Gary Pageau of the Dead Pixels Society talks with Andrew Cousin, CEO, Circle Graphics, about the acquisition of Bay Photo, the growth in photo personalization market and the challenges faced by eCommerce companies in the age of COVID-19.
Circle Graphics is a leader in grand and large-format digital graphics, outdoor advertising, business signage, wall decor, art reproduction, and professional photographic output.
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Gary Pageau 0:02
Hello again, and welcome to the Dead Pixels Society podcast. I'm your host, Gary Pageau. And today we're joined by Andrew Cousin, the CEO of Circle Graphics, just outside Boulder, Colorado. Well, Andrew, how are you today?
Andrew Cousin 0:18
I'm great, Gary, thanks for having me on.
Gary Pageau 0:23
So, Circle Graphics is clearly one of the biggest names in the industry. But for the very for the five people who aren't aware of who Circle Graphics is, could you kind of share some of the background of the company because you've been around a long time, but in the consumer printing space a relatively short time.
Andrew Cousin 0:40
Sure, Circle Graphics has been around since 2000. So right around 20 years, and the origins of the company were in grand format, printing, and specifically billboards, the founder of Circle Graphics, back in 2000, I think saw an opportunity to leverage some of the then-emerging digital printing technologies to do things a little differently, and focused on the Billboard market, which was an interesting choice, a fairly mature business, fragmented number of players, but certainly not a business that was or a market that was growing dramatic. But entered the market pretty aggressively at about 50% of market pricing, which of course grabs people's attention, including competitors, who I think at the time told their customers maybe even tried to tell themselves, he can't make money selling billboards at those prices, and the quality must be terrible. And Circle Graphics is going to go out of business about 10 years later. And still today. Circle Graphics prints approximately 70% of all the billboards in the US. so remarkable story, today fairly simple product in a pretty mature market to be able to gain that kind of market share in a relatively short period of time.
Gary Pageau 2:18
So for those who don't know much about the billboard market, could you kind of give us an estimate, like you mentioned before the podcast, you know, the number of square feet, you print a year, I just think that number would Wow, some folks?
Andrew Cousin 2:35
Yeah, it's approximately 300 million square feet of printing a year. That's a lot of grand format. So five meter 16, put printers, and a lot of ink, which you may wonder how any company in any market can get to that kind of market share. And I think the simple answer is through innovation and improvement. And as it relates to ink is just one example. We have PhD ink chemists on staff and formulate arrow links, which began with 300 million square feet. That's a lot of ink in a year. So I think we are now fortunately at a scale, whether it's the cost of substrates, or ink, or the ability to run a operations 24 seven, I believe we have a cost base in that market. Now that is virtually impossible for anyone to duplicate without the scale.
Gary Pageau 3:43
So that's one thing that you have an advantage in bed marketplace, you have, you know, custom inks, you have some custom printing equipment, and you have your own r&d. That's that that's pretty impressive. Is that is that been from day one sort of the market position? Or is that something that's kind of been acquired over time?
Andrew Cousin 4:04
I think overall, including entree, I guess eight years ago into the personalized water call market, I think we look for products and processes where we can differentiate. We want to be able to deliver high quality products at exceptional speed, and that really compelling price points. And of course, you're not able to hit a really compelling price point without a significantly attractive cost basis for the product. So as I think about generically, what Circles core competencies are certainly printing is part of the puzzle and I think we are as good as any intern Being able to print a product cost effectively and high quality and quickly. But I do think one of the core capabilities is the ability to handle via digital workflows and extraordinary transaction volume on any given day. And we're just rolling into the busy season for the wall decal market, with a lot of products being gifted over the holidays. Just as an order of magnitude, we are about to be producing approximately 70,000 units a day through operations. And that's certainly a big number. But when you think about it, that is not Amazon receiving 70,000 orders and pulling 70,000 items off the shelves, putting them in boxes and shipping them. That's an order that comes in and with it comes a decent sized image file that's requires significant bandwidth to be both accessing and pushing those large files around the systems. And it's a totally automated, paperless workflow. We can't be printing 70,000 job packets a day to be going through the facility. So I would say coming back to the point being able to handle in a highly automated fashion, a huge transaction volume on a daily basis in very low quantities for wall decor, typically a quantity of one. And even on the Billboard side of the business now 50 billboards would be a large order 50 of the same image. Right. So I think it's about good manufacturing disciplines were firm disciples of the lean manufacturing philosophy. And that allows us to hit high velocity of a large number of transactions for a large number of customers on any given day.
