No More Big Squeeze
Book manufacturers and publishers used to squeeze each other to cut costs at the other's expense. Now they are cutting costs together in partnerships of convenience.
Welcome to 2004. It's like 2003, only the recession's grip has lessened. Production managers continue to shave a penny here, save a dollar there, while keeping up hope that the vaunted recovery will hit their employer's slice of the book publishing industry soon.
Meanwhile, large retail and bookstore chains are returning books by the truckload, according to industry regulars. This dilutes revenues and increases costs for the publishers, leaving them with diminished cash flow and pinched profits.
With publishers all the poorer, book manufacturers aren't dancing in the aisles over the alleged recovery of the U.S. economy, either. Certainly it will come, but it's not here yet, according to several book manufacturers Booktech spoke to.
Book manufacturers are continuing their quest to increase sales and profits, while they cut costs and look for more savings. This quest for greater efficiencies is certainly a factor in the recent wave of mergers and acquisitions among book manufacturers and component makers.
For recession-weary book publishers and manufacturers, the process of cost containment and reduction goes on. And that, say the publishers and manufacturers we spoke to, is actually a good thing. Surviving the recession has resulted in leaner, meaner publishing and manufacturing organizations.
For production managers, cutbacks and consolidation of offices, plants, managers, and staff means they have to do more with less. Faced with smaller teams and budgets, publishers and manufacturers leveraged their relationships to help their organizations maintain productivity, quality, and a competitive edge.
"The biggest change I see in the traditional relationship is the one of the publisher sitting down with the printer and demanding lower prices," says Owen Mitchell, VP for global supplier management at Pearson Co., an international media company based in London and New York.
In the past, when a publisher squeezed their printer on pricing, the onus was on the printer to cover their fixed costs with greater plant utilization (as the manufacturer's margin shrinks, plant productivity should, ideally, increase to compensate).
Now with recession-era economics still squeezing publishers and printers, the pressure is on both parties to work together and find efficiencies. "We work to create joint teams to attack the costs of raw material and labor," Mitchell says. "The ideal situation is that we get to a lower price, and help the printer secure net income and assets."
Last year was 'challenging' for most book manufacturers, a euphemism for 'lousy'. The recession sucked the life out of nearly all manufacturing sectors in 2001 and 2002; book manufacturing was no exception.
The Book Industry Study Group (BISG) projects domestic publishers' 2003 net sales will, in the final analysis, hit $27 billion, up only 2.7% over 2002. For 2004, BISG estimates a modest 3.4% increase in publishers' net sales, to about $28 billion.
Categorically, trade, mass-market, and professional sectors will average increases in the 2.3% to 2.5% range for 2004, BISG researchers predict. El-hi will be up 3.6%, hitting $4.3 billion, while college sales will increase by 8.3%, to roughly $4.6 billion.
TRADE HIT HARDEST
"We've seen some good progress in the school division, with growth of 4% percent for the grade school and secondary school markets," says Jacques Gregoire, VP for the books group at Transcontinental Printing Inc., in Montreal. "The hardest hit is trade," Gregoire says, as the largest booksellers burn through inventory without reordering, in response to an anticipated sales increase that failed to materialize.
The first half of 2003 was "slow for trades, better for education," says Ed Lane, president of the book group at R.R. Donnelley & Sons Inc., Chicago. Next year Lane projects a reduction in el-hi sales, as school districts are finished with textbook selection and replacement. But the trade business, Lane says, should pick up. Overall, 2004 "will be challenging, but 2005 and 2006 will see a more robust recovery," Lane says.
Despite the recession, Quebecor World Inc., Montreal, saw an increase in its trade business, but the year remained a "challenge", says Jerry Allee, executive VP of book services and president of international sales.
"Publishers [tell us they] view the first half of 2004 conservatively at this time, but they indicate that inventories are being reduced to levels requiring reprinting," Allee says. "In addition, we are told they will continue to tightly manage their inventory, placing emphasis on speed-to-market and faster turnaround."
