Outlook: A 'Catch-22' Situation

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The scheduled merger between R.R. Donnelley and Moore Wallace sent shivers down many spines in the print production business.

After all, it was only early last year that Moore completed its purchase of Wallace. And not that R.R. Donnelley needed to feel something was missing: Even without Moore Wallace it has customers worldwide served by 30,000 employees in 200 locations in the Americas, Asia-Pacific and Europe. The merger is still pending based on reviews of both companies' 2003 financial statements.

"It's not a good thing for the industry," said Bill Duhownik, vice president and director of production at ad agency MAB Advertising Inc., Chicago. "It seems to be what consolidation does - short-term it's good, but eventually you're putting companies out of business. They start shutting plants. For agencies that buy printing and offer direct mail, it narrows the pool where we buy goods and services and it narrows the ballgame. Also, nobody has a competitor edge. If I'm bidding for a job and three other competitors are, we're bidding to the same company."

But that is capitalism and the free market at work.

Without a doubt, the consolidation has taken its toll on the profitability of smaller companies.

"Over the last year, to stay competitive, we've had to slash our margins by 30 percent," Duhownik said. "You'll see fewer and fewer smaller, family-owned businesses. Since the technology has changed and become more advanced, it's also become more expensive."

Duhownik advises caution to mailers, including publishers and catalogers. Clients should look for quality even in an environment rife with bargains.

"Things are very competitive," he said. "Each one of those printers is [almost] within $100 of each other. Companies are so hungry for business, they're cutting their margins. It's almost like they're low-balling. What it does is drives the perceived value of our product down."

Even the big players are concerned as larger companies snatch smaller ones to gain economies of scale. The acquired companies typically have aging equipment bases and are in difficult competitive situations.

The capital-intensive nature of production makes it difficult for consolidators to update their capabilities fast enough, said Quad/Graphics CEO Tom Quadracci. Thus, they cannot offer catalogers and clients the most cost-effective and profitable printing options like highly targeted personalization and demographic binding.

"Because they can't compete on capabilities, they compete on price," he said. "This type of commodity selling is further eroding printers' margins and making equipment installations and upgrades even more unlikely. Quite simply, it's a Catch-22."


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