Economic Challenges with Strategic Agility

At the beginning of 2024, the wide-format digital printing industry stands resilient against economic headwinds. With a lens of cautious optimism, industry players have not seen a worsening of conditions but do face continuous margin pressure from both operating cost inflation and stiffened resistance to price increases. Yet, this has spurred a strategic pivot towards maximizing productivity and aggressive revenue generation. Amid these challenges, there’s a silver lining: The fear of recession is waning and companies are seizing the day with robust capital investment, determined not to be outpaced. The spirit within the industry is one of proactive adaptation, with a notable shift toward automation and strategic planning, positioning for growth despite the odds.

Peering into the crystal ball for 2024, Andy Paparozzi, chief economist at PRINTING United Alliance offers a tempered forecast. Growth will be there, but it will be modest, mirroring the tentative steps of an economy still reeling from interest hikes and the fading warmth of stimulus measures.

WFI: How do you view the current state of the slowdown?

Paparozzi: It hasn’t gotten worse. Margins are under pressure because of operating cost inflation, which has moderated considerably as supply chains have healed. But resistance to price increases has stiffened, and it’s continuing to pressure margins.

Things have not degenerated further since mid-year. The slowdown is still meaningful and still requires an all-out focus on maximizing productivity, controlling costs, and building revenue. But confidence has increased a bit since our mid-year reading.

WFI: What are the reasons for that?

Paparozzi: I think for two reasons. Number one, the mindset is that the fear of recession is fading. That does not mean they expect things to get better, but it’s the sense that maybe the worst isn’t going to happen, and maybe it’s even going to get a little better. So that’s kind of the good news. In February, only about 57% of the panel said they planned to make a capital investment over the next 12 months. That jumped to nearly 70% in November.

Second, I’m convinced of what you might call “fear of falling too far behind.” More and more of the participants in our research have realized something: don’t wait for interest rates to come down or the economy to turn up. They’re recognizing, “I have got to move ahead with capital. I have got to move ahead with my plans to build revenue because if I don’t, I’m going to fall too far behind, and I’m not going to be prepared for that upturn when it comes.”

I find that’s a very encouraging mindset. It’s encouraging to see so many who are embracing that. A lot of companies across our industry, not just in wide-format, when the economy turned down, went into survival mode, and were waiting for something to happen. What’s encouraging is the number of companies that are increasingly saying, “We’re not waiting; we’re going to invest and we’re going to pursue both revenue and cost-side actions to build margins in 2024.”

WFI: Sales seemed to be robust at PRINTING United Expo. Was that expected or surprising?

Paparozzi: It confirms what’s coming out of our research — a significant increase in the number of companies who recognize they’ve got to move ahead with CapEx. I spoke to people at Expo who were saying, “We’re going to wait for interest rates to come down,” and that’s not a winning strategy, and I think at Expo you saw a growing mindset, a growing recognition, that we’ve got to move ahead with our business plans and capital investment. I saw that, and I was very interested because that was not the case in February.

The wide-format printers who participate in our research see an opportunity to capture market share from weak competitors who are not going to be able to function with elevated interest rates, tightened credit, and a persistently weak economy. They see that as an opportunity. It’s a mindset that’s optimistic — not about overall business conditions but about their ability to capture market share.

WFI: What are you seeing as specific barriers to profitability in the wide-format segment?

Paparozzi: We asked them, “What’s had the biggest effect on your profitability so far this year,” and the number one answer — 68.7% — said the economy, interest rates, and inflation. Seventy percent said the availability and cost of personnel. And they talked about the cost of labor rising too fast for them to pass it along.

Also, we asked what factors have had the most positive effect on profitability this year, and respondents mentioned capital investments to increase productivity, production speeds, and automation. That’s what’s boosted productivity so far this year, even though the economy has not cooperated and costs have risen. It makes perfect sense that they’re growing. They’re moving ahead with the kind of investments necessary to maximize strength and profitability by increasing productivity.

WFI: So, they’re doing more with the same staffing?

Paparozzi: Yes … automation to do more with fewer staff but also to increase the productivity of the staff they have. A high percentage are investing in workforce development, cross training, recruiting, and retention. And building a company culture that attracts and retains the most desirable, productive employees.

Also, competencies required are changing. We asked, “Are there any positions in your company for which the skills and competencies required to do the job well are changing?” A majority said there are, and indicated which positions, and I thought that was very interesting. We all know about labor shortages, but they didn’t just talk about production personnel — competencies and skills required are changing significantly right at the top. Trying to run one of these companies is becoming much more strategic. The gamut of opportunities is expanding, but the margin for error is shrinking. So now they are talking about the kind of skills required to be effective in everything from strategic planning to execution to personnel development.

WFI: In terms of the growth you’re seeing in wide-format segment, do you think it’s tracking with other print segments, or is it growing faster than, let’s say, commercial?

Paparozzi: It’s growing much faster than commercial printing can. That’s why so many commercial printers are moving into wide-format. It’s definitely growing faster than the industry at large — and certainly the commercial segment. Absolutely, wide-format is growing much faster.

WFI: Do you see companies looking at automation, or at efficiency, to shore up margins? Do you see margins slipping?

Paparozzi: In the survey, we ask not for the actual profitability rate, but the profitability trend. “Is your pre-tax profitability higher, the same, or lower than during the same period last year?” For 2022, 56% of the wide-format printers in our panel reported that profitability was higher than the year earlier, 16.7% the same, and 27% lower. For the first 3/4 of 2023, those numbers were very different. Only 38.2% said profitability was higher, 27.5% the same, 34.3% said lower. So, the trend is because of a significant slowdown in the economy, persistent cost inflation (particularly labor costs), and a growing resistance to price increases. That’s pressuring margins. So, that trend makes perfect sense with everything else they tell us. That’s the big issue. Economically, they’ve been under increasingly great pressure in 2023.

WFI: Looking at 2024 — a little bit of forecasting here — are you expecting reasonable growth for wide-format?

Paparozzi: We asked that, and I’ll tell you what the panel said. Overall business conditions, the business climate in 2024, is going to look a lot like 2023. We shouldn’t expect much help from the economy, even if it skirts recession. It is still going to be very weak, and the reason for that is two-fold. All those interest rate hikes that started in February of 2022 can take up to two years to work their way through the economy, so we haven’t seen anywhere near their full effect. Second, all that stimulus that followed COVID is now fading, so the consumer is going to start to weaken. So even if the economy skirts recession in 2024, we should not expect it to grow much more than 1-1.5%, which is quite modest.

WFI: Are there specific headwinds for the wide-format segment?

Paparozzi: It’s very unlikely the economy is going to strengthen next year, and the possibility of recession is not off the table because, again, we have not seen the full effects of interest rate hikes and the tightening of credit. It’s still going to be a very challenging, unforgiving business environment. Labor will still be in very short supply, and margins will still be under pressure because of the weakened economy and weakened demand.

Companies in wide-format were able to pass along price increases. Everybody was kind of in the same boat. Oh, and by the way, inflation was going to be “transitory.” We kept being told that, which was utter nonsense. Price resistance is getting stiffer because customers are trying to protect their own margins — they’re dealing with the same thing: persistent inflation, particularly rising labor costs. So, where they were kind of willing to accept cost pass-throughs in 2022, they’re resisting it. They did it in 2023 and conditions will be such that they’ll continue to do it in 2024. That’s a headwind, and that has to be offset by productivity gains, or come out of the bottom line. What was a headwind in 2023 is going to be a headwind in 2024.