So how do printers and publishers increase their bottom line when the top line isn't growing? In addition to the cost cutting, some have been spending, applying manufacturing and computer technologies to profitably change how they do business.
Even as management cut back or consolidated offices, plants, managers, and staff, investments in technology continued, even increased. This bucks the general trend among businesses during the recession, many of whom pulled back or canceled planned technology upgrades and initiatives.
"The trick is to harness technology," says George Davidson, associate director of GDP Publishing Associates Inc., a production consultancy in New York. "You use it in the best way to create greater efficiencies."
And greater market opportunities. "We don't want to limit ourselves to putting ink on paper," says Transcontinental's Gregoire. To that end, Transcontinental is focusing on offering more print-related services to book publishers, and is using technology to cut costs all around.
Color management is one such service. The company started offering the service last year, and will be pushing it harder in 2004, Gregoire says. The service involves a Transcontinental engineer visiting the customer site, calibrating proofing systems (computers, monitors, printers, etc.), then training users to generate color proofs that look the same on press as they do on screen or page.
Another service being aggressively promoted at Transcontinental: remote soft proofing. Transcontinental offers both the service, the software, and the on-site training to help publishers quickly leverage this popular and cost-saving approach.
The soft-proofing service depends on a reliable exchange of PDF files, so helping publishers learn to generate PDFs for e-proofs is another crucial service. "It's important they build their files to our standard, so when they reach the plant there are no hiccups," Gregoire says.
Gregoire projects 100% of publishers will be proofing 100% electronically in two to four years, noting that PDFs already comprise about 50% of all proofs handled by Transcontinental.
At Quebecor World, efficiency means increased capital spending, with specific goals in mind. The company purchased a Hewlett-Packard Indigo 3000 digital press to handle custom publishing and short print runs on demand at lower cost per page.
Another $19 million is being plowed into Quebecor World's Dubuque, Iowa, plant, to make it "an efficient producer" of elementary, high school, and higher education textbooks. The plan calls for the revamped plant to be on-line in the second quarter.
"This investment was driven by customer feedback," says Allee of Quebecor World. "[Textbook publishers] indicated that an investment in a specialized facility that enabled them to create efficiencies and reduce cycle times was the correct approach to winning more of their business."
Translation: textbook publishers aren't content to place large orders that end up in some warehouse, unsold, on the inventory report. They want shorter runs, and more highly customized runs, too.
Quebecor World's goal: to become an agile producer of shorter textbook runs, allowing the book manufacturer to efficiently react to 'demand spurts' just in time. And by investing in customized and shorter run textbook capabilities, Quebecor World can potentially reduce returns.
But the emphasis is not exclusively on cost containment, cutting, and technology investment. Book publishers and manufacturers are coordinating their technological strides with their indispensable human assets.
Take R.R. Donnelley, which optimizes its operations using a process called 'continuous improvement'. The process started four years ago when Donnelley implemented its own 'Six Sigma' program, using trained statisticians to gain greater insight and control of its processes, to ultimately improve efficiency, says book group president Lane.
(Six Sigma is a serious analytical discipline, where any process can be made consistent and efficient through thorough statistical analysis. Think of it as throwing algebra at workflow problems.)
"We use [the statisticians] to identify and address the bottlenecks and big challenges across the [manufacturing] platform," he says. The performance of these 'process managers' keeps getting better year over year, Lane says, as their knowledge about the company and its processes grows.
Manufacturers are also looking beyond North American borders for lower labor costs and comparable production quality. R.R. Donnelley is increasingly assigning print jobs to company-owned plants in Mexico and China.
Book publishers with projects that can afford longer lead times can gain significant cost savings by going abroad, says Donnelley's Lane. U.S. plants can be reserved for spot printing extra books on demand, if sales of an offshore-produced title take off.
