The 2018 State of the Industry Report

Expectations are for sales to continue to rise, margins to hold steady.
The 2018 State of the Industry Report

With NPR reporting national unemployment under 4% for the first time in many decades, the stock market looking good and The Wall Street Journal finding wages finally creeping up incrementally, you might think the sign industry has benefited from these developments – and other important economic and policy changes during the previous year. If our annual survey of sign companies is an accurate measure, you’d be right – for the most part. In virtually every segment we sought information, the responses showed continued health in all key areas: employees, sales/margins, profitability and others. Last year we were surprised that the number of companies expecting growth in sales volume exceeded those expecting a decline by nearly 10-to-1. This year that number has increased to almost 12-to-1.

Also of note, the amount planned for equipment investment in 2018 has more than doubled from the 2017 figure. In addition to a healthy economy driving the demand for more sign manufacturing and installation, the new federal tax law, which greatly reduced the federal tax levied against certain equipment purchases, added a “sweetener” to any deal. Our “Shop Ops” columnist Dale Salamacha, president of Media 1/ Wrap This! (Longwood, FL), described the significant tax savings when his company purchased both a new router and a new bucket truck. Media 1’s experience is instructive. Yes, they needed to replace old, under-functioning equipment. And yes, their growing client list and demand supported the capital outlays. But the tax savings certainly eased making the deal, and likely is doing the same for other companies with the means to engage in these investments.

RESPONDENTS AND EMPLOYEES

Almost 72% of this year's State of the Industry respondents reported themselves as an independently owned sign company.
Almost 72% of this year's State of the Industry respondents reported themselves as an independently owned sign company.

Of this year’s 288 responses, nearly 72% identified themselves as independently owned sign companies, just over 4% as franchise sign companies and approximately 7% as national sign companies (Table 1). We suspect the share of franchise respondents understates their actual makeup within the industry, as in 2017 when nearly 8% were franchise companies. Any company beginning our survey that did not choose one of these three identifiers – in 2018 we had 17% choose “other” – was not allowed to continue.

We received 152 responses to the question seeking their number of full-time-equivalent employees (Table 2). The average number came to 20.1, up slightly from last year’s 19.7. However, as in 2017, that average was skewed by a small number of very large companies (seven with 100 or more, one with 384). Just over 20% of the respondents employ 20 or more, whereas 64% employ 10 or fewer. So, while our average is useful for comparison’s sake, the 20.1 figure far more represents the mean than the median.

SALES AND PROFITS

As in 2017’s survey, 70% of companies reported an increase in sales volume from two years previous to last year (Table 3), with the remaining 30% split between reporting a decrease (13%) or sales staying the same (17%). Clearly the expectation is for positive growth to continue, as a whopping 77% of companies expect their sales volume to rise this year (Table 4) versus less than 7% who expect their sales volume to decline. We thought last year’s 9-to-1 ratio was impressive; this year it exceeds 11-to-1.

When asked about their company’s profit margin for the previous year (Table 5), 134 responses garnered an average of 23.9%. This figure is down a bit from last year’s finding of 27.8%. However, the number of responses above that average was 76, while those below numbered 58, so a majority of companies reported healthy profit margins. At the same time, nearly 28% of companies cited a profit margin of 10% or less, a significant increase over last year’s finding of 19%. Perhaps this is an indication that the current “rising tide” in the US national economy is not raising all boats – or not in all areas of the country. A fair number of sign companies appear to be struggling to achieve a more comfortable level of profitability. As for 2018’s expected profit margin (Table 6), 133 companies answered, with 26.4% the average anticipated. Again, more companies (76) anticipate a profit margin higher than the average than predict it to be lower (57). More than 20% expect their profit margin this year to be 10% or less.

EQUIPMENT AND INVESTMENT

Some interesting findings here. While 152 companies responded to our question asking what type(s) of equipment they purchased in 2017 (Table 7), 41 (nearly 27%) reported “none” – not even software, the most affordable choice, as well as the selection of 70 (46%) of the respondents. Last year’s category leader as well, software was followed by digital printers (34%), vinyl-cutting plotters (22%), crane/bucket trucks (16%), laminators (15%) routers (10%) and metal-forming equipment (7%). In addition, nearly 9% reported investing in “other,” which included computers for the most part, but someone also named a 3D printer.

The same 152 companies reported investing an average of $86,948 on equipment in 2017 (Table 8). Here’s where it gets really interesting – the nearly $87,000 figure represents a 106% increase over last year’s average of $41,071. Large companies are likely skewing this dollar amount as well, as only 23 of the companies responding cited investing a figure greater than the average while 129 – more than five times as many – reported a spend below the average. Of those 76 companies, exactly half plugged in a dollar figure of $10,000 or less, with half of those (38 companies) stating they plan to spend nothing at all on equipment this year. It seems the vast majority of high-dollar investment in equipment planned for this year stems from a fairly small minority of sign companies.

THREATS TO THE INDUSTRY

Just over 30% of survey respondents selected "price competition or diminishing profit margins" as the greatest threat to the industry.
Just over 30% of survey respondents selected "price competition or diminishing profit margins" as the greatest threat to the industry.