Gary Pageau 7:13
So how many facilities do you have that are doing the wall decor segment? I mean, up you're doing them all in one location? Or do you have multiple locations?
Andrew Cousin 7:22
We have six locations doing well, they call and primarily to focused on the billable market. Okay.
Gary Pageau 7:33
So take me back in time, it's 2010-2011. When you're looking for new markets, and you come across the wall, the core segment, what was the thought process there for getting into the you know, that segment of the business because, as I recall, at that time, it was getting pretty heated up, you know, there were a lot of players in that market.
Andrew Cousin 7:58
Yes, it is not a very obvious choice to go from billboards to not at all, to a canvas gallery ramp. But as the same the soul searching, I think focused on core competencies of the company, identifying a product that, in our view, was overpriced in the marketplace. And we felt the product could be redesigned to lend itself to high volume, production, automation, and so on. So back in 2010 2011, that's what the company did was redesigned the product. Canvas gallery rent stretch Canvas has been produced the same way. For hundreds of years, even since an artist would stretch a canvas around the winter to paint an original painting. We did redesign the product, a very different method of construction. Today, we hold seven patents on that, on that design. And as I mentioned before, it allows us to produce an exceptionally high quality product and a compelling cost basis, allowed Circle similar to its entry into the billboard market back in 2000. It allowed Circle to play aggressively in the marketplace with a very compelling price point. So I guess when you think about that, quite a similar strategy to getting into billboards 1011 years earlier, was successful, helping get us a toehold in the business and over the last eight years or so, grow the volume dramatically to the point that it Circle was substantial the size business just when it was a billboard company, and the company today is about five times the size 10 years later.
Gary Pageau 10:14
And, you know, let's not overlook the fact that, you know, having seen your your products, you know, these are very, you know, high quality product. I mean, you've got, you know, from backings on them, you've got, you know, pretty nice hardware, you've got framing options. So there's, you know, even though it's competitively priced, there's not, there's not a lot of skimping on the quality.
Andrew Cousin 10:40
No, we would like our sales team, to have no reason not to win the business with a retail partner. And, you know, maybe these are all tickets to the game today, but you need a high quality product. Everything is needed fast, multiple locations allow us to direct orders to manufacturing location, close to the customer, so that the freight cost and the delivery time ground is is attractive than is fast. But all those things are critical. And so so yes, while Circle plays at aggressive price points, it's certainly not because of a low quality or poor quality product, we want to have the best products in the market, the fastest deliveries and the most compelling price, which is the saying gives a sales folks the tools that they need to go and win new business.
Gary Pageau 11:44
So Circle Graphics has been in the news, the last, you know, few weeks, you know, month or so with your acquisition of Bay Photo, which has been one of the biggest names in the professional photography space. And like, you know, other professional photographer, photography labs, you know, they've gone after the high-end consumer and the enthusiasts, they're much more well known than they used to be as a as even a enthusiasts brain. So how did that come about? Because it's a big change for Circle Graphics, in the sense that you have a consumer facing brand right now.