"If there is a long enough lead time, we can leverage China," Lane says, pointing out that Donnelley's book manufacturing plant in Shenzen is no different—with identical plant designs and equipment—than Donnelley plants in Roanoke, Va., or Willet, Ohio.
Then comes the recent $2.8 billion merger with Moore Wallace Inc., which capped a year of mergers, acquisitions, and consolidation throughout the book printing, manufacturing, and components sectors. The merger will take a year to close, and some consolidation will be seen, Lane says.
Pearson's Mitchell says publishers are also becoming more analytical, not just about their workflow, but about their business relationships.
"We are moving into an ever-increasing metric environment," he says. "We're working with our suppliers to drill down into the relationship. You measure where the cost drivers are, and you take steps to leverage them out of your operations."
It is not data analysis for the sake of it, but rather gathering information of value across the supply chain, and making decisions based on that data. It's not the only tool, says Mitchell, who cautions "being wedded to any one technique," but it's certainly one of the new tools borne of a recession-era economy that will likely remain on the tool belt in years forward.
One insight Pearson has learned: paperless transactions are faster, easier to audit, and save money. The publisher is aggressive about eliminating paper in supplier relationships and the workflow.
Instead of paper, they're using electronic purchase orders, invoices, remote proofing, and digital file transfer. Whenever technology offers a compelling reason to change the way business is done, such a change is pursued, Mitchell says: "There is no question that [this] is driving down the cost of business. We are targeting at least a 5% productivity improvement every year."
Global sourcing is also gaining favor among publishers and manufacturers. With the ease and ever-lower cost of proofing and transmitting publications electronically, publishers are increasingly willing to consider printers and manufacturers not just in their backyard, but around the globe.
Caution and focus are the watchwords in the education market. "We said we were recession-proof," says Susan Badger, president of the Wadsworth Group, Belmont, Calif., a unit of Thomson Learning Co. (owned by Thomson Corp.). "But state and local budgets took a plunge in the past year, affecting textbook sales."
One example Badger cites is North Carolina State University, where, at the last minute, 25 sections of introductory Spanish were cut for budgetary reasons, even though registrations were there.
Publishers and manufacturers say it's hard to get a 'gut feeling' for 2004, as many customers have yet to decide what their purchases will be. In these uncertain times, publishers must be more creative, focused, and forward-thinking, trying new technology solutions, business models, and price/value schemes that yield additional profit.
Two technology areas where Thomson/Wadsworth is investing are sales force automation (SFA) and content management (CM). On the SFA front, salesmen are being outfitted with tablet PCs to increase mobility and productivity, and provide a platform to demonstrate technology, Badger says.
For content management, Thomson/Wadsworth will be looking to assemble textbooks from a content database, to easily customize and personalize products to suit customer needs.
MOVING FAST IN SLOW TIMES
Penguin Group UK has also felt the U.S. recession's wrath, and is working to make the best of lean years. "The state of the economy in the U.S. has badly affected our trade book sales this year," says Liz Allen, group production director, in New York. "There has been a dramatic falling off of backlist sales, which are our bread and butter."
Even so, Penguin is "investing quite heavily in new systems right now," she says. "But this is in the context of a mature company that has failed to invest enough in technology in the past."
Penguin now appreciates the "huge cost and efficiency benefits" that the publisher can get by managing its supply chain better, Allen says. "This is the area where we are making the most investments. Capital investment is crucial when times are tough, but still must be clearly targeted to bring real benefits."
Grove/Atlantic, a New York-based book publisher, also threaded its way through the eye of the recession's needle. "In general, it's harder to sell books, and even when it works, it doesn't work as well," says Morgan Entreken, president and publisher of Grove/Atlantic. "The accounts take fewer books, and it's harder to get sell-through."
Being small has advantages and disadvantages. "We're not saddled with large overhead that requires huge volumes," Entreken says. "Nor is the house shackled to expensive contracts with authors negotiated in better days but we're probably more vulnerable, because we are not part of a big media group."
