What GDP Says About Competing Media Superseding Print

Print Action, Mar 2004 by Goss, Al

I remember chatting with a printer who told me that his business was not really impacted by major economic forces. He didn't pay any attention to economic indicators, arguing that by the time he got around to analyzing his revenues, or cost of goods sold, it was firm-specific factors that mattered, not the exchange rate of the Canadian dollar or the Gross Domestic Product (GDP).

He figured that his time was best spent looking at things he could control instead of waiting for the latest economic numbers to tell him where his business was going. There was some logic in his argument. Printers cannot change the external value of the currency. Printers cannot influence the GDP. So there is a reasonable tendency to ignore the numbers. The problem is that after a while, some long-term trends can sneak up without anyone noticing them.

Take a look at the graph below. It plots GDP (the value of all the goods and services produced in Canada), against print GDP (the value of all printing). The print GDP plot is monthly so it is a little lumpy, but look at the long-term trend. You don't need to be a statistician using chi-squared tables or least-square regressions to see a pretty distinct pattern. Print GDP has been growing slower than the overall economy and has been flat since September 2001. Put simply, Canadian printers produced no more in December 2003 than they did in September 2001. The market has not grown.

Those are pretty startling numbers, and they begin to explain some of the market behaviour that printers are seeing. Looking at the economic numbers may not help you get your next job, but they will go a long way to helping you understand the dynamics of the market.

Having difficult meeting top line? Presses underutilized? Well, the pie is not getting any bigger. If printers were hoping for organic growth to fill up their idle press time this trend line will be a rude awakening. Price pressure eating up the bottom line? Well, if the pie isn't getting any bigger, the only way to you're going to build your business is to take it from someone else.

This point was brought home recently when Quebecor World announced its latest quarterly results. Quebecor World, posted operating income of US$689.8 million in 2003, compared with US$898.4 million in 2002. Jean Neveu, president and CEO of Quebecor World, commented on the economic environment when discussing the $54-million loss from the fourth quarter alone.

"Our decreased operating income for the quarter is the result of significant price declines in our industry," he stated in a press release. "This is in spite of the fact that we increased volumes in most of our business groups. As a result, we have taken additional measures in the quarter to address the current difficult industry and market environments." Neveu's comments bring up another interesting point. Quebecor World is diversified globally. Is the Canadian experience being replicated in other markets? In fact, it is. The NAPL ran a similar analysis on U.S. print growth and GDP and found similar results, with print growth stalling out in 1998. So the obvious question becomes what happens next?

Unfortunately, predicting times series is as much art as science. The big question is whether the flattening of print GDP is temporary or permanent. If structural changes have changed the market such that the industry is no longer growing, the natural outcome will be increased pricing pressure and decreased margins.

Only the most efficient printers will survive and you can expect increased merger and acquisition activity. If the structural change to the industry is so fundamental that other communication media supersede print, then print growth rates will begin to fall and the industry will contract. I'm definitely in a more optimistic camp, but lest you think it impossible, talk to failed owners from the typesetting industry.

The more confident view is that print growth will snap back and begin moving with GDP again. It is clearly within the realm of possibility since print outperformed the economy in general between july of 1999 and November of 2000 (although the U.S. numbers did not show the same jump). Whether sluggish print growth is due to structural changes like the internet or print-on-demand is an open question and, unfortunately, it will be several years before the data are available to test whether this is a permanent change in growth (what an econometrician would call a regime switch). The problem with data analysis is that it is very good at telling you what happened, but not so good at predicting the future. But I don't think we need to wait for the econometricians.

Finance folks are fond of saying, "The trend is your friend." What they mean is that given a set of data (and in the absence of a crystal ball) it is usually best to expect tomorrow to be the same as today. So, I'd accept the data as the near-term reality and expect that the market will not be growing. You can form your own opinion as to whether the factors affecting the industry are temporary or structural, but expect tightness in the near-term.