Direct Mail & Catalogues

Direct Mail & Catalogues The Transformation of Print-Based Direct Marketing October 2014 Sponsored by:

CONTENTS Introduction 3 Direct Mail in North America 4 Direct Mail in Europe 8 Catalogues 12 2 Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing

INTRODUCTION Although pioneered more than a century ago, direct mail remains a trusted marketing strategy in large part because it is measurable. Printed direct mail is being transformed in response to online and mobile media and changing consumer habits. Ricoh Europe commissioned INTERQUEST, Ltd. to gain insights into the current state and future viability of direct mail and catalogues in North America and Europe. Direct marketing is a form of advertising that allows businesses and nonprofits to communicate directly with customers and prospects via a range of media, including display ads, direct mail letters, fliers, catalogues, and email, online, and mobile platforms. Direct mail and catalogues suffered through a perfect storm during and immediately after the recession of 2009. The sharp downturn in the global economy shrank marketing budgets as consumers closed their wallets and businesses struggled to stay afloat. At the same time maturing online and mobile channels began attracting a growing portion of advertising revenue by offering more economical alternatives to print-based marketing. To some observers, print-based direct marketing was in crisis and headed towards irrelevancy. Since then the dust of the recession has largely settled and world economies are slowly recovering. Marketers are beginning to understand the value and effectiveness of multichannel advertising, and direct mail and catalogue volume has stablised and grown. By most reckoning, however, it will never be business as usual. Volumes will likely never return to pre-recession levels. While marketers and consumers alike continue to value direct mail and catalogues, they are increasingly looking for more relevance and personalised content. This report will explore recent trends, challenges, and developments with direct mail and catalogues in North America and Europe. It will also examine how developments in digital printing technology are enabling print providers to transform print-based direct marketing into a vibrant and viable medium for the future. For marketers as well as consumers, print-based direct marketing will remain a trusted and valuable complement to online and mobile channels. Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing 3

DIRECT MAIL IN NORTH AMERICA BACKGROUND With the global economy gradually recovering from the 2009 recession, worldwide advertising expenditures have stablized and grown. According to MAGNA GLOBAL, global media owner advertising revenues grew by 3.2% in 2013 to $489.6 billion; MAGNA expects that growth to increase to 6.5% in 2014 to $521.6 billion. Regionally, MAGNA GLOBAL expects advertising revenue growth of about 5.5% in North America. According to the Winterberry Group, from 2009 to 2013 advertising expenditures in the U.S. increased 2.3% from $235 to $257 billion. Among advertising media: Despite the rapid adoption of electronic forms of direct marketing, print media continues to capture the majority of direct marketing ad dollars. Non-catalogue direct mail captured the highest percentage (39.6%) of direct marketing expenditures in 2012, followed by direct mail catalogues, which accounted for 21.0%. Including those two categories and inserts, print media accounted for about two-thirds of direct market ing expenditures. Internet search advertising accounted for about 19% of direct marketing ad dollars, followed by Internet display advertising. Direct Marketing by Medium Conventional media (radio, TV, magazines, and newspapers) expenses were relatively stable at +0.2% per year Newspapers experienced significant decline Direct marketing (mainly direct mail and telemarketing) increased by 0.8% annually Digital marketing (email, social technology, search, lead generation) increased by 15% annually Magazines and cinema were relatively flat, while television and outdoor advertising grew 3%-4% annually The Direct Marketing Association (DMA) estimates that marketers in the U.S. spent $168.5 billion on direct marketing in 2012, accounting for more than half of all advertising expenditures. Source: DMA, 2012 Despite the rapid growth of electronic forms of advertising, print media accounts for about two-thirds of direct marketing expenditures in the U.S. 4 Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing

DIRECT MAIL IN NORTH AMERICA Direct Mail Volume in the U.S. Source: USPS DIRECT MAIL VOLUME Advertising mail accounts for well over half of all household mail delivered by the USPS. According to the Winterberry Group, U.S. direct mail volume declined 4.3% annually from 2007 to 2012. Direct mail volume dropped by 21% from 2007 to 2009. Advertising mail as a percentage of total USPS mail volume declined from 64% to 63% from 2007 to 2012. The USPS is looking for future growth in Standard (advertising) Mail as the economy improves. Since 2012 direct mail volume has stabilized and grown modestly, but it will probably never return to pre-recession levels. Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing 5

