Thursday, April 10, 2014

What the Quad/Graphics-Brown Deal Tells Us About U.S. Printing, Publishing, and Postal Services

Although Wall Street mostly yawned when Quad/Graphics announced this week it is acquiring Brown Printing, the pending transaction is a big deal for many major publishers. And it provides some interesting insights into the U.S. printing and publishing industries and even into the U.S. Postal Service.

For publishers of major magazines and catalogs – those with a print order of at least, say, 200,000 copies – the country’s third largest magazine printer has been the chief supplier of Duopoly Insurance. When Quad acquired its larger rival Worldcolor in 2010, Brown’s business reportedly surged as the big publishers worried about being at the mercy of printing giants Quad and R.R. Donnelley.

“Brown prints titles like Elle, Esquire, Family Circle and glossy catalogs for Macy's, Lord and Taylor and Saks Fifth Avenue,” noted the Milwaukee Journal Sentinel’s John Schmid (the only mainstream U.S. reporter who regularly covers the printing and paper industries, as far as I can tell).

Few other U.S. printers have the equipment or capacity to handle such large print runs of publications. And as part of Gruner + Jahr, a huge German printing and publishing firm, there was little concern about Brown’s financial strength or its ability to stay current with technology.

An underdog run by German engineers
Brown seems to have performed admirably. I don’t recall hearing anything really negative about the company, perhaps reflecting Americans’ natural tendency to root for the underdog. German engineers have been in key management roles at Brown, and it shows – in precise procedures and practices as well as in a nearly obsessive focus on plant loading (that is, smooth, predictable workloads rather than peaks and valleys).

Rather than trying to squeeze more years out of ancient equipment, as some Worldcolor plants used to do, Brown kept pace with Quad and RRD when it came to investing in new presses and bindery lines. But it wasn’t enough.

Installing the latest 64-page offset press was just table stakes when it came to competing with the Big Boys for prestigious publications. Brown’s investments kept it in the game but gave it no “sustainable source of competitive advantage,” as the MBA-types would say.

Brown may have had a true competitive advantage for awhile in the tabloid magazine market that was dominated by trade publications. Colleagues describe an unusual configuration of its press folders (there’s that German engineering at work) that enabled Brown to run magazine-formatted and tabloid-formatted pages on the same press.

Combined with Brown’s expertise in producing small-circulation weekly magazines (many of the tabloid trade magazines were weeklies) and its infrastructure for delivering them, Brown seemed to have a sizable market share in the niche.

A drooping niche
Then came the droop test. (See Viagra to the Rescue? Postal Regulations Are Taking the Life Out of Tabloid Magazines.) USPS instituted regulations in 2010 penalizing flat mail that wasn’t stiff enough to be handled efficiently by sorting machines. In advances of the new regulations, B2B publishers rushed to transform their tabloids to the shorter, less droop-prone magazine format.

Rising postage rates, a challenging advertising market, and improvements in browser-based magazine formats have meant continuing declines in B2B print orders. (Despite all the hype about iPads and fancy e-magazines, I suspect fewer Americans read magazine apps than read the more pedestrian browser-based page-flip magazines.)

Brown also has another distribution challenge: scale. “In every printing-contract negotiation I’ve witnessed, distribution has been the tie breaker,” a publishing colleague tells me.

When every printer in a market has the same or similar presses and bindery lines, the ability to provide co-mailing, dropshipping, and other distribution options tends to become the chief differentiator. In fact, much of Quad’s growth in its early days came from focusing more on distribution than the competition did.

Brown has plenty of equipment and expertise devoted to distribution. But without the volume that Quad and RRD have, it struggles to provide the same kinds of postage discounts and shipping efficiencies that they offer.

Brown's spokesperson acknowledged the issue in a statement to the Waseca County News that "Customers will have a lot of opportunity to benefit from this acquisition" because of Quad's "robust distribution service."

Ultimately, what may have caused Brown to be labeled “non-core” by Gruner + Jahr and sold for “only” $100 million was the realization that the U.S. isn’t Europe.

Schmid notes that, as a printing company owned by a publishing firm, Brown is “an anomaly” in the U.S. But that’s standard practice in Germany, where G+J is both the largest publishing company and the largest printer. (I don't pretend to understand why vertical integration of printing and magazine publishing is so common in Europe but virtually non-existent in the U.S.)

G+J was once a major player in the U.S. magazine market as well, with titles like Family Circle and Fast Company, and did much of its printing at Brown. But after several big deals turned into disasters, it turned tail and exited the U.S. publishing market in 2005.

You would think Wall Street would view the removal of a competitor as a favorable event for Quad, but the company’s stock is actually down a bit since Monday’s announcement. Standard & Poor's downgraded Quad, focusing not on competitive gains from the Brown acquisition but rather on Quad’s increased indebtedness amid “lower industry capacity utilization and aggressive pricing tactics by market participants that have eroded profitability.”

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