It’s official. After a year of hand-wringing, political posturing and uncertainty, the powers that be have declared what businessmen have known for some time. We’re now told that the U.S. has been in a recession since December 2007, and the Bank of Canada soon followed that pronouncement with its own statement that Canada, too, is in a recession.
According to the Bank of Canada, tighter credit conditions, weak external demand, particularly from the U.S., and declining commodity prices are the main culprits. The financial crisis and recession had its origins in the housing and credit bubble and the high leverage in the financial sector. It started in the U.S., but other areas were not immune (see housing prices in Alberta). Canadians initially seemed relatively insulated, at least through the summer. True, the manufacturing sector suffered due to the high loonie, but high oil prices, tax cuts and rising real estate prices alleviated it somewhat.
Canada’s real gross domestic product (GDP) increased slightly in the third quarter, after remaining essentially flat over the first half of the year. Most of the third quarter gain occurred in July. The increase was led by the mining sector, notably support activities for oil and gas extraction as well as construction. And, despite all the hand-wringing coming out of Ontario, the country’s manufacturing sector increased as did production in the services industries with notable gains in the public sector and, to a lesser extent, in retail and wholesale trade. Nevertheless, economic growth has been weak for a year, particularly in export markets, and the disaster in the auto sector will cause real pain.
But, does it really matter whether the Canadian economy is in a recession? If you’re a worker who has lost a job or whose plant or mill might close, it sure feels like one. Although the annual growth of seasonally adjusted real GDP was positive during the third quarter, the numbers mask a deeper slowdown that we are all experiencing. With the turmoil of Canada’s auto industry hurting Ontario’s manufacturing base, the fall in oil prices affecting Alberta and Saskatchewan and the continued problems with the forestry sector, the economy is likely to get worse before it gets better.
More to the point, however, is that the printing industry has been in recession for some time. Over the past 10 years, the nominal (current dollar) value of sales of Canada’s printing and related services sector has inched up by an anemic 0.7% per year. The situation is even less rosy looking at the past five years only, with total top line sales falling by more than 15%, and the situation is even bleaker after taking inflation into account.
As one would expect with the decrease in revenue and production, the number of plants has declined as well. While the consolidation hasn’t been as dramatic as in the U.S., principally because of the lack of acquisitive “mega printers” and the large number of “mom and pop” printers serving smaller communities, there are still fewer printers in Canada today than a decade ago.
Many printers got caught in an unavoidable downdraft. But, others have themselves to blame for making things worse. The crisis has been particularly hard on executives who gambled badly with their business – they got into the wrong segment at the wrong time, took on risky investments, piled too much debt on their companies or leveraged their own finances to a catastrophic degree. Clearly, the economic slowdown and pain among many Canadian print buyers will further exacerbate this situation. Last year began with Quebecor World’s filing for creditor protection and ended with the closing of its progeny Grafikom. We anticipate there will be more financial difficulties during the coming year.
As depressing as these numbers are, however, it also means that many printers have already positioned themselves not only to survive but also to thrive. For example, Mark Airdrie, president of Toronto’s Serv-a-Trade Lithographers, a 40-year-old family business that offers a wide range of services for the trade, started fine-tuning his business in anticipation of a downturn as long as three years ago. He invested in equipment such as a CTP-system to lower his costs and mid-production digital colour printers to expand his product offerings.
“Because of my timely investments, we are in good shape to weather some tougher times. I will be able to make some money when things pick up,” says Airdrie.
Not every printer is well positioned though, and even those who are will be challenged. That doesn’t mean there aren’t things that you should be doing. It should be remembered that each printer’s situation is different, and the focus of owners and managers will differ from their employees. Yet, there are certain basic principles that, nevertheless, bear repeating.
1. Cash is king
Most printers are used to focusing on profit-and-loss statements. Re-orient your thinking. Take stock of your balance sheet; it is the key to your flexibility and survival. Debt will weigh on you. If your balance sheet is weak, it limits what you can do. Talk to your lenders NOW. Keep an eye on coming debt maturities, interest payments and your lease commitments. In the meantime, manage your cash position as best as you can. Cut inventory. Be very careful on your receivables. (More on that later). Work with your suppliers on your payables. Try to make sure you have positive free cash flow, or, at the very least, avoid burning cash. You will need cash to survive.
