Overcapacity woes can be overcome with forward planning
Richard Stuart-Turner & Rhys Handley
Monday, July 23, 2018
Sheetfed magazine specialist Pensord told PrintWeek last month that, as part of a future-proofing strategic investment, it was set to reduce its capacity by replacing two existing Heidelberg Speedmasters with a new ‘Push to Stop’ specified eight-colour XL 106.
“We have surplus capacity as an industry and as a business, and when you’re looking at selling in the current commercial market, the prices that some other printers are willing to do work for mean it’s pointless retaining that capacity only to fill up the presses with non-profitable work,” Pensord managing director Darren Coxon said at the time.
While it is clearly more common to hear about printers investing to increase their capacity, the reverse is happening increasingly frequently in recent times, as printers strive to maximise their profits in a market often dictated by price.
Businesses operating in more traditional areas, such as litho and web offset, have faced particular overcapacity issues, with many prepared to take on almost any job, at any price, to fill their presses and cover their operating costs.
J Thomson Colour Printers managing director Kevin Creechan believes many companies of this nature are “lifestyle businesses” that have no intention of investing and are “diluting the market”.
“That’s alright if they are putting something back into the market, but most of them don’t. My view is that in the next three to five years there will be a real cull of print companies because owner age is rising, and I see a period of real consolidation.
“Companies that are proper businesses will have a medium to long-term plan that will involve investment, training, recruitment and the development of employees as well as relationships with customers that are not just ‘there’s a price, give me a print job’.”
He adds many companies “want to get out but can’t afford to because of the cost. And while they are there they need to fill their machines, so to try and do that they primarily look at price and it cheapens the industry.
“I think the only way this will change is when a lot of the companies that are just limping along, trying to prolong their life in print, eventually start to go. Then just maybe the companies that are investing, training their employees and taking on apprentices will start to reap some of the benefits of that.”
The BPIF’s latest Printing Outlook report found that capacity utilisation picked up in April, with 37% of printers surveyed operating in the 80%-89% range, compared with 28% in January.
BPIF research manager Kyle Jardine says such fluctuations are common as “things move up and down depending on the markets and what’s going on”.
But it is during the industry’s seasonal quiet periods of summer and the new year, when overcapacity is amplified, that many struggling printers have found themselves pushed to breaking point.
A printer based in the South East, that wishes to remain anonymous, replaced two B2 Speedmaster 74s with a B3 Speedmaster 52 Anicolor earlier this year after assessing the changing nature of its work. The business also moved from a 1,115m² site to premises half the size.
“We’d got to the point where we had to do something. We had to look at the work that we actually do now, which sits just above the digital threshold,” says the company’s managing director.
“So we looked at the equipment and structure that we needed to make ourselves more competitive for that kind of market, and for us it made sense to go down to B3 with a machine that is better suited for that sort of work.”
He adds the business turned in a profit in the first month following the restructure.
“We were just being busy fools, so we thought we’d get out of that and not constantly fight just to make something.
“I strongly believe there is work to be found but you have to look at the market, look at what’s changing and change with it.”
The Taylor Bloxham Group has also undergone changes, replacing two Heidelberg Speedmasters, a B2 CD 74 and a B1 XL 105, with a B1 Koenig & Bauer Rapida 106 litho press earlier this year.
Chief executive Robert Lockwood says that, having recognised the overcapacity in the market, the business made the switch to “get the right mix of manufacturing assets for the most flexibility and efficiency”.
“We’re buying a press to match what we perceive the market requirements are and to give us a cash saving on the operating side, so we’re getting the same out for less,” he says.
“While there are a lot of successful B2 printers, in our opinion the B2 market is under threat. The digital market is eating into the bottom end and the B1 market is eating into the top end.”
While some printers may hesitate to remove machinery to address overcapacity, believing it could leave them handicapped during busy periods, outsourcing certain jobs at these times could prove less costly than trying to fill a surplus press all year round.
“You could start working with partners who can take on that capacity – it’s what the print managers have been exploiting for years,” says Lockwood.
While digital and wide-format equipment is clearly less expensive to operate than litho presses, particularly for businesses that mostly handle short runs, these areas also suffer from overcapacity, particularly as technology improves and automation increases.
“Where you needed two printers five years ago to print a certain volume, today you can most probably do that with only one print device,” says Agfa Graphics sign and display marketing manager Willy Van Dromme.
“There is a trend in the market of consolidation and we expect there will be fewer companies in the future, but the companies that will [remain] will be bigger and stronger.”
Ultimately, while printers may have to make many tough decisions to overcome overcapacity issues – removing machinery, downsizing, making redundancies, or all of the above, doing nothing could prove much more painful in the long run.
The market is changing and printers need to change too
Charles Jarrold, chief executive, BPIF
Pressure on margins is the top-cited concern from members. Printing is capital-intensive, requiring expensive equipment. Over time, productivity also improves through innovation and product development. Without corresponding growth in demand, increases in productivity can lead to excess capacity and margin pressure.
However, it’s more complicated. Firstly, some parts of the sector suffer more from overcapacity than others. Secondly, overcapacity isn’t something that always affects the whole year. Most in the sector have their busy seasons.
A further factor has been the cost structure. Only a fraction of the costs of a printing business are variable, many – capital, staffing, premises are fixed or semi-fixed. So, facing gaps in the schedule, companies are tempted to reduce prices, preferring this to standing. However, across the sector as a whole, this leads to collective pain.
So, what can be done? Companies must keep investing, innovating and improving productivity. Yes, this may contribute to overcapacity, but, in the words of the Red Queen, ‘from now on, you have to run as fast as you can, just to stay in the same place’.
Secondly, a hawk-eye on costs, and, ensure costs can be flexed where possible. Thirdly, keep a close eye on pricing. Pricing affects capacity utilisation, and top management must take responsibility.
Fourthly, look after and value customers. Relationships and trust matter, for good business reasons. Fifthly, think about how to develop the business to move from ‘what work at what price?’ to ‘here’s how we can help your business’.
The industry continues to change. It’s moving more towards more complex solutions provision, with print as a core element. Whatever the individual strategy for companies, differentiating an offering from competitors, and providing solutions to clients’ businesses are approaches that ensure better margins and long-term success.
How has your business dealt with market overcapacity?
Daniel Miller, digital manager, Edwardthompson
“We made more than half of our staff redundant in 2016 as the bingo market declined in the wake of the smoking ban and reduced demand from our key customers. It was a hard decision to make because 90% of them had only ever worked for us. We held long consultancies with them before making decisions and it allowed us to step back and detect the cracks in our business. Now we have been able to stabilise, streamline and take back on staff we had to let go in temp and part-time positions.”
Ian Clasper-Cotte, managing director, Northern Flags
“Our highest turnover client is not as important as a mid-ranking, more profitable one, so we are not dependent on one or two big accounts which might force us to make redundancies and reductions if they pulled out unexpectedly. Our capacity continues to grow, and we run at about 75% of our full capability to keep space for things like prototyping. As part of the FaberExposize international group, we take up jobs at overseas factories and then reshore them once we know we have the capacity.”
James Baxter, production director, Swallowtail
“In September, we will take on a Heidelberg Speedmaster XL 106 to replace two other Speedmasters and streamline our operations. A few good people have unfortunately been made redundant because of that. We offered them alternative employment but for various reasons they opted to leave. I had sleepless nights about this, but if we had stayed the same it would simply have cost us more money. This has taught us how to be a better company by really looking closely and analysing how to become more efficient.”