Market Potential Estimation Methodology
Overview
This study covers the world outlook for commercial flexographic printing across more than 2000 cities. For the year reported, estimates are given for the latent demand, or potential industry earnings (P.I.E.), for the city in question (in millions of U.S. dollars), the percent share the city is of the region and of the globe. These comparative benchmarks allow the reader to quickly gauge a city vis-à-vis others. Using econometric models which project fundamental economic dynamics within each country and across countries, latent demand estimates are created. This report does not discuss the specific players in the market serving the latent demand, nor specific details at the product level. The study also does not consider short-term cyclicalities that might affect realized sales. The study, therefore, is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved.
This study does not report actual sales data (which are simply unavailable, in a comparable or consistent manner in virtually all of the cities of the world). This study gives, however, my estimates for the worldwide
latent demand, or the P.I.E. for commercial flexographic printing. It also shows how the P.I.E. is divided across the world’s cities. In order to make these estimates, a multi-stage methodology was employed that is often taught in courses on international strategic planning at graduate schools of business.
What is Latent Demand and the P.I.E.?
The concept of latent demand is rather subtle. The term latent typically refers to something that is dormant, not observable, or not yet realized. Demand is the notion of an economic quantity that a target population or market requires under different assumptions of price, quality, and distribution, among other factors. Latent demand, therefore, is commonly defined by economists as the industry earnings of a market when that market becomes accessible and attractive to serve by competing firms. It is a measure, therefore, of potential industry earnings (P.I.E.) or total revenues (not profit) if a market is served in an efficient manner. It is typically expressed as the total revenues potentially extracted by firms. The “market” is defined at a given level in the value chain. There can be latent demand at the retail level, at the wholesale level, the manufacturing level, and the raw materials level (the P.I.E. of higher levels of the value chain being always smaller than the P.I.E. of levels at lower levels of the same value chain, assuming all levels maintain minimum profitability).
The latent demand for commercial flexographic printing is not actual or historic sales. Nor is latent demand future sales. In fact, latent demand can be lower either lower or higher than actual sales if a market is inefficient (i.e., not representative of relatively competitive levels). Inefficiencies arise from a number of factors, including the lack of international openness, cultural barriers to consumption, regulations, and cartel-like behavior on the part of firms. In general, however, latent demand is typically larger than actual sales in a city market.
Another reason why sales do not equate to latent demand is exchange rates. In this report, all figures assume the long-run efficiency of currency markets. Figures, therefore, equate values based on purchasing power parities across countries. Short-run distortions in the value of the dollar, therefore, do not figure into the estimates. Purchasing power parity estimates of country income were collected from official sources, and extrapolated using standard econometric models. The report uses the dollar as the currency of comparison, but not as a measure of transaction volume. The units used in this report are: US $ mln.
For reasons discussed later, this report does not consider the notion of “unit quantities”, only total latent revenues (i.e., a calculation of price times quantity is never made, though one is implied). The units used in this report are U.S. dollars not adjusted for inflation (i.e., the figures incorporate inflationary trends) and not adjusted for future dynamics in exchange rates (i.e., the figures reflect average exchange rates over recent history). If inflation rates or exchange rates vary in a substantial way compared to recent experience, actually sales can also exceed latent demand (when expressed in U.S. dollars, not adjusted for inflation). On the other hand, latent demand can be typically higher than actual sales as there are often distribution inefficiencies that reduce actual sales below the level of latent demand.
As mentioned earlier, this study is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved. If fact, all the current products or services on the market can cease to exist in their present form (i.e., at a brand-, R&D specification, or corporate-image level) and all the players can be replaced by other firms (i.e., via exits, entries, mergers, bankruptcies, etc.), and there will still be an international latent demand for commercial flexographic printing at the aggregate level. Product and service offering details, and the actual identity of the players involved, while important for certain issues, are relatively unimportant for estimates of latent demand.