Identify the two or three key drivers of your business. Deal with reality. Face the truth early. You cannot assume that things will automatically get better when the economy turns around. Printers will need to be proactive. Pay attention to demand, costs and cash flow. Differentiate between core and non-core operations and assets. Identify what is most important to your business and concentrate on them. It’s easy to get distracted fighting fires, but to come out of the other side of this, you will have to maintain your focus on what really matters to your business. This doesn’t have to be fancy. Doug McMillon, recently appointed CEO of Wal-Mart’s international operations, says when he was head of Sam’s Club that they were going to “manage expenses, be thoughtful about how [to] spend capital, and have conviction about where [to] take risk.”
3. Examine your costs
This is an excellent time to look at your entire cost structure and work flow. A bad economy is one of the best instigators for companies looking at cost containment. Jez Metcalfe, owner of Signet Graphics, a seven–employee Woodbridge, Ontario trade printer comments, “Recession makes you streamline your business and look at it from another perspective, eliminate and reduce waste and increase efficiency.”
Focus on improving productivity and eliminating waste. Both will reduce manufacturing costs and are likely to improve print quality as well. By looking at the entire production process and flow of work, you will begin to identify bottlenecks. If you have less work, where are things moving more smoothly? What processes can be automated? What steps eliminated? What mistakes can be removed? It is an ideal time to introduce lean manufacturing initiatives. Streamlining operations means that fewer people are required to accomplish an equal or greater volume of work.
4. Only cut where it makes sense
Make sure there’s a purpose. Don’t try to be fair, but target areas that you let slide during better times. While most printers don’t have a lot of wiggle room, it’s always possible to clean out overhead and fat, prune the product line and invest in higher-growth areas. Incremental moves won’t cut it.
Managing labour costs is clearly a priority for many. Layoffs, as unpleasant as they are, may be necessary. Avoid across the board cuts. Focus on poor performers, overhead and administration – anything that doesn’t directly add value.
Signet’s Metcalfe had expanded to a second shift after installing their computer-to-plate system in 2007. But, work began to slow down in the middle of last year, so the second shift was just performing maintenance.
“After eight weeks, the second shift asked to be laid off. They were disappointed that we couldn’t give them work. We were prepared to keep going on, but they felt bad. So, we saved some money that way.”
It is important, however, not to underestimate or overlook the costs of layoffs. There are expenses for planning, severance and redistributing work. They can also reduce productivity among survivors.
While layoffs and reductions in work force are most common, other tactics may be necessary or preferable. Cuts to benefits, raising employee contributions to health care, reducing pension contributions and plant shutdowns or reduced hours are all alternatives to consider – however unpleasant. Nevertheless, layoffs do provide an opportunity to get rid of the poorest performers and restructure the remaining work. And, it can be argued that alternatives such as salary freezes or even reductions hurt morale and can drive away top performers, so they tend to be the last resort.
If you do have to let people go, do so in the right way. Say the right things, privately, one-on-one, and clearly tell the employee he/she is being let go and why. Rehearse what you are going to say and bring notes. Be direct in telling people the company can no longer employ them and explain the financial hardship causing the need for layoffs. Your employees have seen what’s happening on the plant floor, so while they may be shocked, they won’t be surprised. Let the laid-off worker leave with dignity and self-respect. If you are providing severance or other assistance, let the employee know. And, any information you can provide to your former employee about continuation of benefits or government assistance will be very helpful in assisting with his/her transition.
5. Take care of your remaining employees
Layoffs and financial problems can wear on your remaining employees. Uncertainty is killing the economy; it can kill your employees too. It is particularly important to maximize your personnel resources. Communicate regularly with your employees to keep their morale up. Talk about what the financial crisis means to your company.
