Monday, October 28, 2019
It can be brutal out there. Arguably, it’s never been tougher to thrive in the print sector. Low margins are the order of the day and some markets are being eroded by stiff competition from new media. Businesses in the print sector simply can’t afford to stand still.
But what can you do? Perhaps there are fresh avenues to explore? Diversification may provide a means to survive and prosper. However, opening up new revenue streams typically requires capital expenditure and may come with serious risks.
So, how do you assess whether a market is worth a large upfront investment? And what steps should you take to ensure that you set about diversification in the right way? After all, the long-term aim is to end up in a better rather than a worse situation.
“Before embarking on any expansion or growth plans, any business owner – not just printers – must evaluate the amount they can afford to lose and not be drawn into a situation where they spend more than they can afford,” cautions Roger Aust, managing director of Close Brothers Asset Finance’s Print division.
Some printers have shown themselves willing to make major investments to meet changing market needs. Book specialist Clays, which prints approximately 150 million books a year, has over the past 12 months invested £12m in new equipment, including a Muller Martini finishing kit and new Fujifilm Jet Press 750S. CEO Paul Hulley explains the investment was made to ensure the business remains on the front foot in meeting “evolving market requirements” as Clays transforms its factory to accommodate the changing needs of the UK book market.
Park Communications has also diversified its offer a number of times, including making an investment in large-format printing two years ago. Managing director Alison Branch says Park determines whether a market is worth a big upfront investment based on several criteria: assessing the size of the market, how a new offering would differ and be more attractive to that of the competitors, what the barriers to entries/risks are and how to overcome them; and by forecasting the profit stream and cashflow.
The key to calculating how much is worth spending, she asserts, lies in reviewing the scale of the opportunity, how quickly the company wants to build scale and its appetite for risk. “When creating our large-format department we could have spent half the amount we chose to spend but we wanted to be sure that the kit could produce the quality and speed that our customers would require,” she says. “From the beginning we were able to produce for well-known brand names.”
That’s not to say that printers always need to invest big money when diversifying. Rather, it’s simply to note that there are circumstances in which going for the low-cost option may prove a false economy.
Indeed, ProCo client and technical services director Andrew Lydiatt makes the point that diversification doesn’t have to always rely on capex. In his view, having access to capex can often greatly assist delivery of diversification, but an open mind, lateral thinking and courage are far more important characteristics for success and driving change into a business
“It’s important to understand that a large capex purchase is not a guarantee. It can often be driven through vanity, and then wrapped up as change or diversification, but in reality, it’s just an upgraded version of what was already being done – with a much larger burden to facilitate,” says Lydiatt. “I think we can all draw experience of this from within our sector to demonstrate this. Successful diversification or change, which involves capex, can often be found in using kit for a function it was not originally designed for, by integrating multiple technologies to create a new capability or in some cases, designing/building from scratch!”
Follow the customer
Determining whether a new market is worthy of investment is tricky. Lydiatt says that at least in its “early thinking” ProCo tries to be customer-led in all its investments and initiatives. After all, customers are the reason the company is in business and any new area the company moves into should be valuable to them. Once an embryonic idea takes shape, ProCo digs further, taking a thorough look at the market, competition and forecasts from associated industries.
Similarly, Integrity Print accesses its diverse customer and reseller base for market intelligence when looking to expand or diversify. “We also do a lot of networking with suppliers and competitors to ensure we are aware of technology trends and innovation in the market place,” says Integrity sales and marketing director Andrew Law. “Across the Integrity group we now employ over 400 people, with a number of subject matter experts in particular market sectors and a huge range of experience. With the flat management structure we operate it is very straightforward to initiate a dialogue about investment and new markets and then draw in the views and knowledge of your peers.”
In terms of calculating how much to invest, generally Integrity operates on a maximum two- to three-year payback. Then the finance team applies a rigorous process for reviewing and stress testing any assumptions around sales forecasts for new investments. The outcome of all this is a robust business case that is put in front of the managing director for consideration.
“It’s business-critical for us to keep developing new markets, so we are encouraged to be bold and entrepreneurial, but this is backed up by sound financial management,” says Law. “Over the past 12 years we have seen a huge change in our business with an estimated £20m loss of sales, which is entirely down to product replacement and technology advances. In the same period we have been able to replace this lost turnover with new sales channels and achieve net growth. This has primarily been down to investment in technology and sales channels.”
Integrity has in the past negotiated with equipment suppliers to structure a deal that suits its needs. However, the company has also been prepared to buy secondhand kit where appropriate.
A good example of this comes from earlier this year when the business took on two finishing lines that previously belonged to the liquidated Nottingham-based business Tressanda. These custom built machines turn out leak-proof, sealable plastic bags primarily used for transporting medical samples and can attach the multi-part medical forms needed to label the bags with the correct patient and sample information.
This diversification into specimen bags, explains Law, was a case of picking up secondhand kit and coupling it with market knowledge and sales reach. “For our transactional division we have bought both new and refurbished enclosing lines depending on what was available in the market place when the investment was required.”
Equipment suppliers can help with payment schedules, particularly for secondhand kit. “Having a strong balance sheet and a good cash deposit helps secure the best finance rates,” says Central Mailing Services managing director Mitesh Chouhan. “For secondhand kit, warranty periods are very important to me. I always look at new versus old.”
Although buying secondhand can be a useful and cost-effective way in, you need to be sure that the kit still provides the product differentiation you need. In addition, maintenance costs must not outweigh what you’d spend buying new, and clearly you need to check whether it’s feasible to obtain finance on attractive terms before committing to the purchase.
