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.”

Related articles:

• Hell Freezes Over: Quad/Graphics Wants To Buy Worldcolor and Go Public 
• In Closing 5 Locations, Quad/Graphics Sticks With Its 'Mega-Plant' Strategy  
• 6 Challenges Facing the Commercial Printing Industry

 

The Scoop on Droop: Bad News for Mailers

The Postal Service released final “droop” regulations this week that give small newspapers a break but are otherwise full of problems for mailers of catalogs, magazines, and other flat mail.

The rules, which are to be fully implemented Oct. 3, will be an especially hard blow to tabloid-sized publications and to skinny magazines, catalogs, and retail flyers. And they might prove to be a hindrance for co-mail operations – which postal officials have touted as an ideal way to reduce both mailers' and Postal Service costs.

The regulations will impose a significant penalty on mail that fails a new flats deflection test, commonly referred to as the droop test, which is supposed to determine whether mail is well suited to the Postal Service’s sortation equipment.

The Postal Service received comments from 35 associations, businesses, and people regarding the proposed regulations – and ignored almost all of them. One exception is that copies in carrier-route bundles delivered to a destination delivery unit (DDU) are exempted.

That change was in response to claims that the regulations would impose a 78% price increase for some In-County Periodicals mailers – and an acknowledgement that the penalties make no sense for copies that are sorted manually. It seems to help mostly small local newspapers. The national dropship networks run by the major printers of magazines and catalogs rarely deliver to DDUs, which is where letter carriers are based.

Among the problems the Postal Service didn’t fix are:

• Carrier-route copies: Except for DDU deliveries, copies in carrier-route bundles are not exempt from the penalties. Even some postal officials had said carrier-route copies would be exempted, because in theory a carrier-route bundle bypasses sortation equipment and goes directly to a letter carrier. The Postal Service did not explain its logic (or illogic) on this point, but it may have to do with copies being handled on Flats Sequencing System machines. So much for the promise that FSS would save mailers money.
  
  
• Objective test method: “We are making modifications to improve the objectivity of the testing process,” the Postal Service says in its explanation of the revisions, but it failed to address many concerns. For example, there is no language regarding how a piece is to be handled prior to testing (which can make a huge difference as to how much it droops), when in the process it should be selected for testing (prior to bundling or pulled out of a bundle?), or how many pieces in a mailing should be tested. A cantankerous postal clerk could put a printing plant out of business, while an easygoing one could give the printer a competitive advantage.
  
  
• Pre-qualification: Many mailers asked for a way to pre-qualify samples of a mailing rather than producing an entire mailing before discovering that mail pieces fail the droop test. The USPS rejected that, as well as related calls for tolerances of up to half an inch or a certain percentage of failed copies. As a result, although normal magazine-sized pieces can droop up to three inches, mailers would be wise to build in a safety factor and not produce anything likely to droop much more than two inches.
  
  
• Co-mail: “We are developing a random sampling procedure to test mailings of nonidentical pieces, including comailed and copalletized mailings,” the USPS explanation says -- but the regulations themselves say nothing about such a process. Cataloguers and publishers that co-mail are concerned that, even if all of their copies meet the standard, they will be penalized for the failings of another co-mail participant’s copy failure. Because printers typically select and presort magazines and catalogs for co-mail before production starts, they will probably exclude anything that has a remote chance of failing the droop test.

For further information:

• Viagra to the Rescue? Postal Regulations Are Taking the Life Out of Tabloid Magazines explains why the new droop rules are especially problematic for tabloid-sized publications and provides links to videos and explanatory materials about the test.
• Eligibility for Flats Failing Commercial Deflection is the Postal Service's description of the comments and its response, along with the actual language to be added to the Domestic Mail Manual.
• Common Sense Prevails for Flats Deflection - For Awhile discusses why USPS decided this week to delay implementation of the penalties for a few months and describes a Postal Service demonstration of the new test.
• The Cost of Droopy Flats: Joe Schick, Quad/Graphics' postal guru, discusses how difficult it is to predict whether a mail piece will fail the droop test when it's still in the design phase and says the new regulations could mean a 40% postage increase for some mailers.