The current situation represents an opportunity as well. Invest in training. The Canadian Printing Industries Sector Council has put together a Standards and Certification Roadmap, which includes a set of standards for a host of production processes. That’s a good place to start. Encourage your employees to explore process improvements, to tackle projects that might have been put off. Are they up to speed on the latest software? Have them cross-train. Do you have a fully functioning website? How useful is it in meeting the needs of your customers for communication and purchasing? How can it be improved?
It is also important to keep your best talent. Don’t forget your stars, whether they are in production or sales. Set tough but realistic goals. Get everyone involved. Make your workers part of the solution. Empower your front-line supervisors and engage your top workers. People want to grow and be challenged. Give them new opportunities to take on responsibilities and build their sense of affiliation with the company.
6. Stay close to your customers
Communicate, communicate, communicate. Get information from where the customer action is, and get that information to your operating people as quickly as possible. Recessions provide an excellent opportunity to propose new ideas to clients and to disrupt business relationships of competitors. Understand your customers’ needs and focus exclusively on them. Strategies will vary from one company to another. Provide long-term vision when talking to customers. Not everyone is looking to buy solely on price.
Jamie Barbieri, president of the PDI Group, the largest independent sheetfed printer in Quebec, notes that they have been able to deal with the current situation primarily based on the relationships they have developed.
“You can’t continue to sell 40-inch output.” Barbieri believes there will be another big push from larger customers looking to consolidate.
“Customers want to do business with people who will be in business, so they are looking at service and quality. The RFPs we’ve seen are looking at our financial statements, strategic planning and vision.”
Be a resource in helping clients make the most of their marketing budgets, and help them get the most out of their print budget. Reinforce the value of print. Do you have any particular knowledge that can help them be more effective? For example, changes in postal regulations provide an opening to show prospects and customers how to save money. On the production side, work with them on improving better files. This helps you, of course, but also cuts their costs and cycle time. It’s to their benefit.
It is critical to differentiate business in some other way that competitors can’t copy or mimic. Provide some new product, alternative approach, or insight into the company’s business that you can aid them with. Inventory, fulfillment and administration all represent outsourcing opportunities that help them eliminate their costs. Sales of your clients who are buying print should be a major focus. Give them ideas on how to increase sales.
Also use this opportunity to evaluate your customers. Who is profitable? In bad times, managing cash and receivables are critical. Identify your higher risk customers and decide what to do with them. Options include cutting them off or working out a way to keep the relationships going. Extending longer credit terms can be a way of differentiating yourself, but it’s dangerous. You might win contracts, but it could be a real problem if they default.
Jez Metcalfe of Signet Graphics says, “My biggest worry about the recession isn’t [the volume of] my work coming down, but if my customers get caught up, either they go bankrupt or their customers go bankrupt and they don’t pay me. It’s not just that my sales go down, but it’s the loss of payment that hurts. I’ve never been strict on credit terms, but I am trying to reduce my risk. I’ve established credit limits. I try to rein people in on payments, even if that means they go somewhere else.”
7. Identify new markets and opportunities
Too often, businesses think they’ve taken care of execution by doing the same old thing, only better. Winning execution means doing it perfectly and then finding new customers and new markets. Some regions, industries and businesses are stronger than the others. Grow by identifying the growing businesses and going along for the ride.
So, where are the growth areas? For now, the growth areas are those areas heavy on bureaucracy: health services, educational institutions, government. Engineering firms, insurance, pharmaceuticals and biomedical also should hold up well. Tim Flaman, vice-president of sales and marketing at West Canadian Digital Imaging, a 240-employee firm with facilities in Calgary and Edmonton, notes that while a number of large engineering firms and their clients have delayed projects, it has not hit yet, as they continue with their current work. Given the pace of growth in Alberta the last two years, things might have slowed down a bit, but “it’s closer to normal,” he says.
Flaman also notes that West Canadian’s commercial business is holding up well and “hasn’t slowed at all.” Their clients have increased their direct mail operations and their signage business is also doing well.
“The digital world is slightly different than commercial offset,” he says. “Digital is more what it’s worth or for quick turn‚Ä¶a lot of work is fixed with customers, on contract, so we’re not quoting every job.”