DIRECT MAIL IN NORTH AMERICA CONSUMER ATTITUDES The percentage of households that read advertising mail has remained by and large unchanged since 1987 despite a large increase in volume over the period. According to the USPS, in fiscal year 2012, over half (55%) of U.S. households usually read their advertising mail, and 24% of households scanned it. The percentage of households that indicate they usually read (versus scan or not read) the advertising mail they receive has remained relatively consistent since 1987. Twenty-eight percent (28%) of the respondents say the biggest challenge in multichannel marketing is educat - ing customers on its effectiveness and proper use. DIRECT MAIL PRINTING An increase in the use of targeted and personalised direct mail has driven down print volumes, leading to an increase in the use of digital printing in place of offsetproduced static pieces. INTERQUEST surveys of direct mail printers also find: MULTICHANNEL MARKETING Although digital marketing represent less than one-fifth of advertising expenditures in the U.S. it is growing rapidly. Yet consumers prefer different media at different times, so coordinating communications across multiple channels is a growing requirement. In a recent INTERQUEST survey of direct mail printers in the U.S., 89% of the respon - dents indicate their companies are involved in cross-media or multichannel marketing. Respondents anticipate that in three years non-print services will represent slightly more than one-fifth of their company s direct mail revenue. According to the same survey, PURLs and QR codes are the most common multi channel technologies used by direct mail printers surveyed by INTERQUEST. QR codes are placed on about 9% of the digitally printed direct mail they produce, and PURLs are used on about 6% of the pieces. Emerging technologies such as augmented reality are able to utilise smart phone apps to overlay rich content onto printed pieces. The volume of printed direct mail in North American will decline by 1.8% annually from 2013 to 2018. Offset-printed direct mail will drop by 3.2% each year while digitally printed direct mail remains stable. Little investment in offset equipment only about 15% of the respondents indicate they invested in offset printing equipment over the 18 months prior to the 2013 survey. In the coming year and a half, the percentage of respondents planning to invest in offset equipment is 6%. Rapid adoption of inkjet although in 2009 the volume of direct mail produced on inkjet technology was negligible, it now comprises more than one quarter of the impressions produced by respondents in 2013. Inkjet presses represent about 10% of the installed base of colour digital printing equipment at respondent sites, a marked increase from 2% in 2009. Explosive growth in colour digital printing inkjet adoption is also driving up the use of single-pass colour digital printing in direct mail. In 2009 respondents reported that only about 7% of the digital impressions they produce for direct mail were printed in full colour. In 2013 colour comprised about 28% of the digital impressions reported by respondents. Similarly, the use of overprinting plummeted by 15%. 6 Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing

DIRECT MAIL IN NORTH AMERICA Multichannel Technologies Employed Offset & Digital Print Volume Source: INTERQUEST Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing 7

DIRECT MAIL IN EUROPE BACKGROUND Total addressed postal mail volume amounted to about 75 billion pieces in 2012 in Western Europe. Germany, U.K., France, Spain, Italy, and the Netherlands accounted for nearly 80% of the total volume. From 2008 to 2012 postal operators addressed mail volume declined by about 7% annually in the combined six top countries of France, U.K., Germany, Italy, Spain, and the Netherlands. Addressed Mail Volume in Western Europe DIRECT MAIL VOLUME Western Europe has been slow in recovering from the recession, with ad spending expected to return to positive growth only this year. MAGNA GLOBAL expects advertising revenue growth of about 2.1% for Western Europe in 2014. From 2008 to 2012 advertising mail volume declined by 4.5% annually in France, U.K. Germany, and Italy, dropping from about 18 billion pieces in 2008 to about 14.75 billion pieces in 2012. Companies tend to shift their marketing focus away from acquisition to customer retention in economic down - turns since it costs less to keep a customer than to acquire a new one. European direct mail providers recently interviewed report that nearly two-thirds of the direct mail they produce is targeted at customer retention and loyalty programms. Direct mailers in North America also shifted away from acquisition, but providers now report a nearly even split in acquisition and loyalty mailings. Volume continues to decline we see more and more segmentations and smaller jobs. There is an enormous pressure on prices, and some large international players are dropping out of the market. Large French direct mail printer Sources: postal operators, Eurostat, National Regulator, PostNL Team Analysis, 2014 8 Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing

DIRECT MAIL IN EUROPE TRENDS Recent trends in direct mail are similar in Europe and North America. Slightly more than 40% of the European direct mail printers recently interviewed by INTERQUEST report an increase in the use of segmentation, and nearly 40% cite an increase in the use of personalisation as a leading trend in the market. Market Trends Nearly 40% of the repondents also point to a decline in the volume of printed direct mail. About one-third of the providers report an increase in the use of colour digital printing, and nearly 30% note an increase in the use of multichannel marketing. Source: INTERQUEST The role of printed communication is changing, not only is it becoming personalised for each recipient and only sent on request, but it is used for loyalty campaigns rather than acquisition for which email is better suited and less costly. German marketing agency/direct mail provider Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing 9

DIRECT MAIL IN EUROPE CHALLENGES Over-capacity in many commercial printing markets caused by declines in volume have creating challenging environments for providers. Nearly one-third of European direct mail printers interviewed by INTERQUEST cite competitive pressure as a leading challenge in the market. Other challenges noted include rising postal costs which often drive mailers to cheaper online channels; the challenge of creating unique and effective direct mail pieces; and reacting to a fast changing market. The cost of postage has increased very rapidly over the past two years. This is definitely driving mailers away from traditional printing communication and more to digital channels. Large U.K. direct mail provider Challenges Source: INTERQUEST 10 Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing

