Crouser is CEO of CPrint International, a program of Crouser & Associates, Inc., 4710 Chimney Drive, Charleston, WV 25302, 304/965-7100. You can reach him at tom@cprint.org. Join Tom as he discusses "Surviving the Economic Downturn" and what you can do about it, coming to a location near you. Go to www.cprint.org and click on the seminar icon. See the ad for Tom's services in this issue.

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