Companies in more challenging environments might try some new tactics, however. If you are encouraging your customers and prospects to use direct mail, it might be a good idea to use it to generate new customers or to show your existing ones what can be done. Signet’s Metcalfe is “actively marketing the company,” which he never had to do before. He’s using his in-house prepress and design staff to develop a website and marketing materials. Metcalfe is even considering hiring an outside salesman.
8. Sell – or buy?
Sometimes it’s just best to sell assets, or even the entire business. While the price you get may not be the highest, you still may get a better return. Perhaps, you have a press that no longer fits your work, but that someone else might be able to use?
The ultimate resolution, of course, is to sell the entire business. Tom Blockenberger, of Vancouver’s Broadway Printers, did just that last year, selling the 97-year-old business to Thunderbird Press. Business conditions had become increasingly difficult in B.C.
“The market meltdown has affected everyone,” says the fourth-generation former owner Tom Blockenberger. Faced with increasing property taxes, Blockenberger was forced to evaluate his situation. “A lot of the value of the firm was in its real estate. It was too valuable to be used for a printing company.”
The latest round of property tax increases forced the issue. “We had to move anyway, but it was just too expensive.” The business was sold to Thunderbird, more than doubling their revenue, while the land was sold “for fair market value.”
For every seller, there is a buyer, and this market presents an excellent opportunity to buy businesses or equipment at attractive prices. You don’t want to compromise your current operations by overleveraging, assuming financing is available. Before buying another business, you need to assess whether you have enough of a cushion to survive a long downturn in the business. Can the business you’re looking to buy realistically generate enough cash flow? The last thing you want to do is take a good business and acquire a poorly operated competitor.
On the other hand, sometimes there is a good fit and assets can be acquired. Thunderbird Press’s purchase of Broadway Printers is one example. Another is the purchase of Grafikom’s Sherbrooke facility by Phipps Dickson Integria.
President Jamie Barbieri notes that the Quebec market has been poor for a number of years. Diversification of customers and printing capabilities is part of their long-term strategy. So, when the specialty plant became available, they moved quickly to acquire it. It was a good fit, Barbieri explains, adding new UV printing capabilities to PDI. It also provided the opportunity to add extended services and new applications for the specialty card market.
9. Keep building
There are other ways to build besides acquisition. While you have to cut costs and conserve cash, make sure to keep up product development, innovation and brand building. If you have the wherewithal, invest in new equipment or capabilities to be more productive as we come out of the recession.
For example, looking to counteract a decline in some of its core markets, BCT Ottawa, Business Cards Tomorrow franchisee, recently upgraded its print manufacturing capabilities to include high-quality, short-run four-colour printing with the installation of a Presstek 34DI press.
“Our traditional sales were flat so we were looking for a growth opportunity,” says Graeme Olmsted, co-owner. Since installing the press, Olmsted reports that sales are up 10%, even in the face of declining traditional sales. Olmsted realized that short-run colour was a potential growth area, and he wanted the next step up after digital, runs between 500 and 10,000.
Similarly, Melan, a full service marketing print products provider in Saint-Laurent, Quebec, near Montreal, recently installed Xeikon technology. Melan uses Xeikon to produce oversized posters, banners and signage for its expanding customer base. Garo Nazarian, owner of Melan, also sees “additional opportunities with the Xeikon for variable data printing.
In today’s economy, our customers are looking for more than “just a printer.” The Xeikon is our springboard to provide the value-added services that enhance our customers’ marketing print projects.”
West Canadian Digital has just moved into a new 60,000 sq.ft. facility. They laid it out to maximize efficiency. It’s had other benefits as well, improving employee morale. “Everyone has their own locker, and people love it,” says Tim Flaman. “Little things make a big difference.”
10. Maintain a sense of urgency
Finally, it’s critical to maintain a sense of urgency. Your survival is at stake, and you have to move quickly, if deliberately. As Andy Grove, formerly of Intel, puts it “Only the paranoid survive.” Remember, Alan Kay – “The best way to predict the future is to invent it.”
Good advice, in any economic environment.