The Methodology
In order to estimate the latent demand for commercial flexographic printing on a city-by-city basis, I used a multi-stage approach. Before applying the approach, one needs a basic theory from which such estimates are created. In this case, I heavily rely on the use of certain basic economic assumptions. In particular, there is an assumption governing the shape and type of aggregate latent demand functions. Latent demand functions relate the income of a country, city, state, household, or individual to realized consumption. Latent demand (often realized as consumption when an industry is efficient), at any level of the value chain, takes place if an equilibrium in realized. For firms to serve a market, they must perceive a latent demand and be able to serve that demand at a minimal return. The single most important variable determining consumption, assuming latent demand exists, is income (or other financial resources at higher levels of the value chain). Other factors that can pivot or shape demand curves include external or exogenous shocks (i.e., business cycles), and or changes in utility for the product in question.
Ignoring, for the moment, exogenous shocks and variations in utility across countries, the aggregate relation between income and consumption has been a central theme in economics. The figure below concisely summarizes one aspect of problem. In the 1930s, John Meynard Keynes conjectured that as incomes rise, the average propensity to consume would fall. The average propensity to consume is the level of consumption divided by the level of income, or the slope of the line from the origin to the consumption function. He estimated this relationship empirically and found it to be true in the short-run (mostly based on cross-sectional data). The higher the income, the lower the average propensity to consume. This type of consumption function is labeled "A" in the figure below (note the rather flat slope of the curve). In the 1940s, another macroeconomist, Simon Kuznets, estimated long-run consumption functions which indicated that the marginal propensity to consume was rather constant (using time series data across countries). This type of consumption function is show as "B" in the figure below (note the higher slope and zero-zero intercept). The average propensity to consume is constant.
Is it declining or is it constant? A number of other economists, notably Franco Modigliani and Milton Friedman, in the 1950s (and Irving Fisher earlier), explained why the two functions were different using various assumptions on intertemporal budget constraints, savings, and wealth. The shorter the time horizon, the more consumption can depend on wealth (earned in previous years) and business cycles. In the long-run, however, the propensity to consume is more constant. Similarly, in the long run, households, industries or countries with no income eventually have no consumption (wealth is depleted). While the debate surrounding beliefs about how income and consumption are related and interesting, in this study a very particular school of thought is adopted. In particular, we are considering the latent demand for commercial flexographic printing across some 230 countries. The smallest have fewer than 10,000 inhabitants. I assume that all of these counties fall along a "long-run" aggregate consumption function. This long-run function applies despite some of these countries having wealth, current income dominates the latent demand for commercial flexographic printing. So, latent demand in the long-run has a zero intercept. However, I allow firms to have different propensities to consume (including being on consumption functions with differing slopes, which can account for differences in industrial organization, and end-user preferences).
Given this overriding philosophy, I will now describe the methodology used to create the latent demand estimates for commercial flexographic printing. Since ICON Group has asked me to apply this methodology to a large number of categories, the rather academic discussion below is general and can be applied to a wide variety of categories, not just commercial flexographic printing.
Step 1. Product Definition and Data Collection
Any study of latent demand across countries requires that some standard be established to define “efficiently served”. Having implemented various alternatives and matched these with market outcomes, I have found that the optimal approach is to assume that certain key countries or cities are more likely to be at or near efficiency than others. These are given greater weight than others in the estimation of latent demand compared to others for which no known data are available. Of the many alternatives, I have found the assumption that the world’s highest aggregate income and highest income-per-capita markets reflect the best standards for “efficiency”. High aggregate income alone is not sufficient (i.e., China has high aggregate income, but low income per capita and can not assumed to be efficient). Aggregate income can be operationalized in a number of ways, including gross domestic product (for industrial categories), or total disposable income (for household categories; population times average income per capita, or number of households times average household income per capita). Brunei, Nauru, Kuwait, and Lichtenstein are examples of countries with high income per capita, but not assumed to be efficient, given low aggregate level of income (or gross domestic product); these countries have, however, high incomes per capita but may not benefit from the efficiencies derived from economies of scale associated with large economies. Only countries with high income per capita and large aggregate income are assumed efficient. This greatly restricts the pool of countries to those in the OECD (Organization for Economic Cooperation and Development), like the United States, or the United Kingdom (which were earlier than other large OECD economies to liberalize their markets).
