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Photo Industry 2004 Review and Forecast

Photo Industry 2004:
Review and Forecast

The face of the photographic industry is changing. At the end of 2003, 31 percent of U.S.
households owned digital cameras. It was a pivotal year for the industry, as digital cameras outsold
traditional cameras for the first time ever. By the end of this year, digital camera penetration is
projected to surpass 42 percent of households. Film roll sales and processing levels have declined
during recent years relative to the rising use of digital cameras. Although film is still a key part of the
industry, it is clear retailers will need to move beyond film to thrive and to survive.

Perhaps the greatest challenge of digital photography has been convincing consumers to print their
images. The environment is changing, however, as the profile of the typical digital camera user
shifts towards the profile of the typical film camera owner – primarily women and families with
young children. These consumers will find having prints of their digital images to be more important
than did the early users of digital cameras. Indeed, the total number of prints made (including film
and digital), is projected within a couple years to return to the level experienced in 2000, when film
use was at its peak.

Methodology
PMA Marketing Research relies on a combination of trade and consumer surveys to estimate
total unit sales of film rolls and film processing. As the organization expanded its surveys, it
became evident the models used to estimate these numbers were overstating the total volume of
film rolls sold and processed. For this reason, it was necessary to revise the estimate of film roll
sales and film processing sales back to and including the year 1990. If readers compare the
numbers published in this report to previous reports published by PMA Marketing Research, they
will find the numbers printed in this report are lower than previously stated. Please be assured,
however, the year-over-year changes remain the same, and PMA Marketing Research is
confident these revisions accurately portray activity in the amateur photographic market.

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Photo Marketing Association International 1


The industry in transition

Not long ago, the state of the economy was one of the most influential factors impacting film sales. If the
gross domestic product was rising at a fast pace, the unemployment rate was low, and consumer
confidence was high, households were willing to engage in more discretionary spending than when
economic indicators were not so favorable. Perhaps most significantly, consumers traveled more, taking
vacations more frequently or engaging in more elaborate trips than they would when the economic cycle
was in a trough. More travel would result in higher levels of picture taking, and thus rising film sales.

While there is no reason to believe economic factors and consumer travel no longer have an impact on
picture-taking activity, the way consumers take pictures is changing. The 2001 recession and
subsequently slow recovery certainly had a negative impact on film sales over the past several years, as
did concerns for safety as a result of recent terrorism threats. Just as significant, however, has been the
growth rate of digital camera penetration. By the end of 2003, 31 percent of U.S. households owned
digital cameras – well into the mass adoption phase. It is no coincidence the decline in film sales
accelerated to 8 percent that year, with sales projected to fall at a similar pace this year. Household
penetration of traditional cameras has also declined as more households adopt digital cameras.

According to Dan Carp, chairman and CEO of Eastman Kodak Co., Rochester, N.Y., the deceleration
in film sales has occurred faster than expected. “I attribute it to consumers taking on digital cameras a
little bit faster than we predicted,” he told Photo Marketing magazine. He predicts the amateur
photographic market will be a growing business, however, despite the declines in film and processing.
“After 2006, we see the total growing for the consumer and professional businesses, because the
majority of the digital substitution will be behind us,” he says. “Most of that will shake out by 2006, and
the consumer business will start growing again.”

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Photo Marketing Association International
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The weakness in film sales is reflected in the declining film processing rate. Film processing volume fell
by an estimated 6 percent in 2003 to 686 million rolls. The decline in processing revenue fell by nearly 8
percent during 2003, to $5.4 billion.

U.S. Amateur Photofinishing Sales
Level of rolls, exposures, and revenue
2003
2002 (est.)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Rolls (in millions) 630 634 614 627 646 641 670 691 711 745 781 756 731 686
Exposures (in billions) 15.2 15.3 14.8 15.3 15.9 15.3 15.9 16.2 16.8 17.5 18.5 18.1 17.4 16.3
Sales (billions of $) $5.0 $5.1 $5.0 $5.0 $5.0 $4.9 $5.2 $5.6 $5.7 $5.9 $6.2 $6.1 $5.8 $5.4

Source: PMA Marketing Research

For some time, the cost of photofinishing has been declining relative to the overall cost of consumer
goods. As a result, photofinishing’s share of overall consumer spending has declined from 0.13 percent
in 1990 to 0.07 percent in 2003. Digital photography’s displacement of film usage has contributed to this
trend as well over the past several years. The good news, however, is the growth rate of consumer
spending has accelerated as the economy recovers, suggesting consumers are more willing to make
discretionary purchases. With the excitement surrounding digital cameras currently, retailers that are
prepared to service customers’ digital-imaging needs should be the beneficiaries of some of this
discretionary spending.

