Every summer there is a glut of fresh tomatoes in Australia. Growers lose, consumers win and the two intermediaries, the wholesalers and retailers, make their normal margins albeit on lower prices but usually higher volumes. Being a seasonal phenomenon, everything soon reverts to its normal supply and demand balance. Disgruntled growers can easily switch to another cash crop at any time.

Why is this relevant to paper and print? Demand for print communication is in structural decline; statistics from Australia Post and falling newspaper circulation are objective examples of this. This means there is an oversupply of print capacity. Unlike the supply of tomatoes, it is permanent and will not self-correct. Even when printers go broke, their plant is bought cheaply but still remains as capacity. Anecdotal evidence suggests the oversupply of print capacity is about 40% in some sectors. There is only one winner – print buyers.

Unless there is rational corrective action taken by printers, unlikely in the SME sector, then those who supply them will continue to bear printers’ financial problems arising from permanent excess capacity. Installing quicker, slicker machinery isn’t the answer; it only exacerbates the problem of excess capacity.

Printing and paper merchanting are both low ‘value-added’ businesses with low barriers to entry. Neither has any real franchise, nor significant intellectual property. I realise this will offend the traditionalists, but it’s a fact – the craft of printing has been deskilled by technology; and let’s finally accept that paper is a commodity. Worse still for paper merchants, paper is a ‘grudge’ purchase by printers, just as fuel is for the transport sector.

Neither the printing nor merchanting industries will ever make an adequate return on invested capital unless skilfully managed. The management of Paperlinx over the past 10 years verifies this.

The solution, for printers and merchants alike, is to reduce the overall print capacity to an equilibrium of supply and demand. If printers cannot manage this process, it must be forced upon them by their ‘unofficial bankers’ – merchants – in three ways: applying rigorous credit policies; unwinding reliance upon credit insurance; and implementing transparent pricing of paper as a commodity.

Credit insurance isn’t a solution but an abrogation of management responsibility. It’s expensive and could easily be withdrawn from the paper and print industry overnight. The real solution is to divert the cost of credit insurance into employing serious credit analysts from the banking sector.

It is in all merchants’ interests to see this happen as the volume of paper sold will remain static, but the bad debts will reduce. Here, a strong heart is required by the initiator/s as traditional merchants will incur the inevitable bad debts and may even fail themselves.

The third limb is to accept that paper is a commodity and unbundle its price like the major traded commodities such as wheat and iron ore (see box). Paper merchanting must be about the simplest of all businesses because the product isn’t perishable or seasonal or subject to extraneous events like weather.

Will this work and which merchants will be game enough to try it? It won’t be those merchants who believe that ‘service’ means having reps making expensive, unsolicited, unproductive calls on busy printers, allegedly to maintain the ‘relationship’.

It won’t be those merchants afraid to make changes in their rapidly changing world. Printers aren’t fools. They realise there is a real cost of delivery and real cost of credit, so tell them exactly what it is.

Under this scenario, the strong printers will prosper through better paper prices and the weak will fail simply through lack of supply of paper because foolish credit is unavailable.

Graham Critchley is a self-funded retiree and private investor with 30 years’ experience and convenor of Paperlinx PIGS, a volunteer investors group

Factfile: unbundling prices

Wholesale price of paper The equation here is: (cost) + (margin) + (cost of delivery) + (cost of credit).

Prime price This is: (cost) + (margin). A cash sale with customer-arranged pickup. This must be a standout price as the merchant bears no risk.

Cost of delivery There is a foolish industry practice of competing on speed of delivery. By unbundling the true cost of delivery, the buyer will determine when the goods are required and pay accordingly. Curiously, paper merchanting is one of the few businesses that still ‘owns’ its distribution. This is nonsensical.

Cost of credit This must be realistic and determined periodically by negotiation between an ‘enhanced’ credit department and the buyer. It must never be zero as that defeats the process of unbundling.

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