The selection of countries is further reduced by the fact that not all countries in the OECD report industry revenues at the category level. Countries that typically have ample data at the aggregate level that meet the efficiency criteria include the United States, the United Kingdom and in some cases France and Germany.
Latent demand is therefore estimated using data collected for relatively efficient markets from independent data sources (e.g. Euromonitor, Mintel, Thomson Financial Services, the U.S. Industrial Outlook, the World Resources Institute, the Organization for Economic Cooperation and Development, various agencies from the United Nations, industry trade associations, the International Monetary Fund, and the World Bank). Depending on original data sources used, the definition of “commercial flexographic printing” is established. In the case of this report, the data were reported at the aggregate level, with no further breakdown or definition. In other words, any potential product or service that might be incorporated within commercial flexographic printing falls under this category. Public sources rarely report data at the disaggregated level in order to protect private information from individual firms that might dominate a specific product-market. These sources will therefore aggregate across components of a category and report only the aggregate to the public. While private data are certainly available, this report only relies on public data at the aggregate level without reliance on the summation of various category components. In other words, this report does not aggregate a number of components to arrive at the “whole”. Rather, it starts with the “whole”, and estimates the whole for all cities and the world at large (without needing to know the specific parts that went into the whole in the first place).
Given this caveat, this study covers “commercial flexographic printing” as defined by the North American Industrial Classification system or NAICS (pronounced “nakes”). For a complete definition of commercial flexographic printing, please refer to the Web site at http://www.icongrouponline.com/codes/NAICS.html. The NAICS code for commercial flexographic printing is 323112. It is for this definition of commercial flexographic printing that the aggregate latent demand estimates are derived. “Commercial flexographic printing” is specifically defined as follows:
323112
This U.S. industry comprises establishments primarily engaged in flexographic printing without publishing (except books, grey goods, and manifold business forms). This industry includes establishments engaged in flexographic printing on purchased stock materials, such as stationery, invitations, labels, and similar items, on a job order basis.
3231121
Label and wrapper printing, flexographic
32311211
Label printing (flexographic), custom and stock labels, including bordered, made of paper, flat (except pressure_sensitive)
3231121111
Label printing (flexographic), custom and stock labels, including bordered, made of paper, flat (except pressure_sensitive)
32311212
Label printing (flexographic), custom and stock labels, including bordered, made of paper, rolls (except pressure_sensitive)
3231121216
Label printing (flexographic), custom and stock labels, including bordered, made of paper, rolls (except pressure_sensitive)
32311213
Label printing (flexographic), custom and stock labels, including bordered, made of paper, pressure_sensitive, flat
3231121321
Label printing (flexographic), custom and stock labels, including bordered, made of paper, pressure_sensitive, flat
32311214
Label printing (flexographic), custom and stock labels, including bordered, made of paper, pressure_sensitive, rolls
3231121426
Label printing (flexographic), custom and stock labels, including bordered, made of paper, pressure_sensitive, rolls
32311215
Label printing (flexographic), custom and stock labels, including bordered, made of materials other than paper (including cloth)
3231121531
Label printing (flexographic), custom and stock labels, including bordered, made of materials other than paper (including cloth)
32311216
Printed rolls and sheets for packaging purposes (printing only) (flexographic), made of paper (single_web)
3231121636
Printed rolls and sheets for packaging purposes (printing only) (flexographic), made of paper (single_web)
32311217
Printed rolls and sheets for packaging purposes (printing only) (flexographic), made of polyethylene (single_web)
3231121741
Printed rolls and sheets for packaging purposes (printing only) (flexographic), made of polyethylene (single_web)
32311218
Other printed rolls and sheets for packaging purposes (printing only) (flexographic), including multiweb structures
3231121846
Other printed rolls and sheets for packaging purposes (printing only) (flexographic), including multiweb structures
3231123
Flexographic printing, n.e.c.
