Wednesday, January 16, 2008

2008 Print Budget Realities

2008 Print Budget Realities
Everyone wants to know the future, particularly when it relates to love and money. While we can't help in the love department, we can do something about the money part . . . at least as it relates to the cost of printing in 2008.

We spoke with industry expert Dick Gorelick, president of Gorelick & Associates, Inc. and the Graphic Arts Sales Foundation, and asked him what he predicts for the coming year.

PS: Is it inevitable that costs will rise for printing in 2008?
DG: Yes. We believe that unit costs of manufacturing and distributing print will increase at a rate exceeding that of inflation. The key to offsetting the increases will be to address both sides of the cost-benefit equation. More effective, productive use of print is the only way to offset the full effect of these increases, which really began in December 2007.

PS: How will paper prices affect print costs this year?
DG: They'll be a major contributor to increased print costs in 2008. The increases seen in 2007 will continue this year, particularly for coated publication papers.

PS: What kind of paper price increases are we talking about?
DG: It's difficult to generalize because of differences in individual stocks, grades and mills, but I expect the increase to be in the neighborhood of 25 percent for coated and 20 percent for uncoated during the course of the year. Our original projections did not include the tariffs proposed on imported coated paper from China, South Korea and Indonesia.

PS: What accounts for these increases?

DG: Paper manufacturers have closed many large mills, some permanently, in order to bring supply into balance with demand. Transportation costs are also increasing as paper production has shifted offshore due to environmental rules that have discouraged the building and upgrading of mills in the United States.

PS: What about energy costs and their impact on transportation costs? Those have to be increasing as well.
DG: Absolutely. The price of oil just hit a $100 a barrel on January 3 before backing off. Paper mills are major users of natural gas and are subject to strict environmental regulations.

But it's not just energy costs affecting increases in transportation. There's actually a major shortage of drivers in the United States. In addition, drivers are now required by new government rules to present credentials proving they're in the U.S. legally when they enter seaports and airports. Drivers are also restricted in the number of hours per day that they can drive on the road.

To make matters worse, importers are anticipating a possible labor strike at all West Coast ports and are incurring additional costs (to be passed on to you) to shift their ports of destination to the East Coast.

PS: What other costs are expected to go up?
DG: Ink will likely track with paper costs in double-digit increases. Not a major cost in printing, but no increase is welcome.
Postal rates will also increase in the last half of 2008.

While the legislation passed last year capped rate increases to the rate of inflation in the Consumer Price Index, the Postal Service signed contracts with unions that exceed the predicted rate of inflation - and labor costs are almost 80 percent of all U.S. Postal Service costs.

Given these contracts, the decline in First Class mail and an expected several billion-dollar loss for fiscal 2007, it will be tough for them to find enough worksharing incentives and efficiencies to avoid another increase.

PS: How else will mailers be affected in 2008?DG: The deliverability of mail will become increasingly important as a means of reducing costs for the Postal Service. This affects mailers not only in terms of postage costs, but bottom-line results.

Good, clean databases and mailing lists are key elements. The cost of file preparation to take full advantage of data in a marketer's house list must be calculated by each print buying organization.

The use of psychographic, or "lifestyle," mailing lists is increasing. These lists are more expensive than traditional demographic lists but, correctly selected and used, can more than pay for themselves.

Generally, the cost of mailing lists hasn't fluctuated much in the last year or two and that will continue into 2008. Many mailers can lower the bottom-line cost of list acquisition through testing, improved list hygiene and mailing and negotiation with list providers.

PS: We heard some things last year with Do-Not-Mail lists. Do you think that will come to pass in 2008?
DG: Bills were introduced in fifteen state legislatures in 2007 banning for-profit companies from sending unsolicited promotions to addressees with whom they had not had a prior business relationship. None of them passed.

Some state legislators are already preparing bills for 2008 sessions. Environmentalists and other supporters say that Do-Not-Mail legislation would force marketers to be more efficient and thereby reduce their mailing costs.

It is anticipated that some form of Do-Not-Mail legislation will be introduced in about 25 state legislatures this year.

Opponents cite First Amendment rights violations. The marketing and printing communities vigorously oppose it saying it would add to their costs and damage business development. As you might imagine, the Postal Service also opposes such legislation.

PS: This sounds pretty gloomy. Are there any positive thoughts for printing budgets in 2008?
DG: Print buying is sure to be a challenge in 2008. Increased costs for paper, ink, postage, mailing lists, etc. are difficult to fight. And unlike before, you'll not be able to offset the increases by simply changing a format or using economies of scale.

As a practical matter, I'd recommend testing before doing a mailing. You can test physical format, method of postage, the offer, kind of paper, copy on the envelope, design, etc. and it's relatively inexpensive and simple.

Testing will uncover issues that can offset additional postage and material costs.

Bottom line - both sides of the cost-benefit equation need to be looked at. It will be necessary to address the effectiveness and productivity of print, wherever possible.

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