Preview of FORMTRAC 2002 highlights

By Ivars Sarkans

Forms manufacturers along with many other printers have felt the impact of the slowing economy during the first half of 2001. Before September 11, 2001, NAPL and PIA forecasts called for gradual strengthening of the general economy during the second half of 2001. The threat of a recession appeared to be diminishing.

The September 11 attack on the U.S. changed the outlook for the second half of 2001 and the next year. According to current PIA forecasts, the economy can be expected to experience a mild recession during the third and fourth quarters of 2001. Recovery during 2002 will be slower than previously anticipated. This change in general economic outlook will extend the challenging 2001 environment for the entire printing industry, including forms manufacturing, well into 2002. This preview of FORMTRAC 2002, scheduled for publication in early 2002, presents some of the latest forms industry forecast highlights for 2002-2006 and estimated product sales in 2001.

BUSINESS ENVIRONMENT
NAPL data on the U.S. economy show an abrupt slowdown starting in the third quarter of 2000. Exhibit 1 illustrates this major change in the quarterly real GDP (gross domestic product) growth, from an average over 4% during the third quarter of 1999 through the second quarter of 2001, to below 2% starting in the third quarter of 2001. Initial weakness in the technology sector and internet-based businesses during the second half of 2000 spread to the entire economy during the first half of 2001. PIA estimates that the September 11 attack will contribute to a .5% GDP decline during the third quarter of 2001 and a .5% to 1.0% decline during the fourth quarter.

EXHIBIT 1:

Sources: NAPL - through Q-2, 2001; PIA- Q-3 -Q-4 2001

Sales of printed products, including forms, suffered a steep drop following September 11, 2001. According to a PIA survey, a 17% decline in printed product sales during September, equivalent to approximately $2 billion, can be attributed directly to the attack. While 34% of printers surveyed by PIA reported no impact on their sales from the September 11 attack, 66% reported sales declines ranging from 5% to over 10%. For the entire second half of 2001, sales of all printed products can be expected to fall approximately $3.3 billion below PIA 2001 forecasts made before September 11, equivalent to 2% of annual printing industry shipments.

PIA forecasts a gradual recovery in printed product sales during 2002, but the rebound will take longer than anticipated before September 11, 2001. PIA expects advertising expenditures and related printing sales to recover slower in 2002 than the overall economy. PIA estimates that the total loss of 2001-2002 printing sales due to the September 11 attack and subsequent mild recession will exceed $6 billion. Exhibit 2 presents a summary of printed product sales estimates by PIA before and after September 11, 2001.

EXHIBIT 2:

The forms industry generally had a difficult year in 2001, even though some manufacturers and many distributors report increases in sales of conventional forms and other printed products. Preliminary FORMTRAC 2002 estimates based on data from over 700 manufacturers that produce forms or use the forms industry as a distribution channel indicate that sales of products other than conventional forms could not replace all of the erosion in demand for unit set and continuous forms. Total retail value of all conventional forms sold in 2001 declined by approximately 6.6% from 2000, while sales of other printed and promotional products increased only 0.4%. The general decline in business advertising and promotional expenditures during the second half of 2001 affected direct mail, commercial printing and advertising specialty sales by forms industry participants. Overall, retail value of products manufactured and sold by forms suppliers declined approximately 3.5% in 2001.

FORMS INDUSTRY OUTLOOK
Formtrac 2002 projections of total forms industry sales at retail value include all products and related services manufactured and distributed by forms industry participants. This is a distribution perspective of the forms industry, recognizing the value added by distributors, manufacturing operations owned or operated by forms distributors and sales of products other than conventional forms. On this basis, preliminary estimates indicate that total 2001 forms industry sales were approximately $13.6 billion, down 4.5% from 2000. For the next 5 years, the overall size of the industry can be expected to remain stable, with small annual increases in total sales to approximately $14.2 billion in 2006.

Behind the overall apparent stability of the industry are projected major product mix shifts that will challenge manufacturers of conventional forms and expand the role of manufacturers who use the forms industry as a distribution channel for products other than conventional forms. Conventional forms, which constituted 52.2% of industry sales in 2001, are projected to be 41.7% of the industry product mix in 2006. Exhibit 3 shows the projected total forms industry sales though 2006 and the product mix shift from forms to other products and services.

EXHIBIT 3:

Source: Preliminary FORMTRAC 2002

The conventional forms product category includes custom continuous, stock continuous and other stock papers, short run forms and checks (software-compatible continuous and cut sheets) produced in specialized plants, unit sets, and manual system forms such as salesbooks, pegboard, register forms and 3-per-page business checks. Retail value of total conventional forms sales will be approximately $7.1 billion in 2001. This product category will continue to decline gradually to a projected $ 5.9 billion in 2006. Demand for several products within the broad conventional forms group will remain stable or even increase during the forecast period, including forms produced in 50" rolls, short runs, self-seal single ply mailers, form-label and form-card combinations, and documents with security features.

The annual total volume change in retail sales from actual 1997 through projected 2006 for the three main groups of conventional forms that will have the highest rate of decline are custom continuous, unit sets and stock continuous forms and stock papers. Direct-selling manufacturers will generally experience greater volume erosion in these conventional products than the independent segment. This is partly due to conventional forms plant closings by the Directs and selective increase in their purchases from trade manufacturers. Decline in sales of stock forms and papers will be moderated by strong demand for processed paper in 50" rolls and distributor sales of a wide variety of stock papers for office machines.