32311231
Magazine, periodical, and Sunday comic and supplement printing (flexographic)
3231123111
Magazine and periodical printing (flexographic)
3231123116
Magazine and comic supplement printing (flexographic) for Sunday newspapers
32311232
Flexographic printing, nec (excluding labels and wrappers)
3231123221
Financial and legal printing (flexographic), including annual corporate reports, bank printing, etc.
3231123226
Advertising printing (flexographic), including direct mail, display, preprinted newspaper inserts, book jackets
3231123231
Shopping news printing (flexographic)
3231123236
Newspaper printing (flexographic), except shopping news
3231123291
All other flexographic printing, nec
32311233
Other commercial and general job printing (flexographic)
3231123321
Financial and legal printing (flexographic), including annual corporate reports, bank printing, etc.
3231123326
Advertising printing (flexographic), including direct mail, display, magazine and preprinted newspaper inserts, brochures, pamphlets, etc.
3231123392
All other commercial and general job printing (flexographic), including customized stationary
323112M
Miscellaneous receipts
323112P
Primary products
323112S
Secondary products
323112SM
Secondary products and miscellaneous receipts
Furthermore, the definition of NAICS code 323112 includes the following:
Address lists flexographic printing without publishing
Agricultural magazines and periodicals flexographic printing without publishing
Art prints flexographic printing without publishing
Atlases flexographic printing without publishing
Business directories flexographic printing without publishing
Business forms (except manifold) flexographic printing without publishing
Calendars flexographic printing without publishing
Cards (e.g., business, greeting, playing, postcards, trading) flexographic printi
Catalogs flexographic printing without publishing
Catalogs of collections flexographic printing without publishing
Comic books flexographic printing without publishing
Commercial flexographic printing
Databases flexographic printing without publishing
Directories flexographic printing without publishing
Discount coupon books flexographic printing without publishing
Financial magazines and periodicals flexographic printing without publishing
Flexographic printing (except books, manifold business forms, printing grey goods
Globe covers and maps flexographic printing without publishing
Greeting cards (e.g., birthday, holiday, sympathy) flexographic printing without
Guides, street map, flexographic printing without publishing
Job printing, flexographic
Juvenile magazines and periodicals flexographic printing without publishing
Magazines and periodicals flexographic printing without publishing
Maps flexographic printing without publishing
Music, sheet, flexographic printing without publishing
Newsletters flexographic printing without publishing
Newspapers flexographic printing without publishing
Patterns and plans (e.g., clothing patterns) flexographic printing without publis
Periodicals flexographic printing without publishing
Postcards flexographic printing without publishing
Posters flexographic printing without publishing
Print shops, flexographic
Printing, flexographic (except books, grey goods, manifold business forms)
Professional magazines and periodicals flexographic printing without publishing
Racetrack programs flexographic printing without publishing
Racing forms flexographic printing without publishing
Radio guides flexographic printing without publishing
Radio schedules flexographic printing without publishing
Religious magazines and periodicals flexographic printing without publishing
Scholarly journals flexographic printing without publishing
Scholastic magazines and periodicals flexographic printing without publishing
Sheet music flexographic printing without publishing
Shipping registers flexographic printing without publishing
Stationery, flexographic printing, on a job-order basis
Technical magazines and periodicals flexographic printing without publishing
Telephone directories flexographic printing without publishing
Television guides flexographic printing without publishing
Trade journals flexographic printing without publishing
Trade magazines and periodicals flexographic printing without publishing
Yearbooks flexographic printing without publishing.
