The Consolidation Train Keeps Rolling  

April 22nd, 2015

Last week, Henkel Corporation announced its acquisition of Novamelt.  Henkel is a large supplier of adhesives, over 8 billion Euros in revenue in their adhesive technologies division.  Novamelt is a smaller player in the adhesives market, approximately 50 million in Euros in sales, or less than 1% of Henkel’s revenue.  While I’m sure a lot of factors went in to the decisions made by both sides to consummate this transaction, the overarching theme I see is a larger player buying a smaller player.  It’s harder and harder for smaller players to compete across the supply chain in our industry.  What was once a very local business is now an international business.  Scale matters.  Access to capital matters.  Being able to serve customers across the world matters.

Many label/packaging converters purchase adhesives for various products.  Our suppliers purchase adhesives as well.  We’ll all have one less choice.  Not only does less choice potentially impact pricing, it also impacts product development and technical support.  That’s the big risk in consolidation.  With the advantages of scale also come disadvantages.  It’s harder for a larger company to be nimble.  Quite often, it’s harder for a larger company to make a decision.  Those are the big risks of consolidation.  I hear it within our own company and we’re a rounding error in terms of size relative to our industry.  As much as we all talk about empowering people to make decisions, sometimes the message doesn’t get delivered or received properly within an organization, especially as it gets larger.   As a result, it can often be easier for a smaller company to be innovative, despite disadvantages in access to capital and resources.  Henkel admitted this in its press release, citing Novamelt’s “portfolio of hot melt adhesives” as a reason for the acquisition. (http://www.henkel.com/press-and-media/press-releases-and-kits/2015-04-16-henkel-to-acquire-novamelt-gmbh/424876)  Innovation creates value and Novamelt was able to capitalize on its ability to innovate.

As I’ve said before and I say to our team at I.D. Images on a regular basis, I believe we’re heading to a barbell industry shape: small, nimble innovative players on one side and large, global (or certainly super regional) players on the other side.  That has happened upstream in our supply chain and is starting to happen on the converter end.  As our choices of suppliers get less and less, more is going to fall on our shoulders for product development.  That favors either the small and nimble companies or the large companies with resources.  Don’t get stuck in the middle.

 

Another Tax Day Is Upon Us

April 14th, 2015

I’m in a little better mood this April 15 than I was last year and won’t ask for a thank you from all the tax jurisdictions I pay (although it would be nice).  It might be because I watched John Oliver’s “report” on the IRS. https://www.youtube.com/watch?v=Nn_Zln_4pA8  If you haven’t seen it and are pressed for time, go to about the 13 minute mark and watch Michael Bolton perform.  I promise you it will be worth your time.  I wasn’t a Michael Bolton fan before but I might not instantly change the station if one of his songs is played on the radio now.

I think the real reason I’m in a better mood regarding tax season because I think change is in the air.  More of the tax reform ideas coming out of Washington D.C. and the states are pragmatic and have some type of bipartisan support.  They are being dismissed almost immediately by the intelligentsia that is our media (sarcasm intended).  The media are more pessimistic than ever about tax reform occurring.  That’s a positive sign to me – it’s always darkest before dawn.  Companies are starting to do things for business reasons instead of tax reasons.  General Electric announced it is significantly scaling back its financial services business, which will result in a significantly higher tax bill for its industrial businesses.  I have a hunch they just might know something about corporate tax reform.  Call me crazy.  Have there been any tax inversion deals announced lately?  I can’t think of any.

We’re entering another presidential election cycle.  Didn’t the last one just end?  We’ll get populist rhetoric again about paying “fair shares” and other sound bytes that fit the ever shorter news cycle.  I’m fortunate (and hard working) and pay a lot in taxes. (I should pay more than someone less fortunate.  I’ll debate how much more everyday of the week even with you, Warren Buffett.)  The reality is elected officials are finally figuring out that if the “fair share” were 100% of the income of the “wealthy” (pick a number to define wealthy), the US federal government still couldn’t pay all its bills.  The brutal reality is everyone needs to pay more taxes or we need a lot less government spending.  I think the American people are ready to have an intelligent conversation about how the government spends OUR money.  I think we’ll get a little bit of both – higher taxes across the board and a slower growth rate of the government’s spending.