Andrew Cousin 12:26
It's interesting Bay Photo is a brand primarily focused at the independent pro photographer, right? So not so much a consumer brand, the Larry abitbol, founded before photo boy almost 50 years ago, and 72, I think, is exactly and has done an extraordinary job expanding the business and developing in my view, one of the best brands for the professional photography market. Yeah, definitely. And those are incredibly high end products, whether they be framed prints, whether they be photos, acrylic, metal, wood, just a great range of high end products, that fits extremely well with Circle's lineup of products, and, you know, different products that suited for different parts of the market. So we tend to think of segmenting products and thinking about which channels that they would be appropriate for in terms of a good, better best concept. And I think the base photo product lineup firmly falls in the best category.
Gary Pageau 13:50
So but that's a lot of different product types to manage. I mean, it's a very, very diversified product portfolio compared to, you know, canvas. Now I know there's a lot of variations within the canvas space in the sense you've got some different substrates, some different sizes and things like that. But now you're talking metal, silver halide inkjet would serve, you know, dye sub, all these other things. Is this something you're going to be able to move to some of those other plants around the country? Those those production cells?
Andrew Cousin 14:24
I think the simple answer is yes. For the higher volume products, okay. It doesn't make sense to duplicate manufacturing capabilities for some of the more natural fringe, right? photo output products, but for the high volume items, absolutely. Part of it is being able to produce those in a geographic location that's close to the customer.
Gary Pageau 14:50
So what's been the response from some of your customers now? I mean, I'm assuming perhaps Bay was a customer of Circle Graphics? Maybe that's how the conversation started. But you know, now you're in a sense, you're competing with some of your customers, there's, you know, there's some channel conflict there, how how have those conversations gone?
Andrew Cousin 15:09
But the conversations have gone well, and you're right, there's the potential for channel conflict there. Our retail partners, though, after announcing the Bay Photo acquisition, were by far, much more excited about having additional range of products available, could go through their channels, then they were about the competitive or potential competitive dynamic. Again, Bay Photos customers are little different than retail partners, customers of our retail partners are very much direct to consumer wear is a photo is far more targeted at the professional market.
Gary Pageau 16:01
So you were recently one of the folks on a panel at the Visual 1st conference on industry consolidation. And for those who weren't able to attend that, I'd like to kind of talk about, you know, center kind of the industry consolidation trend that's happening right now, certainly, Circle Graphics is not the only company out there looking at acquisitions. So what are some of the macro factors that are driving the industry consolidation right now?
Andrew Cousin 16:34
I think there are a couple of things. And we are a fragmented market still, and I think there is a something of a natural order to consolidation as a as a market grows and matures. Secondly, the market itself is growing, I think setting aside what we have seen in 2020, that I think is a bit of an artificial lift to demand based on people being stuck at home for a period of time and, and the decorating phenomenon has been well kind of documented and written about in terms of Home Depot selling more grills than ever, and people at home and and if they're going to be there, they're fixing things up. And that includes changing out pictures that are hanging on the wall. So I think we've seen something of a remains to be seen how sustainable but something of an artificial lift in the middle of this year. But setting that aside, our estimate is that the personalized wall decor market is growing in the 9-11% range. Right. And growth in an industry will also I think, attract investors, as growth is one of the key determinants as to whether your investment makes a good rate of return or not. Yes, of course, the business is growing. So it's more market conditions. And in thirdly, I think, for whatever reason, the private equity world has taken an interest in the personalization space and of course, personalized wall decor folds intimate.
Gary Pageau 18:20
Yeah, yeah, cause definitely seen with the Shutterfly private equity activity with Apollo and Snapfish and things like that. And you have some private equity behind your company as well, as I understand.
Andrew Cousin 18:36
That's right, I actually led an investor group that acquired Circle Graphics right at the end of 2012. So just as a wall decor business was kind of getting going, huh, really, the business that we invested in was the billboard company with a mature This is the right term, but with a lottery ticket, that the wall decor business would be successful. And a lot of my focus, so the first two, three years, was making sure that new division reached the critical mass as quickly as possible. Say, if you roll the clock forward, eight years, that business is now four times the size and the companies therefore five times the size as it was billboard alone.