Step 2. Filtering and Smoothing
Based on the aggregate view of commercial flexographic printing as defined above, data were then collected for as many similar countries and cities as possible for that same definition, at the same level of the value chain. This generates a convenience sample from which comparable figures are available. If the series in question do not reflect the same accounting period, then adjustments are made. In order to eliminate short-term effects of business cycles, the series are smoothed using an 2 year moving average weighting scheme (longer weighting schemes do not substantially change the results). If data are available for a country, but these reflect short-run aberrations due to exogenous shocks (such as would be the case of beef sales in a country stricken with foot and mouth disease), these observations were dropped or "filtered" from the analysis.
Step 3. Filling in Missing Values
In some cases, data are available for countries or cities on a sporadic basis. In other cases, data may be available for only one year. From a Bayesian perspective, these observations should be given greatest weight in estimating missing years. Assuming that other factors are held constant, the missing years are extrapolated using changes and growth in aggregate national income. Based on the overriding philosophy of a long-run consumption function (defined earlier), cities which have missing data for any given year, are estimated based on historical dynamics of aggregate income for that country.
Step 4. Varying Parameter, Non-linear Estimation
Given the data available from the first three steps, the latent demand is estimated using a “varying-parameter cross-sectionally pooled time series model”. Simply stated, the effect of income on latent demand is assumed to be constant across cities unless there is empirical evidence to suggest that this effect varies (i.e., the slope of the income effect is not necessarily same for all countries). This assumption applies across cities along the aggregate consumption function, but also over time (i.e., not all cities are perceived to have the same income growth prospects over time and this effect can vary from city to city as well). Another way of looking at this is to say that latent demand for commercial flexographic printing is more likely to be similar across cities that have similar characteristics in terms of economic development (i.e., African cities will have similar latent demand structures controlling for the income variation across the pool of African cities).
This approach is useful across cities for which some notion of non-linearity exists in the aggregate consumption function. For some categories, however, the reader must realize that the numbers will reflect a city’s contribution to global latent demand and may never be realized in the form of local sales. For certain category combinations this will result in what at first glance will be odd results. For example, the latent demand for the category “space vehicles” will exist for cities in “Togo” even though they have no space program. The assumption is that if the economies in these countries did not exist, the world aggregate for these categories would be lower. The share attributed to these cities is based on a proportion of their income (however small) being used to consume the category in question (i.e., perhaps via resellers).
Step 5. Fixed-Parameter Linear Estimation
Nonlinearities are assumed in cases where filtered data exist along the aggregate consumption function. Because the world consists of more than 2000 cities, there will always be those cities, especially toward the bottom of the consumption function, where non-linear estimation is simply not possible. For these cities, equilibrium latent demand is assumed to be perfectly parametric and not a function of wealth (i.e., a city’s stock of income), but a function of current income (a city’s flow of income). In the long run, if a city has no current income, the latent demand for commercial flexographic printing is assumed to approach zero. The assumption is that wealth stocks fall rapidly to zero if flow income falls to zero (i.e., cities which earn low levels of income will not use their savings, in the long run, to demand commercial flexographic printing). In a graphical sense, for low income cities, latent demand approaches zero in a parametric linear fashion with a zero-zero intercept. In this stage of the estimation procedure, low-income cities are assumed to have a latent demand proportional to their income, based on the city closest to it on the aggregate consumption function.
Step 6. Aggregation and Benchmarking
Based on the models described above, latent demand figures are estimated for all cities of the world, including for the smallest economies. These are then aggregated to get world totals and regional totals. To make the numbers more meaningful, regional and global demand averages are presented. Figures are rounded, so minor inconsistencies may exist across tables.
SHOW LESS
READ MORE >
Colombia Country Analysis 2012-2017: An Evaluation of Political, Social, Economic, and Business Risk
FROM
