Prices and Costs and Profitability: Oh My!!

By Andrew Paparozzi
In April 20, 2010

With much of the media focus on recently enacted health care reform legislation, pending financial reform, and the continuing large number of unemployed, the government’s inflation reports for the most part have been pushed to the backburner—not eliciting much attention when released. One reason for the muted reaction: Overall inflation has been relatively benign to non-existent. The latest government data on inflation from the Bureau of Labor Statistics (BLS) show that on a year-over-year basis prices at the producer level have begun to trend upward. In February, the index for finished goods was 4.4% above a year ago—the third monthly year-over-year increase in a row after 11 straight monthly declines. Granted, when food and energy are excluded, much of the increase disappears. The PPI for finished goods excluding food and energy was up 1.0% in February compared to a year ago. On a similar basis, the CPI was up 1.1% in March. These are not exactly the kind of inflation data that would generate deep concerns over an inflationary spiral.

Nonetheless, we can’t afford to be too complacent over inflation—especially given the competitive nature of our industry. Granted, data on prices and profitability from the NAPL Printing Business Panel are improving. As of February, fewer members of the Panel report prices are falling and the highest percentage in two years—46.2% report prices are steady. Reports of declining profitability—47.8%— still exceed reports of rising profitability by two to one, but the gap has narrowed from 10 to 1 last spring (73.7% to 6.9%). However, if history is any guide, pricing power will not be returning to our industry until the recovery is well established, if then—if you’re essentially in a commodity business it may not be returning.

Insert the likelihood of rising business costs (paper, ink, toner, energy, taxes, fees, etc.)—40.7% of the Panel report paper prices increased in February, up from just 6.9% last August and the highest reading since December 2008—and you’re staring at quite a challenging combination. Cost cutting and productivity gains remain essential in providing some relief from any negative pressures on profitability, but relief is not a cure. In many cases, the latter may require fundamental business model/value proposition changes in order to move away from the commodity aspects of print. And remember, just adding standalone services is far from being the answer—technology is quickly commoditizing the services printers have been diversifying into. For more discussion on avoiding commoditization and confronting the “changing rules of recovery,” see the upcoming NAPL Strategic Perspective 2010. A key rule—regardless of the state of the economy—is one of picking our value proposition carefully. For many, this will entail a move toward providing integrated solutions. That journey isn’t going to be easy and there’s no yellow brick road to follow, but for many companies that want to become leaders or remain leaders—the trip is a must.

Andrew Paparozzi        Joseph Vincenzino         Kong Lue Wang

Andrew Paparozzi

Epicomm's Andrew Paparozzi, Vice President/Chief Economist, is well-known for his accurate and thoughtful discussions on the economy and US commercial printing industry. A foremost author and speaker on economic business trends in the printing industry, Paparozzi heads Epicomm's Printing Economic Research Center.

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