Most importantly, I think the American people are ready for economic growth.  We’re adventurous and risk takers and we like things bigger and better.  We haven’t seen that in almost 15 years.  Two percent GDP growth doesn’t feel good, especially following the worst recession since the 1930s.  The results demonstrate the solutions our politicians have tried aren’t helping create growth.  Just as growing sales solves a lot of problems, so does growing the economy.  Instead of talking about dividing the pie, it’s time to start talking about growing the pie.  That’s a lot more fun.  Happy tax day!

The Lower Your Prices Challenge Taken to a New Level

April 7th, 2015

Just minutes after posting my blog last week, reports came out that Wal-Mart has asked its big vendors to cut their prices.  Always concerned about its suppliers well being, Wal-Mart has told them to reduce marketing allowances in order to minimize the impact of cutting prices on the suppliers’ profitability.  It is very common for consumer products companies to allocate marketing dollars to major retailers for placement in weekly circulars, in store displays, and other marketing efforts.

We all know what this means.  Consumer packaged goods (CPG) manufacturers happen to be huge users of labels.  Remember how stuff rolls?  Yes, it’s downhill and we’re at the bottom.  Expect calls for price concessions to start coming soon if they haven’t already.  For years, CPGs and retailers had a very symbiotic relationship: CPG made a product, shipped it in bulk to a retailer.  CPG sponsored soap operas (yes, that’s where the term comes from) and the like, and masses flocked to their local retailer to buy them.  Everyone made a lot of money and all was well in the world.  As we all know, that has changed dramatically over the last 15 years.  CPGs responded with SKU proliferation (which has helped the label and packaging industry quite a bit, thank you very much).  Retailers have created online shopping portals to compete with internet retailers.  Even CPGs have created their own online stores.  Retailers have created their own private label brands as well.  No longer is the cozy symbiotic relationship straight forward between CPG and retailer.

In an era where a price or other information (you can make very inexpensive laundry detergent at home and formulas are easily available online), I think there’s a bigger issue at stake: who has more power and will ultimately win the war for the consumer, the CPG or the retailer?  I don’t think retail is going away.  Wherever you go in the world, you will see the social interaction of shopping is still a critical component of daily life.  Technology has made information more available, creating a more informed consumer.  Technology has also given that consumer more choices, making it harder for mass advertisers to reach all of their potential consumers.  Retailers have bricks and mortar in place and are able to use that to reach consumers.  Why do you think Amazon is building a physical store?  Do most consumers know what company even makes their soap?  For the first time in history, Procter & Gamble is advertising its corporate brand instead of just its consumer brands.  While the lines are all blurring, those closest to their customers will win.  That hasn’t changed.

What does it mean for lowly label and packaging suppliers?  Short term, we’ll see price pressure that is probably more intense than normal.  Longer term, trends that have started already will continue to accelerate.  Shorter runs will become more common as CPGs and retailers try to differentiate themselves with targeted products to targeted audiences.  The more ways you can help manage that process, the better.  Finally, and most importantly, think about who is really your customer.  Sometimes it’s not the person that places the PO.  Make sure you know what your customer really needs and values.  It might surprise you.

Remember Who Pays The Bills

April 1st, 2015

Over the last several weeks, it seems like I’ve had a conversation everyday about customer service and how different companies approach things.  Some of the conversations have been industry related, with customers and suppliers.  Others have had nothing to do with our industry.  In general, there are two approaches companies take:

  1. We have products customers need. Therefore, they’ll buy products from us when they need them.
  2. We have customers with problems. If we solve their problems, they’ll buy products from us.

