El-Hi and Trade Fuel Optimism Among Manufacturers
Mergers and acquisitions in the print industry over the past year resulted in some changes at the top of BookTech Magazine's annual Top Book Manufacturing listing—ranked by book-manufacturing revenue.
One change concerns the perennial Nos. 1, 2 and 3 on our list. When RR Donnelley acquired Moore Wallace last year, it changed the way the $8 billion company breaks down its revenues. It used to report the performance of individual units, but now casts revenues into two major business components: publishing and retail services, and integrated print communications and global solutions business. The latter category accounts for 40.2 percent of RR Donnelley revenues. Of that percentage, Ed Lane, president of RR Donnelley's book publishing services business, estimates the company's global book revenues at around $700 million (which was calculated to be $698.4 million, based on an estimated percentage). That estimate would push Donnelley slightly ahead of Quebecor World, which reported its book revenue in 2004 as $695.3 million.
But an acquisition also affected Von Hoffmann, which ranked third on the list last year. Visant Corp., which combines the book manufacturing businesses of Von Hoffmann and Jostens Corp., pushed past both Quebecor World and RR Donnelley into the top spot, with book sales nearly double what Von Hoffmann reported last year as a single entity. Jostens and Von Hoffmann operate separately, but report their earnings under the Visant umbrella. Book manufacturing accounts for approximately 50 percent of Visant's overall revenue, as opposed to 100 percent when Von Hoffmann reported its earnings last year.
"Since these companies are now jointly owned, [we want to] list ourselves under Visant and show book revenues for the entire entity …," says Mike Ford, vice president of marketing at Von Hoffmann.
Competition and Pricing
In addition to the mergers, manufacturers are streamlining their operations, producing less waste and decreasing turnaround times to retain customers and attract new ones. The result: a competitive marketplace that may cause some manufacturers to lower prices to keep business.
"Some strong competitive pressures in the marketplace are causing us to price aspects of our product at a more competitive rate, even though we may be selling the same number of units," says Rob Krehbiel III, president and chief operating officer of CJK: Print Possibilities, in Cincinnati. Krehbiel cites prepress as the area that has changed the most in his business in recent years.
"We certainly have computer peripherals in the pressroom and bindery, but that front-end system, since the days of film, is revolutionized," he says. The efficiencies from these advances, combined with competitive pressures, have led to the lower prices for customers, he explains.
Revving Up for More Demand
Other manufacturers installed new equipment and upgraded their plants to remain competitive and prepare for increased demand in some segments. One segment that is predicted to get particularly busy over the next few years is the elementary-high school (el-hi) and higher-education textbook markets.
State departments of education prepare their adoption schedules far in advance, and tracking the schedules allow manufacturers to know what's in the offing a few years down the road, giving them time to upgrade as they see fit.
"In '03 and '04, those were sort of the trough years of the adoption cycle, [while] '05, '06, '07 look like very strong years in terms of states purchasing textbooks," says RR Donnelley's Lane. "Particularly the large states—California, Texas and Florida—which are big adoption states [this year] with large student populations."
To prepare, RR Donnelley approved the expansion of its four-color education platform in 2004, adding two presses and some bindery modifications to its Willard, Ohio, plant, Donnelley's principal education book facility.
Looking ahead to 2006, the biggest adoptions will be in: California, which will be adopting history and social science books, known jointly as social studies; Florida, which will adopt K-12 subjects, and North Carolina, which has a large reading adoption scheduled, says Rick Blake, vice president of communications and government relations with Harcourt, a global education company, in Orlando, Fla.
"Reading and literature is the largest, followed by math and then science," he notes.
Courier Corp. and Quebecor World also used 2004 as a launching pad for the strong adoption period that lies ahead. Courier added a MAN Roland four-color book press to its Kendallville, Ind., plant last year and will install an identical MAN Roland at the plant in late 2005. Quebecor World made capital investments at its Dubuque, Iowa, facility to increase its volume in the four-color textbook segment.
"We started [installing equipment] several years ago … The investment was really made to ensure that Dubuque was a first-class player in the education market, and the timing couldn't be better," says Kevin J. Clarke, president of the book and directory group at Quebecor World.
"Publishers in general are predicting double-digit growth because of an increase in the number of state adoptions this year and in the next several years," says Peter Tobin, executive vice president of the North Chelmsford, Mass.-based Courier Corp. Tobin adds that the amount of state funding, a critical component of educational publishing, has increased.
Another segment that has made manufacturers optimistic is the trade sector, spurred by this summer's highly anticipated release of the sixth "Harry Potter" book.
"We're optimistic this year for trade," Tobin says. "We don't manufacture [the "Harry Potter"] book, but it creates a big bounce for trade publishing, and anything that drives consumers into bookstores or drives consumers to buy books is something we like."