Gary Pageau 19:30
So you pretty good at picking winners, it looks like?
Andrew Cousin 19:34
Well, it's interesting. There's an old saying, which is the harder we work the luckier we seem to be. There you go. There you go.
Gary Pageau 19:45
So let's talk a little bit about the personalized product market. You talked about, you know, the nine to 10% growth. There's only so much space on people's walls. I mean, is it mean, is it really feasible for that market to continue or is idrisi a time when people perhaps are changing out their wall decor seasonal, or more often,
Andrew Cousin 20:13
We do see that as a phenomenon. It's interesting, I love being out on the, on the floor, looking at the printers and just observing the images that people are uploading and the images that that people are turning into wall decor. And the vast majority people, it's weddings, it's babies, it's kids, a lot of sporting events for those kids. It's family reunions, it's pets it's travel, but write. Those things, in my view, remain fairly topical. Obviously, a wedding photo may stay on the wall for decades. But the photo of Little Johnny scoring a goal likely will get swapped out the following year as he gets older, and maybe his goals become more spectacular. But I do think for the personalized piece of people's walls, they aren't rotating faster than they used to write a little different for a piece of art and as they say a little different for a wedding photo. But I believe part of that phenomenon is due to price. It's not so long ago, maybe 10 years or so where you would be paying well over $100 for a 16 by 20 unframed canvas today, product is out there getting pretty close to $20. And I think that's part of the puzzle. If something only costs $20 to hang on the wall. People are more relaxed about taking it down. Probably not throwing it away, but putting it in the closet or in the basement and and rotating that box. So we do think there's a lot of headroom still in the end. That is probably the the the reason the price point.
Gary Pageau 22:18
But I think is interesting is even at that $20 price point, because the volumes have increased so much there. So quite a bit of margin for the retail. I mean, there's there's definitely a lot of potential there.
Andrew Cousin 22:32
Yeah, exactly. A retailer is likely shooting for 100% markup, a 50% margin from the sale. And, you know, it's really interesting to me, as I look at the end market of who is selling direct to consumers. They fall into two categories. They're the traditional photo departments of the office, often drugstore type retailers, the places we used to go get our four by six ring from have have shifted their business, of course into photo output products. People do still print four by six photos, but it's today dwarfed by other following else space, whether it's wall decor, coffee mugs, mouse pads, phone cases, etc. The trend for personalization is is fairly strong and I think not going away.
Gary Pageau 23:36
So let's talk about the near term and then the long term for a little bit. You mentioned before you know how a 2020 is kind of an anomaly in the sense that some people have had more time off but also with the at home shopping. being such a huge part of the retail landscape these days you know there's a lot of challenges there that are happening in terms of you know, shipping delays, production concerns and things like that. So what is kind of your near term forecast that brands and retailers should keep in mind.
Andrew Cousin 24:18
We think that holiday 2020 is going to be an absolute record and continues on this strong lift that 2020 is head I think the swing to e commerce from bricks and mortar real retail at a macro level is perfect. The home decorating boom that has occurred this year I think will will suffering somewhat eternal appetite for shopping online compared with going to a store has gone up dramatically and and I think has permanent accelerated several years worth of the underlying econ trend. Yeah. You mentioned shipping for the holidays, I read an article the title of which was ship again, in one of the national newspapers, newspapers recent. And no question residential package volume in 2020, has caught the carrier's short read one release from one of the major carriers who say they maintain a 10 year projection of residential package volume for planning purposes, cabinets, trucks and, and system capacity. And they say that in four months in the middle part of this year, they hit their 10 year projection of volume. In other words, residential package volume today is about where they expected it to be in 2030. Wow, that, of course puts a huge strain on the system. We tend to think of delivery trucks and drivers is possibly the constraint. And certainly that's been tight, you can see ups drivers and FedEx drivers, in budget rented trucks and u hauls these days were in their uniforms, but not in branded trucks. The real constraint, I think that is in the system of the sorting centers several years ago, FedEx and UPS each went to fully automated sorting centers. And that means it's not possible to just throw warm bodies and open up warehouse space. To increase the sorting capacity, those mated facilities have a finite capacity in terms of the number of packages. So the carrier is raising the flag that around shipping delays as you suggest, and it will be interesting to see, but we fully expect pack, your being able to have a carrier pick up the package is going to be a constraint this holiday season, not actually making the product. So for anyone listening, that is thinking about holiday gifts, to get those orders in earlier early would be would be my advice, we have actually added 20,000 square feet of additional space in each of our two main locations to store palletized packages ready to go. But they'll be picked up immediately by the carriers, we're not going to slow down production, we will keep making the making the orders as they come in. But we do think that that is going to be a constraint and getting the packages picked up and delivered on time.