There’s a not so subtle distinction in what comes first: the products or the customers.  Very few of us have truly unique products that customers demand and have no substitutes.  Let’s face reality: most products customers want can be readily purchased somewhere else.  Even luxury brands have competition.  Most of us in the label/packaging industry don’t exactly have luxury brands anyway.  We end up competing for customers’ wallets in traditional ways.  Because most of us have been trained in similar manners, we take similar approaches to how we compete.  Traditional marketing approaches involve the 5 P’s anyone who has ever taken a marketing class knows quite well:  Product, Place, Promotion, Price, and Profit.  Note what’s missing from the 5 P’s: the Customer.  I’m starting to think everything the marketeers has taught us is dead wrong.  Sure, it’s a helpful framework for a campaign or tactical marketing but it really does not get to the heart of the matter of how customers are won and lost.  Customers are generated and kept by solving problems and making their lives easier.  It doesn’t matter if it’s a business to consumer transaction or business to business transaction.

When I purchased I.D. Images, one of the first things I told our employees was, “The name might have changed on the signature line of your paycheck.  But what hasn’t changed is who really pays that paycheck: our customers.  As long as we take care of them, we’ll be fine.”  When you think about the companies you admire, I am quite sure they follow approach #2 and put their customers first.  It’s not easy but if you want to survive, put your customers first.

The Federal Reserve’s Interest Rate Policies and The Law of Unintended Consequences

March 25th, 2015

I’m a big believer in the law of unintended consequences.  When we make decisions, we often do so with an expected outcome.  Quite often, we get that outcome.  Sometimes, in addition to the outcome we desire, something else happens.  Usually, we didn’t factor that something else into our decision making process.  A great example of the law of unintended consequences is prohibition.  When the US attempted to ban alcohol in the 1920s, it led to a large increase in organized crime.  People still wanted booze and the mafia and others took full advantage.  Were it not for prohibition, “The Godfather” most likely would have never existed.  (As my example illustrates, not all unintended consequences are bad.  I can’t imagine a world without mafia movies.)

We are seeing an unintended consequence of the Federal Reserve’s low interest rate policy in our industry.  I have been predicting an increase in consolidation in our industry, as have many others.  The label converter world is extremely fragmented, with many small companies participating in it.  As an industry matures, consolidation is a natural occurrence.  While some consolidation has occurred, it’s slower than I would expect given our industry’s dynamics.  A big driver of this phenomenon is the Fed’s low interest rate policy.  Many owners look at an offer for their businesses and say, “That’s great, but how will a generate an income off those proceeds?”  Because of the low interest rate environment we’re in, it’s hard to find investments with significant yield.  Academics will say low interest rates should lead to higher purchase prices – the cost of capital is lower, therefore one can pay more for a business than in a higher interest rate environment.  Those of us in the real world respond by saying, “You can’t make up if you overpay for a business.”  While purchase price multiples have risen over the last few years, they still do not compensate for the low interest rate environment we’re in.

A lot has been written about the impact low interest rates have had on retiree’s income streams.  Not as much has been written about what impact it is having on people that want or need to exit their businesses.  In a perverse way, low interest rates are having negative impacts on those people and their businesses.  The low rates allow healthy (and generally larger) companies to borrow to fund new equipment.  That puts those on the fringe in an even tougher place.  They fall behind from an equipment and technology standpoint, making their companies less valuable.  As regular readers know, I’m certainly not Nostradamus.  I expect consolidation to really pick up once rates start rising.

Strange Times Lead to Strange Behaviors

March 18th, 2015

 

We’re in a strange economy with pockets of strength and pockets of weakness.  Some companies are doing well; others are in a struggle for survival.  Some people see inflation; others see deflation.  Companies complain they can’t find employees yet wage growth is muted and many people complain about a lack of good jobs.  As I’ve written before, add it all up and you’ll be extremely confused.