DIRECT MAIL IN EUROPE MULTICHANNEL MARKETING As in North America, European marketers are increasingly employing a multichannel approach to reaching customers and prospects. Direct mail printers face many challenges in transitioning their services to accommodate cross-media marketing. The challenges include accessing relevant customer data to drive campaigns; attracting and developing the necessary employee skills; and understanding how to tap into new online technologies such as social networking. Non-Print Services Despite these challenges, providers see new revenue opportunities from multichannel marketing. About 75% of the direct mail printers surveyed by INTERQUEST expect nonprint services to represent more than 10% of their direct mail revenue in three years. Source: INTERQUEST Direct Mail in North America & Europe Over the past few years direct mail volume has been declining in both regions, although at a lower rate than transactional mail. North America is ahead of Europe in adopting inkjet and in using digital colour printing for direct mail applications. North American direct mail printers have also adopted hybrid solutions which combine offset presses with high-quality inkjet heads at a higher rate than European providers. To date, North American direct mail providers are more involved in multichannel campaigns than their European counterparts. INTERQUEST surveys conducted in 2013 find that non-print related services account for more than 10% of total revenue for 28% of North American provider respondents. By contrast, only 15% of European respondents indicate non-print services account for greater than 10% of revenue. Only 10% of North American providers offer print services exclusively, compared to 22% of European respondents. Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing 11

DIRECT MARKETING CATALOGUES BACKGROUND Catalogues are a leading direct marketing vehicle for distance selling. A recent study conducted by Kurt Salmon found that 86% of women surveyed have made a purchase after first seeing a product in a printed catalogue. More than half of respondents in the study continue to use catalogues for discovery, and nearly onethird have a printed catalogue at hand when making online purchases. Sales Revenue Generated by Catalogues Recent INTERQUEST surveys of catalogue mailers in the U.S. find that more than half of their sales revenue is generated by printed catalogues. Our surveys among European retailers find that about 60% of sales revenue is generated from direct marketing catalogues. Although catalogues remain a leading marketing vehicle for retailers, the volume of catalogues printed has sustained significant blows over the past seven years. In the U.S., 2007 postal reform legislation resulted in a withering 23% average increase in postage rates. The recession hit the following year, while at the same time an increasing number of consumers were shopping and buying online. According to the USPS, from 2008 to 2012 catalogue volume declined by 32% to about 12 billion a loss of more than 5 billion. In Europe, catalogue volume also declined at a rapid pace over this period. The worse seems over, however, and catalogue volume has since stabilised in both regions. Source: INTERQUEST TRENDS The leading trends in the catalogue market according to an INTERQUEST survey of catalogue mailers in the U.S. and Europe include: Smaller, more targeted print runs Lower page counts The increasing use of printed catalogues to drive online sales According to an article from the Associated Press, the outdoor retailer L.L. Bean reduced its catalogue pages by 20% in 2012. Cataloguers have also cleaned up their mailing lists to defray postage costs by eliminating duplicate mailings to households. 12 Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing

DIRECT MARKETING CATALOGUES Key Trends in Direct Mail Catalogues Source: INTERQUEST We need to bring added value, helping our print buyer customers to easily move to automated integrated multichannel campaigns, and put in place tools that enable them to trigger actions very rapidly. Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing 13

DIRECT MARKETING CATALOGUES CATALOGUE PRINTING The vast majority of direct marketing catalogues are printed conventionally using gravure and heatset offset web presses. U.S. mailers surveyed by INTERQUEST produce nearly 57% of their catalogues using gravure presses, and about 42% using web offset presses. European mailers produce a higher percentage (71%) of their catalogues using rotogravure, and about 27% on web offset presses. In the U.S., about half of the mailers interviewed by INTERQUEST expect catalogue volume to be flat over the next three years, about one-quarter anticipate some growth in volume, and one-quarter expect volume to decline. Over half of the European mailers interviewed expect catalogue volume to decline, 41% think it will be flat, and only 6% project a growth in volume from 2013 to 2016. DIGITAL PRINTING Digital printing has of yet made relatively few inroads into the catalogue market, primarily due to long print runs, the need for light weight coated substrates, and cost requirements. All of these issues are being actively addressed by digital printing systems vendors. The trends driving the use of digital printing in direct mail, however, are also at play in the catalogue market; we expect that as inkjet print quality, substrate flexibility, and cost improve, high-volume inkjet printing will find increasing applicability in the catalogue market for targeting, personalisation, and shorter-run production closer to the end recipient. U.S. and European mailers expect printed catalogue volume to drop by 1%-2% annually from 2013 to 2016 14 Direct Mail & Catalogues: The Transformation of Print-Based Direct Marketing

Cover art: Leonid, Dzhepko, Post Card Expo 2008, Wikimedia Commons Satellite images: Wikimedia Commons 2014 INTERQUEST, Ltd. About the sponsor Ricoh provides technology and services that can help organisations worldwide to optimise business document processes. Offerings include managed document services, production printing, office solutions and IT services. www.ricoh-europe.com/printandbeyond