"[Trade] can be influenced by the big books that [are released] every year," Clarke says. "There are 10 or 12 books that seem to have a life of their own and sell millions. Some of which you can count on, and some of which are surprises."
Clarke anticipates Quebecor World's trade plants to be fairly busy this year, and as a result the company will add two presses this year and a third in 2006. Overall, Clarke sees 2005 as a strong year, with publishers putting an emphasis on inventory and supply-chain control, and quick reprints.
Manufacturers are also doing more with publishers to help take time out of the process. Courier, for one, has begun electronic transactions with their book-publishing clients, online proofing and preflighting in response to publishers' need to compress the book-manufacturing schedule.
The Paper Market
The jury is still out as to what impact the inching upward of paper prices will have on manufacturers' performance this year, but some expect that reality to have repercussions in the long term.
"We haven't seen increases in paper have a tremendous effect on what we're seeing in increased volume," says Clarke. "I'm sure the books that are mid-list might be subjected to reductions or eliminations. But right now we're continuing to see a very favorable manufacturing condition with a lot of our factories full."
"I haven't heard that publishers are pulling back on some of their titles if the cost of manufacturing a book goes up …" says Tobin. "[But it can] cause publishers to evaluate whether or not to print a book, and that usually impacts reprints."
To combat paper-price increases, publishers tend to purchase paper in advance, while some of the larger manufacturers that supply paper to their customers pull rank.
"For the Donnelley-furnished stock, the strategy is to leverage the buying power of being part of an $8 billion company that purchases a lot of paper," says Lane. "[We also] focus on performance and efficiencies in the manufacturing process to minimize waste." That means essentially adding zero-makeready presses to the operation.
Others fear that rising paper prices may push publishers to offshore markets.
"We heard reports that high paper prices could cause publishers to look overseas for manufacturing," says Charles "Tuck" Krehbiel Jr., chief executive officer of CJK. "If they have to pay more for paper, they're talking about paying less for manufacturing."
"I had one customer tell me that India has not had dramatic paper price increases," says Rob Krehbiel. "Suddenly it has become a very desirable region to produce books. It used to be China, Shenzhen, but for whatever reason, India has been holding the price on paper."
Offshore's Here to Stay
Offshore manufacturing is a reality in today's book market, and, to put it bluntly, book manufacturers either need to adapt or perish, according to many in the industry. Strategies to compete with offshore facilities run the gamut from establishing plants overseas to offering discounts on reprints.
Last year, Donnelley continued to develop its global book-sourcing platform to serve customers looking to produce books in China. "Our approach is to provide customers with a global-sourcing solution," says Lane. "So if a client of ours can deal with [the] cycle-time requirements of a sourcing solution in Shenzhen, China, we'll work with them to make that happen."
Donnelley also offers their clients a "rapid reprint scenario" that provides a domestic option for publishers that are unable to work with the lead-time of manufacturing a reprint overseas.
CJK has a similar program it offers to key customers, where it will run a reprint of a job that was originally produced overseas. CJK will treat it as a reprint in its plant. And while manufacturers with offshore facilities have put in place safeguards to prevent piracy associated with offshore manufacturing, Quebecor World uses facilities in Latin America (called nearshore) for customers who are wary of producing titles overseas.
"We have a plant in northern Mexico, about two hours from the [Texas] border," says Clarke, who adds that the turnarounds can be anywhere form two to four weeks, compared to eight to 12 weeks from India or China. "We're seeing a tremendous ability to help our publishers, and we've reclaimed work from China."
For a manufacturer such as Courier, which does a lot of its work in the education market, the offshore trend, so far, has had little effect on its business, but Tobin recognizes the offshore market needs to be watched closely.
"So much of what we do is in the education marketplace, and the time to market, particularly for reprints, is so critical," he says. "Some publishers have tried to go offshore, [but] none have embraced it wholesale. Some of our religious publishers, specifically in Bibles, are doing some work in Asia, and we're watching that very closely. So far, it's impacted us in small areas."
Tobin says while nothing is definite, Courier has talked to potential partners in other countries in an effort to form some offshore alliances.
Sunny Optimism Remains
While challenges remain, manufacturers are upbeat about the remainder of 2005 and beyond, and continue to invest in new equipment and technologies to attract work. And with textbook adoptions on the rise, and a new "Harry Potter" on the way, it appears the work will keep coming.
"It's still a competitive business, and we continue to focus on things we've done in the past—core productivity, cost reduction and integrating our U.S. capabilities with international capabilities to meet our client's needs," says Lane.
"[Education and trade] are causing some real optimism in 2005," says Tobin. "Our plants have a good solid workload, and we're projecting the summer to be a very busy time period for us."