With the exception of 2001, the forms industry has been successful in growing sales of other products to offset declining demand for most conventional forms. The "other products" category consists of five distinct products groups: direct mail, commercial and quick printing, labels, tags and tickets, finishing services and advertising specialties. Formtrac 2002 estimates and projections of sales in these groups includes products manufactured in forms industry plants and forms distributor sales of products purchased from trade suppliers outside the forms industry. Total sales of these "other" products at retail value will be approximately 6.5 billion in 2001, and continued growth in all five groups is projected to raise this total to approximately $8.3 billion in 2006.

Exhibit 4 shows estimated 2001 sales for the five groups of "other" products relative to historical data from 1997 and projections for 2006. Commercial and Quick Printing also includes binders, indexes, presentation folders, envelopes, stationery and business cards. The labels, tags and tickets group includes a small but growing volume of packaging products printed mostly on label presses. Finishing services includes affixing, integrating, die cutting, foil stamping, binding, personalization, imprinting, digital printing, forms repair and other services purchased by distributors from a wide variety of specialized trade suppliers.

EXHIBIT 4:

OTHER PRODUCTS Shipments at Retail Value - $ millions
	1997	2001	2006
Direct Mail	1,132	1,287	1,620
Commercial & Quick Printing	1,658	2,450	3,076
Labels, Tags & Tickets	1,738	2,268	2,798
Finishing Services	245	340	505
Ad Specialties	4,877	6,503	8,251
Source: Preliminary FORMTRAC 2002

Exhibit 5 details the annual total volume change in retail sales from actual 1997 through projected 2006 for the three main groups of "other" products that offer the greatest diversification opportunities for forms manufacturers: direct mail, commercial and quick printing, and labels, tags, tickets and packaging materials. Total direct mail sales by forms industry participants declined in 1999, partly because Standard Register sold their Colorforms operation to R.R. Donnelley. Direct mail volume has also been affected by general economic conditions and reduction in sweepstakes promotions. Commercial printing sales by forms industry participants declined in 2001 due to termination and consolidation of commercial printing operations by several direct-selling forms manufacturers. Distributors have achieved rapid sales growth in advertising specialties, but the vast variety of products and large number of existing specialized suppliers in this category appear to limit the opportunities for most forms manufacturers. The advertising specialty industry is very fragmented and it may be possible for some forms manufacturers to become significant participants in this field through acquisitions and pursuit of other distribution channels.

EXHIBIT 5:

SELECTED PRODUCT FORECASTS % Annual Change @ Retail Value
	Direct Mail	Commercial & QPs	Labels & Tags
1998	9.1%	41.4%	8.9%
1999	-3.1%	8.4%	9.6%
2000	5.8%	6.3%	7.4%
2001	1.7%	-3.4%	1.8%
2002	2.8%	2.8%	3.0%
2003	4.7%	4.8%	4.4%
2004	5.4%	5.4%	4.8%
2005	5.9%	5.4%	5.0%
2006	4.8%	5.0%	4.2%
Source: Preliminary FORMTRAC 2002

FORMS MANUFACTURER CHALLENGES
One of the major challenges facing forms suppliers, and especially trade manufacturers, is definition of the industry. Distributors and direct-selling manufacturers are diversifying aggressively into products and services other than conventional forms. Traditional core forms products are less than 50% of total product sales for an increasing number of distributors and will soon be below that level for the entire forms industry. Can forms still be considered a distinct industry or are forms now a product niche in a much larger printed business products industry? The growing overlap between various printing industry segments such as forms, labels, commercial printing, digital on-demand printing and print-related services points to the need for a new industry definition based on a vision of how forms and related segments of the printing industry will converge and develop in the future.

A related challenge is the lack of businesses that are clearly identifiable leaders and role models for the transition from forms to a new vision of the industry. In the past, when a limited number of large direct-selling manufacturers dominated the forms industry, smaller manufacturers could look at these industry leaders for examples, ideas and business models. Today, the forms industry is very fragmented, large direct-selling manufacturers have a smaller share of the market and each of these companies is pursuing a different strategy to supplement their sales of conventional forms and adapt to market and technology changes. It is even possible that present forms industry participants could gradually disperse among various printing and business document specialties rather than remain united under a common new industry definition.

Another challenge for forms manufacturers is the gradual migration of forms production from conventional plants and presses to various types of document factories, service bureau operations and digital printer operated by end users. This migration has been so gradual and invisible that most forms suppliers have not taken advantage of new digital information management and document production systems to retain more of their core business. Forms industry trade manufacturers face the additional challenge of distributor diversification strategies that diverge from the capabilities of most existing forms plants. Some of the forms industry growth products and related services, such as direct mail, on-demand digital printing, document processing and commercial printing can be difficult to sell through distributors.

Formtrac 2002 projections show that demand for conventional forms will decline gradually rather than abruptly, which should give most manufacturers time to adapt and develop strategies for coping with the industry challenges. It is reasonable to expect more consolidation of both manufacturers and distributors, and a consolidator strategy can be an effective option for manufacturers who chose to focus primarily on conventional forms. Specialization in a narrow product niche is an excellent strategy for smaller manufacturers or plants, and is being pursued successfully by some producers of short runs, security documents, checks, mailers and other common or unique products. Many forms manufacturers are also following the industry product mix trend shown in Formtrac projections by diversifying their product capabilities. Manufacturers who recognize that forms will gradually become a specialty niche within a larger business document industry should be able to adapt by taking advantage of new technology, alternate distribution channels and opportunities in print-related services.

Ivars Sarkans is a noted industry consultant based on Los Angeles. He can be reached at isrkans@sarkans.com, or by calling 323-221-7791.

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