U.S. Photofinishing Sales
Level and share of overall consumer spending
Photofinishing Overall consumer
Photofinishing
sales spending
share (%)
(billions of $) (billions of $)
1990 $5.0 $3,832 0.13
1991 $5.1 $3,971 0.13
1992 $5.0 $4,235 0.12
1993 $5.0 $4,478 0.11
1994 $5.0 $4,743 0.10
1995 $4.9 $4,976 0.10
1996 $5.2 $5,257 0.10
1997 $5.6 $5,547 0.10
1998 $5.7 $5,880 0.10
1999 $5.9 $6,283 0.09
2000 $6.2 $6,739 0.09
2001 $6.1 $7,045 0.09
2002 $5.8 $7,385 0.08
2003 (est.) $5.4 $7,704 0.07

Source: U.S. Department of Commerce, PMA Marketing Research

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Driven by increased interest in digital models, camera sales recovered during 2003, rising to a level not
experienced since 2000. Even stronger growth is expected for 2004, with the number of cameras sold
projected to rise by 7 percent. 2003 was a pivotal year for the industry, with digital cameras outselling
traditional cameras for the first time ever, at a rate of 12.5 million digital units versus 12.1 million film
cameras. This gap will widen in 2004, with 15.7 million digital cameras projected to be sold, compared to
10.6 million film cameras.

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As more households purchase digital cameras, the level of film sales will continue to decline. Film sales
are projected to fall by 6 percent during 2004, to 767 million rolls. More than 180 million fewer rolls will
be sold during 2004 than during 2000, when film sales peaked.

A bright spot in the traditional photographic market continues to be the growth of one-time-use camera
sales. Attracted by their ease-of-use and convenience, consumers are purchasing these products in
rising numbers. The volume of one-time-use cameras sold grew by 7 percent in 2003 and is projected to
rise by another 5 percent in 2004, to 222 million units. It is important to note, however, sales growth in
this segment is slowing. Only a few years ago, in 2000, sales were rising at a 17 percent growth rate.

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Not only are photographic retailers faced with declining sales of traditional photographic products, but
they must also deal with pricing issues. The Consumer Price Index (CPI), a broad-based measure of
inflation, increased by 1.9 percent between December 2002 and December 2003. During the same
period of time, the consumer price indices of various photographic products and services, such as film
processing, have failed to keep pace with the overall CPI. In some cases, these photo-related indexes,
such as photographic equipment and film and supplies, actually declined. Only the increase in
photographers’ fees exceeded the growth of the overall CPI. Although these trends carry good news for
consumers, who are able to purchase photographic products and services at relatively low prices, they
are only good news for retailers to the extent they can spark greater consumer interest in photography. If
consumer purchases do not increase enough to compensate for differences between the growth of the
overall CPI and photo-related prices, photo retailers experience a relative decline in revenue.

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Digital printing activity

As consumers shift their picture-taking activity from film to digital, one of the greatest challenges has
been making them aware of the options for printing their digital pictures. As a result, the volume of
prints made (including from both film and from digital images) has declined from 30.4 billion in 2000 to
29.7 billion in 2003. That trend is beginning to reverse, however, with the total number of prints made
projected to grow by 1.3 billion over the next three years. Digital printing activity will be driving this
growth as the number of prints made from film images declines. A projected 5.4 billion prints will be
made from digital images during 2004, compared to 3.4 billion during the prior year. By 2006, 10.6 billion
digital prints are projected to be made annually, compared to 20.4 billion traditional prints. The most
active customers for retail digital printing services will likely be parents with young children, who not
only tend to be strapped for time and would prefer someone else print their pictures, but also typically
take more pictures annually than other groups. In addition to valuing convenience, many consumers will
likely appreciate the low cost of retail printing options compared to the high price of inkjet cartridges and
photo paper.

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Digital prints are accounting for a rapidly rising share of total prints made. In 2003, 11.6 percent of all
prints were made from digital images, projected to rise to 17.7 percent of all images in 2004 and 34.2
percent in 2006. Thus far, most prints made from digital images have been printed at home, but retail
digital printing activity is rising. In 2003, 2.5 percent of all prints made were digital prints made at retail
locations, compared to less than 1 percent a year earlier. In 2004, 6.1 percent of all prints made are
projected to be digital prints made in a retail environment. By 2006, more than 20 percent of prints will fit
this description. The promotion of retail digital printing services by drugstore and discount chains will help
increase awareness of retail printing options and contribute to the growth in retail digital printing volume.

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When looking at just digital printing activity, the shift towards retail printing is evident. Nearly 22 percent
of digital printing activity during 2003 occurred in a retail environment, compared to just 9 percent a year
earlier. During 2004, more than one-third of digital prints are projected to be made at retail outlets, and
in 2006, retailers will make 60 percent of digital prints. In 2004, retailers will make 1.4 billion digital
prints, and are projected to make 6.4 billion in 2006. The share of prints ordered from online photo
services is also rising, albeit at a much slower pace. More than 7 percent of digital prints are now
ordered from online photo services.