Viagra to the Rescue? Postal Regulations Are Taking the Life Out of Tabloid Magazines

It may be time to bid farewell to the tabloid-sized American magazine.

A variety of forces have been conspiring for several decades to put oversized magazines onto the endangered-species list. Now the U.S. Postal Service appears ready to put the tabloid magazine (and catalog) out of existence.

Postal regulations scheduled to take effect in June will impose significant penalties on magazines, catalogs, newspapers and other “flat mail” that fail a deflection test – commonly called a droop test. The rules are especially tough on skinny publications and tabloids, according to printers who have conducted extensive tests.

“PostCom’s service provider members inform us that mailers of tabloids are likely to redesign their pieces as quarter-folds to meet the deflection standards,” the Association for Postal Commerce (Postcom) wrote recently to the USPS. Some are considering going to a quarterfold format – folding the tabloid in half and securing it with tabs – which could mean more capital investment for printers and more problems for the Postal Service, PostCom says. Others are considering more radical redesigns.

"Unless we can figure out how to put Viagra into the paper to keep it from drooping, the tabloid size is dead," one magazine publishing executive told Dead Tree Edition.

The video posted here, created by catalog printer Arandell Corporation, demonstrates how to conduct the droop test, though other printers have recommended somewhat different methodology. PostCom’s letter requests that the Postal Service “publish explicit and well-documented instructions on how to perform the deflection test, including a demonstrative video.”

Television helped kill off the iconic photo-news tabloids Life and Look four decades ago. Subsequently, developments in press technology, newsstand display practices, and the need to reduce paper costs have caused most major U.S. consumer magazines and catalogs to adopt the “short cutoff” format, which is 10.5” tall. A notable exception is the 12-inch-tall ESPN The Magazine.

For the most part, the tabloid format – generally, at least 11.5” tall and usually more like 13” – in the U.S. is the province of such trade publications as Nation’s Restaurant News (10.75” x 13.25”) and WWD (formerly Women’s Wear Daily, 10 3/16” x 12 ¾”). Catalogs using the tabloid format also tend to be specialty titles that print and mail fewer than 100,000 copies at a time.

The rapid expansion of co-mailing, which typically reduces postage by 10% to 25% for both magazines and catalogs, the past couple of years pressured the tabloid format because most printers offered little if any ability to consolidate the mailing of tabloids. The exception is Publishers Press, which is focused mostly on producing small-circulation b-to-b and enthusiast magazines rather than the big mass-market titles.

For both Periodicals (magazine and newspaper) and Standard (catalog) classes, failing the droop test will increase postage by 10% to 30%, or even more, in June when the USPS starts imposing penalties.

Results of tests performed by various printers show that the new standards are not kind to tabloids. One found that an 80-page book 9.875”x 13.875” book with a four-page cover failed the test but that cutting a few inches off the height did wonders: A 48-pager of the same width that was only 10.5” tall passed the test, even though it had no cover and used slightly lighter paper.

Tests have been even worse for oblong formats, those with a width greater than their height. That means the new regulations will pretty well kill an idea that occasionally surfaces – reformatting print publications to a horizontal format so that their digital twins are easier to read on a computer screen.

Oversized magazines may still be inserted into newspapers, sold on newsstands, handed out at trade shows, and distributed via alternate delivery. But unless the Postal Service changes the regulations and/or the proposed penalties, the sight of a mailbox containing an oversized magazine or catalog could become extremely rare.

For further reference:

• USPS Revisions to Deflection (Droop) Standards for Flats: Worldcolor explains how much droop is allowed and how to test for droop.
• Eligibility for Commercial Flats Failing Deflection: The recent Federal Register notice seeking comment on the Postal Service's proposed penalties for failing the droop test.
• The USPS Announces Applicable Prices for Pieces That Fail New Deflection Standards: Worldcolor explains the proposed penalties.