More and more price competition appears to be coming out of the woodwork in the label world.  Some of the pricing is so outrageous, I have to question if it’s an apples to apples comparison of the products.  I believe in the statement, “When something sounds too good to be true, it usually is.”  I’m not burying my head in the sand but I’m starting to get enough gray hair that I know most (certainly not all) price competition is done out of weakness, not strength.  Companies that have a healthy pipeline and a decent workload generally don’t buy business via price concessions.  Companies with excess capacity generally do buy business as a survival strategy.  Again, there are other reasons to compete on price (strategic customer, for example) than desperation but desperation seems to be a big driver, at least  in our industry.  Like many industries, most of our supply chain relies on fixed asset utilization for profits.  When paper machines, laminating machines, and label presses aren’t running, profits aren’t being made.  Machines need to run to keep lights on.  But you can’t “make it up in volume” when you have a negative margin!

As a customer, my goal is to be my suppliers’ most profitable customer.  If they make money off of us and we make money using them, it’s the proverbial win-win that develops a true partnership.  Likewise, I want profitable customers.  It’s pretty hard for a company not making money to pay its bills.  Certainly, a competitive price is part of the value equation.  So is delivery, quality, technical support, ease of doing business, etc.  It’s easy to grab attention by emailing a prospect a ridiculously low price.  It’s hard to grab attention with an email about on time delivery.

Expect price competition to continue to intensify.  Some of it is justified – companies have invested and created advantages.  I have a suspicion, however, that a lot of it is being done out of desperation.  If it doesn’t work, have a plan B when that supplier is no longer interested in or no longer capable of servicing your business.  Stay in touch with customers that chase the low price.  Eventually, they will need you.

 

It’s Amazing What a Little Sunshine Can Do

March 11th, 2015

It’s been a challenging winter for those of us in the northern part of the country.  Heck, even the southerners had to deal with snow and ice.  Yesterday was the first “warm” day we’ve had in a while.  The 47 degree temperature felt like 80.  People were outside walking and jogging.  Everyone seemed to have a smile on his face.  I saw kids running around in shorts.  All because it got a little warmer and sun shined.  We know better weather is ahead.

By now, you’re wondering what a little nice weather has to do with business.  One of the challenges I face and I believe a lot of business people face is we were taught critical thinking.  We’re taught to fix things.  The first part of fixing something is figuring out what’s wrong.  As a result, we tend to focus on things that aren’t quite right.  Just as looking at piles of snow and feeling a cold burst of wind tends to put people in bad moods, so does always pointing out what can be done better.  People get tired of hearing what they’re doing wrong.  Too often, managers’ views are skewed – we’re told about problems and spend our time putting out fires and fixing things instead of noticing what is going right.  The reality is if more things aren’t going right than are going wrong, you wouldn’t be in business.  You can’t ignore reality and the reality is you’re doing a lot of good things.

Do yourself a favor.  Take the critical thinking cap off for a day or two.  Notice the positive things happening in your business.  Notice the positive things people are doing.  And, if you’re feeling really adventurous, do it with a smile on our face.  I’ll bet people smile back.

You Find What You’re Looking For

March 5th, 2015

I had an interesting and thought provoking conversation with a business partner yesterday.  We’ve had a customer that honestly, we haven’t been at our best with our quality and service.  We think we’ve improved but the customer is still challenging us.  I got sage advice from our partner today, “Just remember, if you’re looking for something, you’ll probably find it.”  We’ve set ourselves up for this treatment by not performing in the past.  Because of our past failings, everything we do is under a microscope.  As a result, the customer looks for what we do wrong with every order.  I don’t blame our customer for taking that approach.

One of my favorite management sayings is, “Perception IS reality.”  People often struggle with that concept.  If you create the perception your quality is subpar, it’s tough to climb out of that hole.  Likewise, if you consistently wow customers with great service and great quality, they’ll take a bump in the road in stride because they have a positive perception of your service and quality.    Perception is reality is a universal truth.  As a follow up to my thoughts on inflation, I got a lot of feedback that absolutely fascinated me.  People took a polar position – either we’re in an inflationary environment already or we’re nowhere near inflation.  Both sides had facts to back up their position.  We all look for facts that support our positions and often ignore other data.  Management psychology gurus call this confirmation bias – we look for data that supports the conclusion we’ve already come to.  As I wrote last week, my bias is towards inflation, at least in our industry.  A lot of our customers have a bias the other way.  I look at my P&L every day and see costs that are up.  Customers look at the price of gas and see costs are down.