What, though, does a finance house look for when weighing up whether to back your proposed expenditure? According to Close Brothers’ Aust, it’s assets; but crucially the people too. “Ultimately, it’s a balance between asset value, the knowledge and background of the people involved, the capital base and our perceived understanding of how a new business will cope with the inevitable ups and downs before it matures.”
Aust makes the point that good businesses don’t go bad overnight and it’s often wise to stick to what you’re good at. Certainly, before venturing down the diversification route, it’s critical to give serious consideration as to whether it will stack up.
“Research is key,” adds Aust. “There is a lot of information available out there, but ultimately, you’ve got to use your own nous. Timing also plays a critical part. For example, is the market already saturated? Are the margins there? Can you add value to what is already potentially an established market?”
Mark Nelson, director of Compass Business Finance, says the sooner a business looking to diversify starts a conversation regarding its plans, the better a finance house can help them explore the possibilities and identify any potential pitfalls. Having a finance partner who understands your market and what you’re trying to achieve is a key element in the success of your diversification strategy, Nelson argues.
Whatever strategy is chosen, the intended outcome is a more stable and profitable business, adds Nelson. “So to provide financial support for diversification we need to be convinced that this is going to be the case. We encourage businesses to provide a full business plan, outlining the opportunity, the market, competitors, resources required and financial forecasts, so that we can assess the viability of their plans and look at the security they have.”
Crunch the numbers
Park Communications generally turns to bank or finance houses for capex needs as most of its equipment is large scale. Branch echoes Nelson’s point, saying the way to persuade lenders to support such plans is by providing a fully costed business proposal – in effect, a mini business plan which outlines the benefits (financial and non-financial) that the investment will bring, and the profit and cash it is expected to generate.
Lydiatt says ProCo’s “numbers guys” get involved once the business has come up with a clear idea and strategy for diversification. “We take a very metric-driven approach to capex, which includes all the things you would expect: savings – both tangible and intangible – guaranteed sales and aspirational sales, payback periods, process improvements, resource efficiencies and improvements. We also add a small factor of ‘courage’ and ‘conviction’ – what does our gut instinct tell us? Then we add this all together and see where we are.”
Diversification may provide a welcome shot in the arm but businesses must temper bravery with a degree of caution and plenty of common sense. Moving too far from your core offer risks a reduction of focus and at worst a journey into the unknown with a potentially major downside.
Several years ago, the leading management consultancy McKinsey & Company published some findings under the title Testing the Limits of Diversification which showed more focused companies outperformed diversified businesses.
The McKinsey research revealed that from 2002 to 2010, the revenues of conglomerates grew by 6.3% a year while those of focused companies grew 9.2%. Even adjusted for size differences, focused companies grew faster. Moreover, they also expanded their returns on capital by three percentage points, while the returns of conglomerates actually declined by a single percentage point. Lastly, median total returns to shareholders were 7.5% for conglomerates and 11.8% for focused companies.
Now, the suggestion here is not that print businesses exploring the viability of new revenue streams will suddenly morph into unwieldy conglomerates. You wish! The point rather is that diversification is not always the right answer. In order for it to work, the costs, market opportunities and fit with the rest of your business must all stack up.
There is no simple, single answer as to whether investing in diversification is the right way forward. What can be said with absolute certainty is that it cannot be done on a whim.
So, good luck diversifying... or well done for staying focused – depending on your ambitions.
From plastic to paper
A wave of magazine publishers have this year made the switch away from polywrapping to paper wrapping for magazine mailings. Among those to take the plunge are Immediate Media for its BBC Countryfile and BBC Wildlife magazines, TI Media’s Country Life and Kelsey Media with Coast.
Moreover, glossy magazines heavyweight Hearst, publisher of a stable of leading titles including Cosmopolitan, Good Housekeeping and Esquire, has announced it will transition to paper wrap for subscriber copies of all its magazines by January 2020. The move comes after Hearst was accredited with environmental standard ISO 14001 earlier in the year.
Sustainability issues are driving these decisions, with publishers coming under pressure from subscribers and other stakeholder to ditch plastics. Spotting an opportunity, several firms have invested in paper wrapping or hybrid paper/poly wrapping machines.
In July, Central Mailing Services (CMS) announced it had ordered a new bespoke CMC One paper wrapping machine for its facility in Birmingham. The £500,000 investment was driven by client demand, says CMS managing director Mitesh Chouhan, although he believes that while environmental concerns will continue to grow, driving demand and justifying his considerable outlay on paper wrap, there is still a solid market for polywrap – to which CMS remains committed.
“CMS have invested in the best paper wrapper on the market with the ability to also polywrap at very high speeds,” says Chouhan. ”I think there will always be a requirement for polywrapping – news trade and direct mail for example – but for the publishing sector there is very strong demand for paper wrapping. There are virtually no secondhand paper wrapping machines available globally and therefore the investment is substantial for a new machine.”
While biodegradable and starch films are available, Chouhan is convinced paper is the most environmentally friendly option. Lack of clarity in government policy and among consumers over how to recycle or dispose of film packaging correctly adds to the confusion in a way that, to his mind, makes paper a better option.
“Paper wrapping has a unique and rare appearance, which clients seem to love. If you look at the marketplace and take out the companies with paper wrappers which are solely used to wrap the print they produce and then you remove the companies that have partnered up with their clients, it leaves very little capacity. Then, if you remove companies which cannot produce a full bleed to edge paper wrapped pack – it leaves a couple of firms!
“I believe the CMC One is the best paper wrapping machine on the market, it gives you the best looking paper wrapped pack with rotary cutting to get full bleed to edge. Plus, it is not a polywrap machine with a paper kit/modification. It is a paper wrapping machine which can polywrap.”