The changing demographics of digital camera users appear to be driving digital printing activity to
retailers. Early digital camera users – which were comprised primarily of men – were just as interested
in the technology as they were with taking pictures, if not more. They printed a small share of the
pictures they took, and those they did, were made on home printers. The average age of digital camera
users is declining, though, and falling prices have enabled many families with young children to
purchase digital cameras. The profile of the typical digital camera user is shifting from technology-
oriented men to time-strapped young mothers. As more young mothers use digital cameras, retailers will
find there is growing demand for the convenience of their printing services as consumers decide it is too
time-consuming and expensive to print at home. (More information on the changing profile of digital
camera users can be found in “The Path from Pixels to Prints,” also published at www.pmai.org).

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The economic outlook

The economic recovery following the recession of 2001 has been slow to come. The economy, as
measured by the gross domestic product, did not grow as fast during 2002 as economists projected. The
economy’s sluggish growth may have come to an end during the second half of 2003, however, with
annualized third-quarter growth of 8.2 percent. Although not as strong as the third quarter, fourth-quarter
growth was projected to be 4.5 percent. Economists hold similarly strong expectations for 2004,
projecting more than 4 percent growth for each quarter.

Holiday sales contributed to fourth-quarter economic growth. CBS News reported January 8 that holiday
sales were 4.2 percent higher than in the prior year. High-end retailers, including Neiman Marcus,
Nordstrom, and Saks Fifth Avenue, posted some of the largest gains. Sales among specialty
photographic retailers, however, were mixed. David Ritz, chairman and CEO of Ritz Camera Centers
Inc., Beltsville, Md., told Newsline International that the chain’s 2003 holiday sales were only slightly
higher than the prior year, although sales in the week following Christmas were higher than in 2002.
Frank Ponder, manager of Bel Air Camera, Los Angeles, Calif., indicated post-Christmas sales were
much better at the store than they were in 2002. Digital cameras were hot items, but he cautions
specialty retailers face growing competition from computer retailers and electronics stores.

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The rising stock market provides further evidence of the economic recovery, and may help buoy
consumer confidence. The Dow Jones Industrial Average rose by more than 2,000 points between year-
end 2002 and year-end 2003, once again rising above the 10,000 mark – a level unseen since August
2002. Many photo and electronics industry manufacturers and retailers saw their stock prices rise during
2003 as a result of this recovery. Some of the best performers were Best Buy, aided by growing demand
for electronics products such as DVD players and digital cameras, and Walgreen’s, representing a
segment of the industry that has aggressively installed on-site minilabs and promoted one-hour
processing.

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The overall economy and the photo industry’s future growth prospects depend somewhat on consumer
confidence. Consumer confidence declined steadily throughout 2001 and 2002, largely due to frequent
announcements of layoffs and apprehension regarding potential terrorist activities and the threat of war.
It experienced a slight rebound in late 2003, however, rising to 92.0, a level not experienced since the
first quarter of 2001. The question remains, however, will this rebound continue? The job market will
likely play a large role in this, and the unemployment rate has not yet made great strides toward
improving.

During 2001 and 2002, the U.S. Federal Reserve aggressively lowered the Federal Funds rate to the
lowest level since the early 1960s in an attempt to stimulate economic activity. While lower interest rates
have helped spark the economy as consumers took advantage of decreased borrowing costs for major
purchases such as houses and new automobiles, business investment initially languished as firms
grappled with excess capacity. As the economy recovers, however, businesses making equipment
purchases will likely enjoy these low borrowing costs in the forseeable future, as the Federal Reserve
has indicated the low inflation rate will enable it to maintain low interest rates for some time.

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Conclusion

Although the economic recovery has been sluggish, there are signs it is finally picking up. After
moderate growth through 2002 and the first half of 2003, gross domestic product increased at a robust
8.2 percent rate in the third quarter of 2003, and is projected to rise at a rate of 4 to 5 percent during
2004. There are some factors that may hinder consumer spending, however. If the unemployment rate
remains high, many households will still feel constrictions on their discretionary spending power.
Further, although consumer confidence has recovered slightly in recent months, there is no certainty it
will continue to do so, and must rise quite a bit yet before recovering to pre-recession levels.

As consumers begin to loosen their restraints on spending, however, it appears the photo and imaging
industry will be the recipient of some of these dollars. Although film sales will not recover, one-time-use
camera sales continue to grow. Digital cameras, in particular, will be a growth product, and as they
reach mainstream users, retailers can expect growing demand for in-store digital printing services.

Photo Industry 2004:
Review and Forecast

Prepared by the Marketing Research Department of

Research and Analysis:
Yukihiko Matsumoto, Executive, Marketing Research
Dimitrios Delis, Associate Director, Marketing Research
Brian Longheier, Marketing Research Analyst

Editorial Review:
Gary Pageau, Associate Publisher

Computer Graphics Design, Page Layout and Production Coordination:
Stephanie Beauchamp, Marketing Research Project Coordinator

©Copyright Photo Marketing Association International, 3000 Picture Place, Jackson, Michigan 49201, (517) 788-8100, February 2004. All Rights reserved.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopied, recorded,
and/or otherwise reproduced without prior permission.

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