In a famous Seinfeld episode, hapless George Costanza determined that he was better off doing the opposite of what he thought the right thing to do was.  Hopefully, no one reading this lives quite like Costanza did.  But it never hurts to take yourself out of a moment and think from a different perspective, especially when you want to understand where your customer is coming from.

Inflation: The Fat Lady is Warming Up

February 25th, 2015

Despite the government’s (and many customers as well) insistence that inflation is non-existent, I think it’s time to start preparing for the inevitable.  Our industry has gone almost 4 years – yes, 4 years without a price increase.  It might not be tomorrow, but I’m willing to wager we’ll see a price increase before the year is over.  As a wise industry veteran told me recently, “I’m sure the letters are written and everyone is waiting for the other guy to hit send.”

The drop in oil gets all the headlines.  As I’ve written before, other factors are stopping freight rates from dropping.  Net, freight rates are about the same as they’ve been.  Pulp remains near record highs.  A few paper mills have recently sent out price increase letters.  For those of you that don’t follow the paper industry closely, remember that Verso and NewPage merged.  Dust off Porter’s Five Forces again and look up “bargaining power of suppliers.”  Heck, you don’t even need to.  One less supplier = better bargaining power.  Skip the Harvard MBA and send me what you think that tip is worth.  To much fanfare, Wal-Mart announced it is raising its employees wages over the next several quarters.  Expect to hear more large companies follow suit.

Call me a cynic but the real driver behind inflation is good ol’ Uncle Sam.  As Milton Friedman wrote, “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”  The government has been trying to spur inflation with low interest rates for years and it’s finally starting to take hold.  Inflation serves many political purposes.  First, for most people, inflation feels like a raise.  Even if the money is spent on the same lifestyle, people see bigger numbers in their paychecks and feel better about things.  Second, and most importantly, inflation is the best way out of our little debt problem.  The $18 trillion we owe (it’s going up every second) becomes less painful to payback with inflated dollars.  Remember, inflation benefits debtors, not creditors.  We’re a debtor.

Start preparing your customers for the inevitable inflationary environment we’re going to see.  If you don’t, be prepared for margin degradation.  You have a choice.  Don’t make the wrong one.

? The Beauty of Competition

February 18th, 2015

A lot has been written here and in other places about the duopoly that is parcel shipping in the US today.  UPS and FedEx seemingly have a stranglehold on the parcel shipment market, particularly the B to B market.  Or do they?  Quietly, the much maligned US Postal Service (USPS) is making inroads into parcel shipping.  I can hear many of you chuckling as you read this.  It might be time to take another look.

The parcel shipping market could turn into a great business school case study.  The USPS took a long time to evolve as fax machines, email, and texting took a lot of their business away.  During that time, FedEx and UPS blossomed by offering guaranteed delivery (“If it absolutely, positively has to be there overnight.”) and incredible tracking capabilities.  Meanwhile, the USPS struggled with customer service issues and became an afterthought when it came to shipping anything important.  Meanwhile, DHL entered the market with much fanfare and quickly exited with little impact.  Those of us that ship a lot had two choices: UPS and FedEx.

We’ve all seen the videos of packages being destroyed by the two dominant parcel carriers.  We’ve all heard about the USPS’s financial woes.  DIM weight has been added by the two dominant players.  If you have a typo in your address, you get charged.  You need a PhD to figure out your freight rates.   The things that made UPS and FedEx stand out – great rates, great customer service, and better reliability – seem to have gone away.  I ordered something online and it got delivered to my house last Sunday – by the USPS.  Weren’t they just talking about ending Saturday delivery?  Now they’re delivering on Sundays?  That’s the beauty of capitalism – someone will step up and do it better than the existing players.  I say this all time to our team, “If we’re not getting better, someone else will.  That someone wants our customer.”  Competition works and makes everyone better.  In the meantime, don’t be surprised if you start seeing more packages delivered by  the Post Office.