This really hit home when Grove/Atlantic got hit with heavy returns. "There's [consumer] resistance to buying fiction by a promising new author at $24," Enteken says. To compensate, Grove/Atlantic is publishing new authors, foreign authors, and books aimed at the youth market as paperbacks, skipping hardcover as the traditional first step. "People are starting to understand that it's better to market 2,000 trade paperbacks than 3,000 hardcovers and 2,000 paperbacks," Entreken says.
Entreken also found out that he can better market hardcover books after the movie version is released. Cold Mountain is being re-released in hardcover to take advantage of its late-December movie release, and a follow-up print run is being pondered.
Then there are simply smarter, more efficient ways to bring books into print that can shave production costs and time. "I'm doing a lot of single-sourcing for my paperback titles," says Muriel Jorgensen, production director at Grove/Atlantic. Text and covers are going direct-to-plate at an R.R. Donnelley plant in Oregon. The plant is only two days from Jorgensen's warehouse in Reno, Nev., which improves turnaround time.
Another tactic: print two sets of proofs, and keep one at the printer for reference, Jorgensen says. Changes are phoned in, rather than consuming budget dollars to send proofs back and forth via overnight mail. Subsequent color proofs are PDF files sent via e-mail.
WHEN IN DOUBT, BID IT OUT
There are also the old fashioned ways of working smarter, such as sourcing work wherever the best price is found. Right now, Grove/Atlantic places hardcover jobs with one printer, and gets book jackets from another, because the price was lower than single sourcing. And advance reading copies were sent to Lake Book in Chicago, because they could deliver a one-week turnaround.
Other mid-sized publishers note the same challenges. Last year saw no break-out book for North Carolina-based Baen Publishing. The house had a good 2002, thanks to a best-selling release by science fiction author Dave Webber. "That skewed our numbers," says publisher Jim Baen.
But 2003 was the same, without a blockbuster. Helping sales, however, was the company's Web site, 'The Bar', at Baen.com. "It translates into hidden customer support for our titles." Baen says.
Sales to retail chains are off by 25% at Byron Preiss Visual Publications, in New York. "The recession has resulted in significant decreases in national account sales," says company founder Byron Preiss. Here again, experimentation and innovation, handled prudently, helped to stem the flow of red ink.
In Preiss' case, that meant increased investment in e-books for Palm Digital Media's Palm Reader platform. "We've been successful with books and DVD packages, and book-and-CD packages for children, such as Jerry Seinfeld's Halloween," Preiss says. "We have also added subscription cards to our MAD paperbacks at [client] DC Comics' request. They supply the cards, and we bind them to the books."
From a book publisher's point of view, the need to push for efficiencies is no less compelling. Pearson Co. is setting up its preferred list of suppliers, negotiating price scales, and creating a climate of controlled competition for all its business units, says VP Mitchell.
Printers are keen to get their business, and will offer more to get it. That might mean offering all the services a worldwide book printer or manufacturer has to offer, regardless of whether those services are based in North America or somewhere else on the globe.
Officials at Quebecor World agree they're keen to get the business, and constantly look to add value beyond a competitive price. The company actively works to get its business units to work together, to build sales through closer customer relationships.
"By combining the resources of all Quebecor World business units, we have effective answers for most business challenges," says Quebecor World's Allee. "These solutions include creative market development programs, mail list services, pre-media and efficient manufacturing featuring every binding/finishing style. Supported by our logistics network, we can deliver our customers' products both domestically and internationally."
The recession has compelled publishers and printers to take a new look at their old relationships, and figure out where and how more value can be squeezed out of them. From the pain of a stalled business climate came a renewed focus on the fundamentals.
Companies are not just cutting costs, doing M&A's, offering more services, investing in new technologies, and stepping outside traditional borders to stay competitive. They're doing it to stay around.
- William Terdoslavich