Last year we introduced a new question (Table 9) to our survey: What do you see as the one, greatest threat to the signage and graphics industry? We offered five choices with “other” a sixth alternative that allowed respondents to fill in their own answer. Right in line with last year’s leader in this category, 32% selected “price competition or diminishing profit margins,” essentially equivalent to last year’s percentage. The increasing number of non-sign companies (e.g. print shops) offering signage services came in second again, at a bit over 28% up a tick from 2017. Recruiting and retaining staff was third again, selected by nearly 16%, an increase of 2%. More respondents this year cited the increasing number of sign companies in the market (8%) versus last year (5%) and about as many chose “Not sufficiently diversifying products/services or keeping up with the changing signage demands” (7%), just down from 2017’s finding (9%). Another 9% went with “other” and offered reasons ranging from restrictive sign codes to internet sales to advanced equipment’s ability to replicate personal artistry.

SELLING ELECTRIC SIGNS

The number of companies that reported selling electric signs – including electric signs bought wholesale – (Table 10) remained about two in three, with this year’s 67.1% down just a smidge from last year’s 68.5%. But this figure may not be fully accurate. Nearly as many companies (136) skipped the series of questions on electric signs, and if they are added to the 50 who responded “no,” the 186 companies who either skipped or said no represent 65% of the 288 total companies presented with this question. Under this analysis, the original figure is nearly flipped with two in three sign companies likely not selling electric signs.

The 102 companies that reported selling electric signs were then asked three additional questions in this subject area, beginning with the percentage of their total sales coming from electric signs (Table 11). Ninety-three companies answered with an average of 36.4%, just up from last year’s finding of 34.8%. And like last year, this average is inflated somewhat by companies whose percentage is higher than the average (37) when compared to those lower (56). In addition, 32% of the companies reported their percentage of electric sign sales as 10% or less of their total.

ELECTRIC SIGN TYPES AND ILLUMINATION

This year, channel letters (91%) surpassed last year’s category leader, cabinet signs, now second (88%) in terms of the types of electric signs sold by the 98 companies pressing on with the electric-sign portion of the survey (Table 12). Electronic message centers again took third place (68%), just ahead of freestanding main ID signs (65%), both within a point of last year’s findings. Bunched in the remaining three slots were outline lighting and backlit awnings, each with 37%, and dynamic digital signage with 36%. We had eight companies report “other” electric sign types with neon, blade and marquee signs cited most.

LEDs remain light years ahead as the illumination source of choice (Table 13) with all 95 respondents who answered this question stating that 82% of their electric signs are illuminated by LEDs. This figure was up significantly from 2017’s finding of 75%. In second place again was fluorescent lighting at 19%, down slightly from 21% last year. Neon held steady with 10% selecting it, compared to 9% in 2017 and 12% went with “other” as their illumination source, down two percentage points from the previous year.

CAS/COMMERCIAL SIGN TYPES/MATERIALS

When it comes to CAS/commercial (non-internally illuminated) signs, the 140 responses we received (Table 14) suggest a significant majority are “full-service shops.” Fully 85% sell window graphics, followed by 84% offering banners and more than 76% doing vehicle graphics. Magnetic signs follow in fourth with just under 71% of companies selling them, dimensional signage (routed/carved/sandblasted) next at 69%, architectural/ADA signage close behind at over 66% and floor graphics at 65%. Most of these are in line with 2017’s results, with floor graphics (57% in 2017) enjoying the largest gain in companies offering that service. Fewer companies (6%) chose “other” this year than last (8%), with the most common write-in applying to artistic services.

Our final question asked for the percentage of CAS/commercial signs produced involving various materials or methods (Table 15). Vinyl (44%) outstripped last year’s leader in this category, in-house digital imaging (39%), representing an increase of 5% for vinyl and a decrease of 2% for in-house digital imaging. However, wholesale digital imaging increased 2% over last year to 19% followed by handpainting (9%) and screenprinting (5%), plus 2% and minus 3% respectively versus 2017. About the same number of respondents (28%) as last year (27%) cited “other” materials and/or methods, likely including HDU, aluminum and other materials well given to carving, routing or engraving.

FINAL ANALYSIS

This survey provides both excellent year-over-year comparisons, as well as some trends. Like last year, the positive reporting of present business circumstances, as well as even rosier prospects, continues. But despite the ratio of those expecting an increase in sales volume through the end of this year to those expecting a decrease approaching 12:1, more than 20% of companies anticipate their profit margin on those future sales to be 10% or less. Another strong indicator of this dichotomy is the expected investment in equipment this year, with the 2018 average more than doubling 2017’s – while at the same time, 27% plan no purchases.

Still, on the whole, the 2018 state of the sign industry must be viewed as strong, building on the positive findings reported last year. And the expectation is that the trend will continue into 2019, though not completely without worry. Recall that more than 31% of sign companies fear price competition and diminishing profit margins as their greatest threat. Figuring out how to convert an expected higher sales volume while still maintaining (or even growing) a healthy profit margin appears to be the greatest challenge to the industry in the macro sense.

Of course, the macro economy is composed of the micro economies of every individual business and consumer. Where do you see your sign company within the current and future business landscapes?

Signs of the Times December 2018

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