Gary Pageau 27:58
And we're already seeing some of that messaging right now, you know, in the consumer channels with, you know, spots on the morning shows and similar news items that paid order early. Black Friday starts now because I think everyone is kind of anticipating this bottleneck occurring. So assuming that COVID has, you know, runs its course sometime in 2021. What are your expectations for next year.
Andrew Cousin 28:36
With the spike in the middle of the year, we would certainly be excited to be seeing some continued growth next year. However, I would say April May, June July, are really high bars in terms of comps for next year. But again, time will tell as to whether the underlying lift in ecommerce volume sustains and my prediction is I think that the home decorating spike that we saw will probably moderate but we would hope to continue to move the needle on growth in in 2021 albeit a very, very strong year.
Gary Pageau 29:28
So, as we come as we come to a conclusion what is some of the opportunities you see for the company overall, in the next 18 months or so.
Andrew Cousin 29:40
continued growth, we do like to grow and we do that organically continuing to sell an increasingly broad product line to our retail customers and we will continue to look at Carefully at whether there are potential acquisitions that that bring value to the mix. We're not a roll up in the sense of the way roll ups were became fashionable in the 80s. Companies just buying companies for their own sake, and buying revenue, buying cash flow and hoping that a larger business is more valuable over the long haul than a smaller business. Yeah. Which I guess is a strategy but perhaps not a very sophisticated one. I think when we look at acquisitions, of course, we would like them to be accretive investments, investment. We're really looking to expand our product line, expand our process capabilities, expand our geographic footprint. And I think those opportunities still exist as we think about our market, not just as personalized wall decor. But broadening into personalized home decor. From a geographic point of view, we are still very US centric, some volume in Canada, some volume in Australia. Europe is an interesting market to us. And I think there are emerging retailers typically not bricks and mortar but ecom businesses, certainly output product that want to add themselves and international footprint, and therefore they need partners that can do fulfillment elsewhere in the world.
Gary Pageau 31:40
I think that's one of the things that in the photographic industry, the industry was so focused previously on you know, printing images on flat piece of paper, and then it's been added on with what people used to call the trinkets, right, the mugs and the most expensive there were those are all really taken seriously. And then over the last five years or so their realization is not only will those products be acceptable or preferred by your current customer base, but whole new markets are being opened up for personalized photography, whether it's for business use, whether it's for home use or some other use.
Andrew Cousin 32:22
I agree. I agree. It was interesting to see Personalization Mall was sold earlier this year. And that business whilst they do produce a smaller amount of wall decor, photo output is absolutely writing the macro trend of personalization, whether that's sure engraving products with monogramming and products both business and for, for consumers just there, I think, unstoppable trend, and the players that have figured out kind of mass customization on a true industrial scale. Will will do well.
Gary Pageau 33:09
Thank you, Andrew, and I hope that you have a wonderful holiday season and we look forward to hearing from you again.
Andrew Cousin 33:17
Thanks, Gary. My pleasure. great to talk to you